Issue #148, Winter 2006

A Merger of Equals

The merger of Over-the-Rhine Housing Network and ReSTOC created a transformative opportunity for these two Cincinnati institutions and their neighborhood.

By David Cramer and Robert O. Zdenek

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Why Merge?

In an environment where community development corporations (CDCs) are competing for scarce resources, joining forces to better serve their constituents makes sense. But merging can be traumatic for well-established nonprofits; it's not often that the two parties collaborate as equals as they go through the merger process. If they can do so, they can emerge as a stronger, more dynamic organization.

Two Cincinnati housing nonprofits, Over-the-Rhine Housing Network and ReSTOC (Race Street Tenant Organizing Cooperative), completed two years of working toward a merger in June 2006. Both were engaged in affordable housing and property management in the Over-the-Rhine neighborhood, located near downtown Cincinnati. They shared the same founder and board members, and had a similar approach, in that both organizations were strong advocates for the homeless. Both were often at odds with others who had different perspectives on improving the neighborhood. The organizations did differ in their development approaches. ReSTOC relied heavily on volunteer labor - rehabbing one building at a time, while Over-the-Rhine Housing Network arranged multiple buildings into financing packages.

Out of their merger into a new entity -Over-the-Rhine Community Housing (OTRCH) - came an opportunity to make transformative changes. The new organization kept its predecessors' core support for the homeless and very low-income people, and at the same time embraced a broader mission to develop a healthy neighborhood by creating opportunities for homeownership and mixed-income housing. The two groups came together as true equals, unlike many mergers in which the stronger organization absorbs the weaker one.

A Changed Environment
History challenged both ReSTOC and Over-the-Rhine Housing Network to rethink whether their status as separate organizations still made sense. Several years had passed since their common founder, Buddy Gray, passed away. A riot in 2001 (see SF#123) drew attention to the desperate conditions of the area. More recently, the neighborhood, which has a significant stock of historic residential and commercial properties near downtown, attracted renewed attention from developers and lenders. Even as people continued to leave the area, contributing to vacancies and poor cash flow, speculator and investor interest increased the value of both organizations' assets.

Both CDCs realized that they had reached a significant crossroads. They could stay in their precarious economic position, holding on to vacant property and gaining very little income, or seize the opportunity to reinvent themselves. They began merger discussions with the help of a facilitator in the fall of 2004. After examining different options, both boards concluded that a merger was a good idea and proceeded with an implementation process the next summer.

They hoped the partnership would bring about better efficiencies, management and professionalism. They also hoped to overcome the polarization of recent years. ReSTOC, in particular, had drawn the ire of key business and civic leaders because of its strong history of advocating for and serving homeless individuals. The homeless were especially unwelcome to those who perceived them and their service providers as threats to major cultural institutions and downtown revitalization efforts. At the same time, both organizations desired to maintain a strong commitment to their core constituents.

Improving the Neighborhood
Low-income residents left Over-the-Rhine in significant numbers during the last few years, in part because of neighborhood conditions, particularly crime as drug dealers had proliferated in the area. Both organizations' rental properties were experiencing vacancy rates as high as 20 percent, except those that had project-based Section 8 contracts. But even people with Section 8 vouchers tended to move to other neighborhoods with better security and housing choices.

OTRCH's leaders concluded that just providing affordable housing was insufficient - the neighborhood needed to be attractive and safe as well. Much of the previous renovation to their buildings had been done only as problems arose. The new group recognized that to attract tenants and buyers housing units needed to be modernized with extra features such as central heating and air conditioning.

OTRCH also intensified resident organizing at its existing properties. Leaders of both CDCs had observed that certain buildings, particularly those that built a sense of community through their residents' associations, did better in attracting and holding tenants. Instilling a sense of "ownership" was also important. In Community Views, a 12-unit project completed in 2005, OTRCH adopted a renter equity model that enables tenants to earn credit for paying rent on time and helping with maintenance. After five years, residents are fully vested and are able to use their equity toward buying a home or investing in a business. The residents' association also performs other tasks normally handled by a management company, such as making sure all units are occupied. The money residents earn through the renter equity program goes into a fund managed by a separate nonprofit, the Cornerstone Community Loan Fund.

Another important area of concern for the new CDC was the issue of race. The 2001 riot raised the profile of racial polarization in Cincinnati. Over-the-Rhine's residential makeup is mostly black, yet the agencies that provide services and housing tend to be white-controlled and staffed. Over-the-Rhine Housing Network and ReSTOC were no exceptions. Both boards and staff were majority white, and staff management positions were all white. Because ReSTOC's board structure required 51 percent of its members to be residents of its housing, a significant portion of its board was black but not the majority. Both organizations' entry-level and professional positions were filled by residents and minorities. The new organization retained a significant portion of residents and recruited black professionals to the new board. OTRCH also began to explore career paths for employees to grow in the organization. Mary Burke, the new executive director and former director of Over-the-Rhine Housing Network, says the board added a number of key minority leaders and now better reflects the leadership within the community.

The new organization was able to benefit from ReSTOC's volunteer base and block clubs. Without the merger, Over-the-Rhine Housing Network would have had to create block clubs and volunteer efforts from scratch. Instead, ReSTOC's strong organizing capacity was absorbed within the new CDC.

Changing Internal Values
As they moved through the merger process, both ReSTOC and Over-the-Rhine Housing Network looked forward to more collaboration with partners in the business community and City Hall. ReSTOC, despite its difficult relationship with downtown leaders, had a deep pool of supporters who were attracted to its intensely proactive homeless mission and advocacy, and many of them volunteered with the organization. These supporters also provided significant financial support.

