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Daily Business Review - February 17, 2015

Nonprofits Earn $500K From Low-Income Housing Fund

By. Eleazar David Melendez,

A city agency is taking $500,000 away from a fund meant to create four low-income housing complexes in one of Miami's poorest neighborhoods.

Payments to two nonprofits chosen without a competitive process have been presented as an administrative expense for handling over $43.5 million in public borrowing for the housing ventures. The developments, one of which broke ground last year, are being built largely with money borrowed by the city's Southeast Overtown Park West Community Redevelopment Agency.
    The chunk of money going to the nonprofits has puzzled some familiar with the development plans. The official role of the charities is as an ill-defined "nonprofit conduit," according to Miami-Dade County documents.
In each project, a complex financing mechanism moves money borrowed by the CRA into the hands of a nonprofit, which must sign the funds over to the project's developer. The roundabout mechanism is being used to secure federal tax exemptions for the projects, CRA officials and developers say.

Each of the four developers will pay the Urban League of Greater Miami Inc., which primarily serves Miami's African-American community, a $125,000 fee for its role as the nonprofit conduit.

The Urban League is expected to keep $200,000 and send $300,000 to Urban Philanthropies Inc., a 15-month-old nonprofit with no stake in the development deals.

The Urban League had no comment on the payments by deadline.

About $100,000 of the money going to Urban Philanthropies is earmarked to create a few-strings-attached grant fund for Overtown small businesses. The nonprofit's board has not decided how to spend the rest of the money, but its president, Philip Bacon, told the Daily Business Review the funds would be used to benefit the Overtown community.

Among the ideas being floated: funding an entrepreneurship competition and tech-focused business incubator for Overtown residents, and hiring a consultant to bring a discount retail store to the neighborhood.

The $500,000 disbursement has been shielded from public knowledge.

The fact a "nonprofit structuring fee" was being charged on each Overtown affordable housing project was not specifically disclosed in line-item budgets considered last year by city commissioners, who had to approve public borrowing for the projects. The existence of the set-asides was disclosed after the county Housing Finance Authority commissioned an independent " credit underwriting report" in November that showed how the CRA money was being spent.
    So obscure is the fee that three of the five city commissioners on the CRA board—Frank Carollo, Marc Sarnoff and Francis Suarez—said they were learning of it for the first time from the Daily Business Review.
CRA vice chairman and City Commissioner Willy Gort told the DBR the commissioners were aware of the fee when they voted for the larger affordable housing package last year. CRA chairman and City Commissioner Keon Hardemon did not respond to requests for comment by deadline.

Clarence Woods, the CRA executive director, said commissioners were generally aware of "the way in which we were doing the finance of these deals."

"Did we ask the board, 'Can we have a nonprofit involved, and can you approve that?' No, we didn't do that," Woods said. "If you're asking me if we told them specifically, I'm not sure that was mentioned specifically, but we did mention it to them ad nauseum about the process."

In an email to the Housing Finance Authority board, Woods offered a different explanation, writing: "As the executive director, I chose the nonprofit with approval of my board. No formal process was conducted, but there were specific criteria for consideration. Specifically, we wanted an organization that was based in Overtown and had an active stake in our redevelopment efforts."

Corporate records filed with the state list Urban Philanthropies' principal business address at Las Olas River House, a luxury condominium tower in downtown Fort Lauderdale, and a Coral Springs mailing address at a Publix-anchored retail center.

Overtown Booster

Bacon is known at Miami City Hall for a decade-long, unsuccessful effort to bring development to Overtown through another nonprofit. From 2002 to 2012, he was an employee of the Collins Center for Public Policy, which owned land in Overtown and was trying to work out a development deal for its properties.

Bacon brought in several developers, including nonprofit builder Carrfour Supportive Housing and Miami affordable housing developer Albert Milo Jr., but failed to hammer out any deals.

Bacon became a high-profile booster of Overtown initiatives. In 2003, he told the Miami Herald that while the inner city had been in decline for over five decades and seen a string of broken revitalization promises, the developments being heralded by his organization and others were "not pie in the sky."
    "If it's not there in five years, you can run us out of town," Bacon told the Herald.
Sarnoff told the DBR that Bacon's Overtown activities were "always concerning and disappointing," driven by his need to cut a profitable deal while selling the land to the CRA.

Bacon blamed the failure of deals to materialize on the inability of developers to secure state tax credits.

"Most of these projects failed because our co-development partners simply didn't get the tax credits," Bacon told the DBR.

Work For Free?

Woods said the idea of having local nonprofits get paid for serving as the "nonprofit conduit" for CRA money was envisioned from the moment his agency began considering taking out a large affordable housing loan of $43 million to $60 million in early 2012. The CRA always intended to work with Bacon but wanted to do it through the Collins Center, Woods said.

He said the CRA considered using a different nonprofit, the Miami Foundation, but couldn't reach an agreement. The CRA decided to stick with Bacon and his new corporation because "he's basically committed to being our partner and following the vision that was there for the area," Woods said.

He vehemently denied the money going to the Urban League and Urban Philanthropies was a grant, insisting it was a fair payment for the conduit role the Urban League is playing in the deal. In an email, Woods told the DBR, "The fee was suggested by one of the developers in a conversation where I asked him what did he think would be adequate compensation for the conduit."

Gort similarly described the disbursement as a payment for services rendered and considers it acceptable.
    "I still haven't seen anyone work for free yet," Gort told the DBR.
An executive with one of the most prominent affordable housing developers in South Florida told the DBR that it's not unusual for developers to pay or give an equity stake to nonprofits that bring significant resources into a project—land, state tax credits or an link to public funding.

But Timothy Wheat, regional vice president at Pinnacle Housing Group, said it made little sense for a developer to pay a 501(c)3 charity for the federal tax exemptions a partnership might generate, saying that's "not as big a factor as you'd think it is."

"The biggest advantage of having a 501(c)3 is their core existence signals the project is being sought for the public interest," Wheat said. While Pinnacle is not involved in the Overtown developments and the executive stressed he would need to see exactly what the developers are doing to make a precise comment, he said he was "having a hard time figuring out their angle here."

"Why bring in a nonprofit and pay them a fee if there's not a competitive advantage?" he asked.

"I can tell you there'sno motivation to defraud or do anything that's not above board," Woods told the DBR.

Transparency?

As part of the due diligence process before releasing funds to build affordable housing in Overtown, the board of the county's Housing Finance Authority questioned the fees going to the nonprofits at its November meeting.

Don Horn, chief assistant state attorney who has coordinated the work of county grand juries and is the long-time chairman of the HFA board, said he had never seen anything like it—where a nonprofit was being paid a large fee for deal participation—in over 20 years of approving public-finance deals.

Not wanting to hold up the affordable housing projects over the issue, the board approved the county's portion of the financing by a 5-1 vote.

Daniel Rosemond, the dissenting vote, is deputy city manager in Hallandale Beach and was brought in in 2013 to lead that city's scandal-ridden community redevelopment agency.

He told the DBR voting no on approving county funds "was a rather reluctant vote because I certainly support the project, but I just can't get over the secondary component requiring the payment to the nonprofit."

"If the Miami CRA required a nonprofit participant, I would have thought the developer should have selected the nonprofit through some transparent process," Rosemond said. "And if the Miami CRA board had not approved the selection or the process, why was it being brought to us?"

Rosemond characterized his vote as a principled stand.

"How long are we going to keep approving these deals that have the rest of the country looking at South Florida government and saying 'There they go again.' "