Rural CDCs: Building the capacity for success

In many American rural areas, crucial community development services are provided by Community Development Corporations (CDCs). These nonprofit, community-based organizations do invaluable work but receive little national attention.

When the Urban Institute estimated several years ago that 1,700 CDCs serve rural areas in the United States, the number astounded even industry experts. Despite their low national profile, rural CDCs are a tremendous resource for the revitalization of rural areas and small towns, and about 100 CDCs serve such communities in the Ninth Federal Reserve District.

Some rural CDCs produce more results than others do. The ability to produce results is often called capacity. A current term in the field of community development is "capacity building," which means increasing the ability of an organization to accomplish its goals.

In this article, we examine the components of capacity that enable a CDC to reach its goals and offer examples of rural CDCs that have solved various capacity problems. The CDCs that we cite in our examples serve rural areas, including Indian reservations, in five Ninth District states. These organizations are all members of the Rural Local Initiatives Support Corporation (Rural LISC) network.

Components of capacity: A discussion framework

To discuss capacity, we use a framework developed in the article "More Than Bricks and Sticks: Five Components of Community Development Corporation Capacity" by Norman J. Glickman and Lisa J. Servon of Rutgers University. Glickman and Servon's framework divides capacity into five components: organizational, programmatic, network, political and resource.

Organizational capacity: Work efficiently and effectively

Success of a CDC depends on the effectiveness of its executive director and board and their ability to manage growth. Also crucial are the competence and stability of staff members in delivering services and their effectiveness in handling fiscal and project management.

For a CDC to fulfill its goals, its leaders must have a vision of those goals and be willing to change the CDC in order to pursue them.

For example, Impact Seven, Inc. (I-7) has a mission of revitalizing Wisconsin communities through job creation. For several years after its inception, I-7 worked in various aspects of economic development, filling development "holes" as they became apparent.

According to Bill Bay, I-7 president, "We found too few good deals to accomplish our goal of community revitalization so we decided to take a different approach. We decided to figure out how to organize a community for economic development action."

For this purpose, the CDC picked Almena, Wis., a town of 625, where agriculture was depressed and retail businesses were losing ground to regional commercial centers. This initiative, later called the "Almena Idea," not only resulted in the revitalization of Almena and national awards for I-7, it created a model of what it takes for a community to revitalize itself. By staying focused on its goal of revitalizing communities, I-7 now knows what revitalization requires from a community and what kind of help a CDC should offer.

This example illustrates another aspect of CDC leadership: risk-taking. Several CDC leaders interviewed for this article said that a CDC must be willing to fail.

Jeff Rupp, executive director of Human Resources Development Council (HRDC), which serves three Montana counties, offers this advice to CDCs: "Don't be afraid. Accept the challenges and just do it." Several years ago, city leaders in Bozeman asked HRDC for its help in solving the city's affordable housing crisis. Although all of its prior experience was in the delivery of human services, HRDC decided to tackle the housing problem and used its savings for this initiative.

The risks to HRDC—both financial and reputational—were high. The result, however, was worth the risks. The city of Bozeman now has a land trust housing development that includes affordable housing for purchase and rent, and HRDC now has locally and nationally recognized expertise in land trust housing development. Taking such risks requires that the CDC have strong leaders who can keep the organization on the path set in the vision, even if the CDC experiences a failure with one of its programs.

Vision and leadership are not enough to ensure an organization's success. It must also be well-managed; that is, able to deliver its services efficiently and effectively. According to Bob Poznanski, program director of the North and Midwest regions of Rural LISC, CDCs must adopt a businesslike mentality. He notes, "A CDC must be managed as well as, if not better than, a for-profit business." Nonprofit funders often scrutinize the operations of CDCs much more closely than do the funders of for-profit enterprises. Thus, CDCs must hire staff with the flexibility to change as the organization changes and offer them appropriate training.

Rural CDCs typically are more visible in their communities than their urban counterparts. As a result, organizational capacity issues faced by rural CDCs may play out much more publicly than those faced by urban CDCs.

On the other hand, anecdotal evidence suggests rural CDCs have an advantage in staff and leadership stability. Although rural CDCs may have difficulty finding staff with required specialized skills, they may be more successful at retaining the staff they have hired. Staffers at rural CDCs—especially key program staffers—appear to stay with the organization longer than staffers at urban CDCs. According to Glickman and Servon, continuity of leadership and staff is closely linked to a CDC's goal attainment. In other words, the most stable organizations are the most effective.