While Over-the-Rhine Housing Network had some of the same leadership as ReSTOC, it was less visible and had a reputation for focusing more on the basic mission of developing and managing affordable housing. Creating a new corporation with a new name provided an opportunity to improve its reputation with the city, private development interests and funders. To maintain its commitment to the homeless, the new organization kept the core board and staff leadership from the two older CDCs and located its main office where ReSTOC had been headquartered.

The missions of both organizations had previously focused solely on serving people with the lowest incomes. But OTRCH's leaders recognized that a healthy neighborhood required a mix of incomes, even within the CDC's own developments. There was some internal debate within the new CDC about this, as its leaders worried about their self-image and that building anything other than very low-income housing might be perceived as "selling out." Others were concerned that resources were scarce enough without devoting any to people with moderate or higher incomes. Nevertheless, the group decided to provide rental units for a range of incomes within the same developments, as well as homeownership opportunities in the form of condos and single-family housing. Mixed-income development offered the opportunity to earn additional income for the CDC, which could then be used to sustain the organization's entire portfolio. The new mission of the organization is to "build and sustain a diverse neighborhood that values and benefits low-income residents and promotes an inclusive community."

Better Business
The new CDC's leaders saw that revenue from rents and home sales could sustain their core business of providing affordable shelter. But for this to happen, they needed to make several shifts in their business strategy. A fundamental change was to become more entrepreneurial by attracting higher-income tenants and also by expanding housing production. The organization also needed to shed unproductive buildings that were a drain on its cash flow. These vacant buildings, part of a previous long-term land banking strategy to thwart gentrification, were draining scarce revenue from the organization, yet recent speculation had made them valuable. Though many CDCs would love to own vacant property in a hot market, OTRCH decided it owned more empty buildings than it could afford to preserve.

A second shift was to raise the standard of property management. While both organizations managed their property adequately, it wasn't sufficient to either attract a mix of incomes or be competitive in the local market. Private developers in the same neighborhood were serving a higher-income renter and were also better able to fill their low-income units using Section 8 subsidies. Higher exterior standards were also necessary to contribute to overall neighborhood attractiveness.

One of the challenges that each organization had faced was not having enough staff devoted to housing production and management. Andy Hutzel, OTRCH's director of operations and ReSTOC's former executive director, says a key benefit of the merger is having dedicated staff with specialized expertise. Before the merger, ReSTOC had limited housing production capacity, since there was only one staff member working on new housing initiatives, and even then they could commit just 10 percent of their hours, he says. The merged CDC now has a full-time staff person devoted to this work.

Lessons
CDCs shouldn't necessarily have to merge to improve their performance, but there are some clear benefits. Mergers provide the creative space to adapt to new challenges, as OTRCH has shown with its renewed focus on the quality of its rental units and creating more ownership opportunities. These changes would have taken longer if the previous organizations had tried to alter their longstanding policies.

There are two major readiness factors that CDCs need to take into account when exploring mergers. First, board members' support is essential, since boards represent the broad interests of the community and can easily stop a merger from occurring. It helps when the two organizations' board members know each other, as was the case in Cincinnati. By recruiting more minority board members and creating career paths, the board and senior staff addressed core capacity issues early in the merger process. The other factor is that merging is easier when organizations have similar size and strengths, but more challenging when they have disparate resources.

Merging is a process that takes time and requires patience, says Burke. "We were very fortunate to have a dedicated staff person devote time to manage the merger process, and we are also fortunate that our board and community are both excited about the new organization. They understand that it will take time, but that we have all really improved our services and skills."

David Cramer is an affordable housing consultant in Baltimore. Robert O. Zdenek is executive director of the Alliance for Healthy Homes and vice president of NHI's board. They both served as the consultants in the OTRCH merger process.

Why Merge?

Since its inception in the late 1960s, the community development corporation (CDC) industry has grown dramatically, totalling 4,600 CDCs in 2005, according to a census conducted by the National Congress for Community Economic Development (NCCED). The survey also showed that cumulative CDC housing production increased from 650,000 units in 1998 to 1,252,000 in 2005.

But trends suggest the growth of CDCs and the resources they access are slowing down significantly. The number of CDCs grew at an annual rate of just over 3 percent from 1998 to 2005, compared to a growth rate of 11.5 percent during the 1990s. The slower growth of CDCs in the past few years correlates to the funding environment. Federal funding for community development, which represents the single largest source of dollars, has declined, and is likely to continue to do so. The NCCED census showed that in 1998, 46 percent of CDCs received state dollars; that figure was down to 38 percent by 2005. To expand or even maintain their housing and other community development activities, CDCs need to build capacity in a tighter financial environment.

Given their reduced access to financial support, it makes sense for CDCs to revisit their vision and mission. It's difficult for mature and stable organizations to be open to this. Organizations with long-term board and staff members often try to preserve their past and a culture that once helped the organization grow, but could now be very outdated. Merger discussions create the space to explore new directions while validating effective policies and initiatives and help participants understand that a new entity will be positioned to respond to new community priorities.

CDCs often have a relatively low profile in their communities, and key leaders and constituents may be unaware of what they have accomplished. CDCs are not well branded, which hampers their ability to raise different types of funding. A merger process gives them the opportunity to increase their public visibility through discussions with diverse stakeholders, and new materials and logos generate greater interest. CDCs can also enhance their political influence through the merger process, since the new organization is likely to have greater resources and more constituents.

Organizations that merge can build their capacity by drawing from their respective strengths and sharing certain administrative, financial and program functions. An organization with a larger staff can have more specialized functions, resulting in improved efficiency. Merging can also cut some of the duplication that exists with two organizations. This leads to increased economies of scale and reduced administrative costs, an important consideration given how hard it can be to raise core operating support.

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