My Trinh was the 2008 – 2011 Bart Harvey Enterprise Fellow. She is currently a Program Officer at Enterprise, helping to coordinate and create resources related to assisting nonprofit development partners. She is also focused on and sharing best practices internally and externally.
What makes some housing development organizations survive and even prosper in tough times while others encounter crisis? We recently examined ten diverse organizations that faced severe financial instability, and drew some lessons from the exercise.
How can developers avoid the pitfalls that we observed?
Grow strategically. New business lines are not to be started without thoughtful consideration, particularly when there are few resources to make the infrastructure investments that will take the new business past the break-even point. For housing developers who do not manage their own properties, property management may seem like a natural business line to grow. It certainly can be very successful and a stable source of income. But, without adequate initial investment and the capacity to subsidize the business for a few years until it becomes profitable, it can also become its own source of problems.
Conduct Forecasting and Scenario Planning. Take some time to peer into the future. Nobody has a crystal ball, but that’s why examining multiple scenarios is so critical. It can help an organization think through alternative strategies should something go awry.
And what can government agencies do to help?
Set Realistic Fees. When fees to owners do not reflect the true costs of operating the properties, the organization must subsidize the project. For greater sustainability, the projects should be able to operate without subsidy, and even generate cash flow for its owners. This is the best way to ensure that projects do not lead to the demise of their owners, and the communities that they serve.
Incentivize Long-Term Ownership. In structuring housing credit transactions, public lenders should ensure that there are financial incentives for effective ownership and operation of the properties. If all surplus cash flow goes to pay cash-flow contingent loans, what financial incentive is there to operate a property beyond the break-even point?
Want to learn more about our study of organizations in financial distress? Looking for more in-depth recommendations? Register for Enterprise’s February 23rd Live Online Event, “Building Sustainable Organizations: Lessons and Recommendations from the Field.” A copy of the full report on this topic will be distributed prior to the presentation.
Enterprise is launching our new blog, @ the Horizon, on February 15, 2011. Please check the link for new posts and share your comments!