Programmatic capacity: Offer useful programs

Rural communities have many community development needs: affordable housing; infrastructure such as water and sewer lines, parks and community facilities; living-wage jobs and venture capital and debt financing for small businesses and the delivery of human services.

Whichever needs a CDC addresses and whatever programs it offers, it must possess the skills, experience and funding to deliver quality programs. Often, newer or less financially stable CDCs decide which programs to offer on the basis of funding availability. For example, Midwest Minnesota Community Development Corporation (MMCDC) was established in 1971 when the Mahube Community Action Program, which served three counties at the time, obtained funding for a specialty crop program. MMCDC president Arlen Kangas notes, "Until we got established financially, we followed the funding. Then we were able to follow the needs." From its modest beginnings, MMCDC has grown to its current capacity—serving seven counties and providing a wide range of economic and housing development programs.

When a CDC structures its programs, it must be certain to address the critical issues and needs of its service area. For example, many CDCs offer microbusiness loan programs, which are often needed when very small businesses lack access to capital. CDCs usually provide these loans at below-market rates. Of course, the business is grateful to pay less than market-rate interest for the loan, and the lower cost of debt may also decrease the risk associated with the business. Nevertheless, offering loans at below-market rates decreases the number of loans that a CDC can make. CDCs must look at the business reason for any program feature.

As a CDC gains experience and funding, its mission and vision may lead it into new program areas. The safest areas are closely related to the original programs. A CDC might branch out from offering homeownership counseling to offering a revolving rehabilitation loan fund.

Sometimes the mission of the CDC leads it into a program area that is quite different from the organization's original focus. For example, MMCDC concentrated its early efforts on economic development. As in many rural service areas, its communities soon found that the increase in manufacturing jobs, created in part by the efforts of the CDC, resulted in a need for affordable housing. To support its efforts at expanding economic activity, MMCDC needed to make housing production a priority.

In another instance, Northern Initiatives (NI), which serves Michigan's Upper Peninsula, found that more than half the borrowers in its loan program were producers in the wood products industry. Although CDCs usually focus on general business practices and not on specific industries, NI decided to become more knowledgeable about the wood products industry and now has a research and development initiative at work on industry-wide problems.

In such a situation, a rural CDC likely has no local contacts to offer advice on operating programs in a new area. "In my experience," says Rupp of HRDC, "people at CDCs in rural areas are very bright but they are isolated and need people to talk to." National organizations such as the Housing Assistance Council and the Neighborhood Reinvestment Training Institute offer training in the operation of specific types of community development programs. Also, the CDC may want to contact CDCs in other areas for advice, using the Stand Up for Rural America Campaign directory of rural CDCs or the United States Department of Agriculture's Rural Development "Success Stories" Web page as resource guides.

In this development in Detroit Lakes, Minn., Midwest Minnesota Community Development Corporation used several creative financing approaches to construct 18 affordable homes—approximately three-fourths of which were sold to first-time homebuyers.

Network capacity: Forge partnerships, reach out

To succeed, a CDC must be willing and able to work with other institutions. Especially in small communities where there are fewer resources, both financial and human, all parts of the community must work together toward common goals. For example, Southwest Minnesota Housing Partnership (SWMHP) resulted from a partnership between a public regional development commission and three private, nonprofit organizations. The groups came together because, separately, they lacked the finances and capacity to tackle housing problems in their area.

Partnerships often enable CDCs to leverage funds or other resources. Northeast South Dakota Economic Corporation (NESDEC), the sister organization of Northeast South Dakota Community Action Program, administers a business loan fund. This CDC formed partnerships with other local loan funds so that its portion of a typical loan package is only about 50 percent, with other loan funds and banks lending the remaining 50 percent. To leverage its resources, Michigan's NI works with local colleges, encouraging them to develop programs on work force development and help realize NI's goal of keeping Upper Peninsula businesses competitive.

Many CDCs have formed partnerships with financial institutions to facilitate joint programs, such as microloan funds.

Typically, the CDC offers partial financing of or a guarantee for bank financing of a small business, and it must build relationships with local banks before they will participate in these types of programs. NESDEC has working partnerships with about 60 local banks.

Bob Hull, executive director of NESDEC, places heavy emphasis on building relationships with local banks. "Banks," he notes, "are the permanent institutions in the community that have the resources to fill long-term demand for business financing." Often, these relationships are critical to innovative programs. Rupp of HRDC comments, "We could not have done the land trust single family homes without the local banks' willingness to make these mortgages, even though they could not be sold in the secondary market."

