Making Change: Property Values

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In its 11 years as one of the country’s leading AIDS services organizations, Housing Works Inc. has combined its mission-housing and caring for homeless people with HIV and AIDS-with an extraordinary entrepreneurial panache. Housing Works is an industry leader in “social purpose business ventures”-businesses run by nonprofits to fill a social need, often linked to their mission, and simultaneously make money for the organization. In its used bookstore in swanky Soho, collectors browse for rare first editions, while homeless people learn job skills. Fashion houses like Chanel donate new clothes to the organization’s thrift shop boutiques, which gross $7.5 million yearly.

This spring, Housing Works is venturing into a business that’s a lot less glamorous, yet far more risky: the high-stakes world of residential property management. For this, Housing Works will need all of its capitalist flair.

Housing property management is the Achilles’ heel of community development nonprofits, spelling many a high-profile crisis over the past 30 years. There’s a long list of those stricken: Flatbush Development Corporation, Interfaith Adopt-a-Building, Pueblo Nuevo, Oceanhill-Brownsville Tenants Association, Harlem Restoration Project, East Harlem’s Nerve, Inc., Banana Kelly, West Harlem Community Organization. Some almost went bankrupt; others got mired in messy public relations problems. Most of the community groups that have tried it have, in the end, had to drastically scale back operations.

The problem, say most housing experts, is that most nonprofits go into the management business thinking of it as an extension of their community service work. “Low-income housing management is not considered a profit-making endeavor by any of the neighborhood housing groups which do it,” says Irene Baldwin, executive director of the Association for Neighborhood and Housing Development, an association of community-based nonprofit housing and social service groups, many of whom have lost money in the field. For most community service nonprofits, housing cannot be separated from mission.

But this is precisely what makes property management such a minefield. Unlike proprietors of a coffee shop or a used bookstore, nonprofit housing managers confront situations that require them to act like a business-or go under. Tenants go on rent strikes. Buildings fall apart. People sue. Managers face piles of paperwork, staff burnout and grumpy clients who sometimes withhold rent.

“Here you are in a not-for-profit organization, but you have to have the mindset of a business,” says the head of one community group that is currently struggling with the contradiction. “You’ve got to run the best possible business, from a business point of view-which almost no nonprofit can ever claim it does-or else the whole organization can go down for one minor point of your social purpose.”

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So if property management is such a nightmare, why would Housing Works-which, after all, has a burnished reputation to lose-want to touch it? For that matter, why do housing groups go into such a tricky field at all?

It’s simple: for the money.

Finding a stream of cash that’s not tied to any particular spending requirement-that has no strings attached-is the holy grail of nonprofit management. “We try to squeeze out as much from the dollar bill as we can,” says Robert Collins, president and CEO of the organization’s new property management arm, Gotham Assets.

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Collins, who has been restructuring Housing Works’ operations for the past three years, pitched Gotham to the organization as another entrepreneurial venture-much like the organization’s venture into Medicaid billing, which proved to be profitable. To Collins, Gotham is the perfect marriage of Housing Works’ “energetic entrepreneurial spirit” and its “eclectic militant objective.”

But long-term observers, who have seen the fall of many a property management scheme since the 1970s, warn that anything above breaking even may be difficult, even for an outfit with a business ethos like Gotham’s.

Unless there are very high management fees and rents-something uncommon for nonprofits, which generally have low-income tenants-property management tends not to generate much income. And rent collection needs to be as close to 100 percent as possible; some nonprofits, which tend to be slacker about collections, tip as low as the 70s and 80s.

To do all this, housing managers need a large concentration of staff. For example, a building of 25 apartments needs a super onsite, a financial person collecting the rent and depositing checks, and someone to supervise the super and coordinate outside workers like electricians and plumbers. If a management company is handling geographically dispersed properties, it will need more than one team to carry out these duties.

Personnel has proved to be a problem for nonprofits whose business ventures double as job-training programs. Housing Works has been successful in using its retail ventures to train clients; it plans to use Gotham to provide additional job training opportunities for them. But for David Pagan, executive director of Los Sures in Williamsburg, training personnel on the job kept his operation from flowing smoothly.