A single organization cannot address all the community development needs in an area, nor should it try. Many CDCs have found they can advance their own goals by helping other development organizations in the community. I-7 has learned that creative and effective partnerships are vital to sustaining development and private investment throughout Wisconsin. Since 1970, this CDC has worked with localities to establish more than 100 local associations and cooperatives in support of community economic development in its service area.

A CDC must reach outside the community—not only for funding, but also for technical and other nonfinancial assistance. NI describes its president's job duties as: "Uses extensive experience in the support of private and public partnership projects to build the strategies and collaborations that support NI's efforts and work."

With few or no professional peers in the community, leaders of rural CDCs often feel isolated. To combat this isolation, visionary CDC leaders, managers and board members often find technical assistance and psychological comfort in reaching out to community development networks.

The Red Cliff Band of Lake Superior Chippewas (Red Cliff Band), located on a narrow strip of shoreline on Wisconsin's northernmost point, knows the problem of being isolated. Although this tribal government technically is not a CDC, the Red Cliff Band took the unusual step of applying for inclusion in the Rural LISC network. As a result, the Red Cliff Band gained access to this network of other community development organizations and obtained information on development approaches that can be adapted for use on the reservation.

Also, CDC staff may benefit from attending conferences and training sessions on rural development issues. These activities take time from day-to-day management and sometimes consume precious funds, but they may make the difference between an organization that continues to grow and one that stagnates.

Southwest Minnesota Housing Partnership is the owner and developer of this 24-unit rental community, a low-income housing tax credit development in Luverne, Minn.

Political capacity: Seek, build community support

The successful rural CDC has a high level of credibility inside its community, and political leverage on the outside. It has educated constituents and partners and can manage conflicts arising from multiple community interests.

To ensure that its strategies and programs reflect the priorities of its service area, a CDC must seek the active involvement of those it serves. Roni Monteith, vice president of NI, notes, "Community development is not just a matter of producing houses or jobs. Only the community can determine the right sets of activities."

In recognition of that idea, SWMHP's policy holds that it must be invited into a community before it will undertake development projects. Then the CDC and community leaders work together to determine what kind of development will best meet the needs of the community, using the housing expertise of SWMHP staff and input from housing studies or other market data.

Without the active support of the community members for which it advocates, a CDC cannot seek the support of public policymakers, other CDCs, and funders. Community members and partners must understand the importance of the CDC's community development efforts and the role of public and private partners in advancing these efforts. The ideal is for community members and partners to advocate on behalf of community development in general and the CDC in particular. Achieving an informed and active citizenry usually requires that CDC leaders be as adept at educating and leading the community as they are at developing it. Kangas of MMCDC observes, "I think that as I've gotten better at working with the community leaders, they've gotten smarter."

Rural CDCs, as an industry, have been hampered by a lack of visibility outside their communities. This harms rural CDCs because funding goes primarily to visible programs.

Rural CDCs often lack the venues available to their urban counterparts, such as exposure in big-city newspapers and the attention of large urban institutions like banks, corporations and foundations. A rural CDC working alone cannot build the type of political influence needed, and each CDC must do its part by regularly contacting its congressional representatives, state legislators and "state beat" reporters from large newspapers in the region. CDCs can also increase their political leverage by banding together to form coalitions and supporting the efforts of national initiatives such as the Stand Up for Rural America Campaign. (See "A Conversation With" for more information.)

A rural CDC may find that representing the interests of a small community is more difficult than working in an urban community. The urban CDC often defines its mission and constituency quite narrowly, such as serving the housing needs of residents in a particular low- to moderate-income neighborhood. The rural CDC often has a broader mission and constituency, such as that of MMCDC—its mission is to provide capital and technical assistance to promote job creation, economic diversification and housing development in seven Minnesota counties. According to Bay of I-7, "A CDC in rural areas has to be a jack-of-all-trades."

Broad missions and diverse constituencies often translate into conflicts regarding goals and strategies. The successful CDC must remain aware of these competing interests and become adept at balancing diverse demands. Conflicts arising from a CDC's community involvement can be resolved in ways that strengthen relationships among community leaders and create more effective programs. Bay observes, "CDCs sometimes have to be the irritant so the pearl is formed."

Through its certificate of deposit pledge program, Northeast South Dakota Economic Corporation helped the owner of this retail store in Sisseton, S.D., obtain a loan to purchase the building and the business.

Resource capacity: Keep finances in order

Access to financial resources is vital to the success of any enterprise. However, CDCs must be able to manage funds as well as raise them. According to Poznanski, "Most failures of CDCs result from funding and financial management difficulties. Typically, CDCs that failed were overly dependent on a few funding sources, didn't take advantage of available federal funding, lacked solid financial management skills and didn't develop administrative and business support functions within the organization."

Since CDCs usually operate on tight budgets, financial management must be solid and financial statements must reflect the true position of the organization. More than one CDC has failed because the board and the leaders of the organization did not recognize the severity of its financial deterioration. Securing and following the advice of an outside auditor is crucial to the financial viability of a CDC in this situation. Saving for a rainy day often seems unimaginable to a CDC. However, without a cushion, the CDC is subject to financial distress that results if funders change their priorities or delay their payments.

Successful CDCs operate like private businesses. Furthermore, funders want to fund a stable CDC—one that is not overly dependent on one or two sources of income and instead explores as many sources of funding as possible, and one with a cushion to get it through emergencies. NESDEC is an excellent example.

NESDEC has built permanent capital, which represents 30 percent of its assets available to lend or to pledge as guarantees on bank loans.

NESDEC has established a variety of funders. Over the last 21 years, 30 percent of the capital in the CDC's permanent reserve was funded by the federal Community Service Block Grant Program and other federal grant programs, foundations, utilities, local development corporations, churches, social investment funds and retained earnings from interest and fees charged to its clients. The other 70 percent of capital currently comes from relending programs offered by three federal government agencies and three national, private community development intermediaries.

NESDEC has created a source of financial strength and stability in its permanent capital, funded in part by retained earnings, and has built a wide range of funding relationships—both within and outside of its community—representing both governmental and private sources.

Federal funds play an important role in CDCs and can provide the stable source of income that is needed to attract other funders. State funds also can fill this role, but the availability of such funds often depends on the visibility of rural CDCs within the state.

The hardest funds for a CDC to raise are operating funds. Newly formed CDCs may have initial success raising these funds, but a CDC must have a plan for generating operating capital long after seed funds are depleted. Some CDCs become self-supporting, or able to cover their operating costs through fees and interest charged to program clients. Other CDCs cover only part of these costs.

One school of thought says that CDCs should work toward self-sufficiency, but should not sacrifice their ability to do innovative programs. As Lisa Onken, SWMHP loan officer, observes, "CDCs are supposed to try things—things that may fail or take a long time to pay their own way." She notes that if innovative programs were easy to do, others would be doing them.

With coaching from Northern Initiatives, the fabrications division of Argonics, a synthetic rubber products manufacturer in Marquette, Mich., performs a complete operations reengineering to improve product quality and decrease costs and delivery times.

Flexibility and interactions

No matter what area of community development a CDC is targeting, Glickman and Servon found that a CDC that is flexible, or responsive and resilient, fares better than one that lacks these attributes. CDC leaders must expect changes in the environment and be prepared, if only mentally, to respond. In addition, a CDC must have the resources, both financial and psychological, to bounce back from reversals, adapt and keep its vision and goals in mind.

Crucial interactions exist among the five components of capacity building, and Glickman and Servon discuss this in their article. A CDC cannot attract resources without first developing community networks, political know-how, organizational skills and programs that address constituent needs. Similarly, an effective organization facilitates fund raising, expansion into new program areas, increased networking and political connections.

Although the components of capacity building are interconnected parts of a whole, recognizing them separately offers CDCs a starting point for making improvements. In some organizations, starting with political capacity may be crucial. In others, organizational capacity might be the most logical place to focus initial efforts. Recognizing these interconnections offers CDCs a caution that deterioration in one area should be stemmed before it affects other areas, but it also provides hope that advances in one area will flow into the others.

For more information on the CDCs profiled in this article, contact:

Human Resource Development Council, www.thehrdc.org or (406) 587-4486

Impact Seven, Inc., www.impactseven.org or (715) 357-3334

Midwest Minnesota Community Development Corporation, www.ruralisc.org/mmcdc.htm or (218) 847-3191

Northeast South Dakota Community Action Program and Northeast South Dakota Economic Corporation, www.nesdcap-nesdec.org or (605) 698-7654

Northern Initiatives, www.northerninitiatives.com or (906) 228-5571

Red Cliff Band of Lake Superior Chippewas, www.redcliff.org or (715) 779-3700

Southwest Minnesota Housing Partnership, www.ruralisc.org/swmhp.htm or (507) 836-8547