Housing property managers have to be on top of everything every minute: Operating margins can vanish if back rent piles up. Cash outflow and staff must be scrutinized minutely to guard against mistakes. Things can quickly fall apart if there is a sudden change in top management. One housing analyst likened building management to trading commodities: “If you don’t pay attention for a day or two, you can lose a large amount of money.”

West Harlem Group Assistance Inc., which has been in the housing business since the mid-1980s, slipped into the red after spreading staff and management over too many housing management projects. When Donald Notice took over as executive director in 1997, he had to radically cut back. For starters, he picked only projects for which he was sure his organization had the capacity and expertise. He reset priorities, putting more resources into training and maintaining staff, and aggressively sought grant funding. One thing that turned West Harlem around, says Notice, was outsourcing rent collection, which the office computers were poorly equipped to handle.

But for Notice, all this restructuring was the easy part. The major quandary, he says, was trying to straddle two things: eyeing the bottom line while serving the community. This contradiction has been a key problem of other neighborhood-based groups, such as Los Sures, which started out doing tenant organizing, then branched into development, and soon after that took on management-only to find itself in the odd position of being the very landlord tenants complained about.

“It’s a conflict,” agrees Los Sures’ Pagan. “You’re set [up] to do services for free, and suddenly you’re charging for services. You’re organizing on one side, then on the other side you’re dealing with the tenants as a landlord.”

To reconcile this dilemma, nonprofits need to find-and keep-especially good managers. Housing managers need to have good communication skills, to placate unhappy tenants and negotiate with contractors. But they also need the skills to stay on top of the business end, too. “It can be hard to find that sort of person, and maintain the intensity without burnout,” says Pagan.

Collins, who has more than 20 years experience as a nonprofit executive, hopes to avoid a lot of these pitfalls by starting out easy.

Gotham’s first client will be Housing Works itself, for which it will manage 95 units of supportive housing and 87,000 square feet of facility space. Over the next 18 months, Gotham plans to bring on 70 more Housing Works units. Outside the group, Gotham projects to end its first year of operation managing 195 private residential units and 60 owned by nonprofits. “By the second part of the second year,” says Collins, “we hope to break even.”

After that, the plan is to quickly build up a portfolio of good private-sector clients. To be viable, property management companies need at least several hundred units; some experts estimate over 1,000. Gotham is looking at privately owned small buildings on the Lower East Side, which by virtue of being close together would be easier to manage than those spread out. Most importantly, Collins will try to focus on new developments and gut-renovating old buildings, to avoid the trap of maintaining decaying properties.

Trying to get a high volume, though, could trip Gotham up. Housing Works’ experience so far is with brand-new buildings that require little maintenance. It chooses its tenants carefully, and closely monitors their lifestyles. But New York is a city of aging properties and cantankerous tenants-people who, unlike the AIDS agency’s clients, won’t have any particular reason to be kind to Housing Works.

Even so, says Maureen Friar, executive director of the Supportive Housing Network of New York, all this can be done. Friar believes that Housing Works has the benefit of hindsight, having studied the poor records of other organizations. “It’s an evolution that’s gotten better,” she says. “Some of the pioneers took over buildings where they could only do patchy repairs. A group like Housing Works, however, knows what it needs in terms of appropriate financing. They bring good management skills to the table.”

As for the contradiction between the social mission and landlord role, Collins hopes that Gotham Assets itself can serve as a buffer between Housing Works and clients. Clearly defining separate staff should help. Trainees-who will learn carpentry, plumbing and electrical skills-will be carefully supervised and chosen from the pool of more functional clients. This is the formula Housing Works successfully applied in its other programs.

If all goes well, Collins even hopes to teach the private sector a lesson: He wants to pick up buildings from private landlords who foundered as property managers. “Every once in a while, you hear of small landlords really struggling,” says Collins. “They get into this thinking they’re going to make a get-rich-quick scheme, and find out that it’s really difficult.”

Judith Matloff is a Manhattan-based freelance writer.