Affordable Housing Institute : US

“A non-profit is a for-profit joined at the hip with a foundation whose grantee is itself.”

 

We share common goals

 

This phrase popped out when I was talking a while back with a friend of mine who works, as I do, with a particular non-profit for whom we both share great fondness but whose professionalism sometimes gives us bouts of despair.  Like most of my beliefs, it’s a Yogi Berra dissertation (”you can observe a lot just by watching“) confirmed by Groucho Marx (”who are you going to believe, me or your own eyes?”).

 

You can’t catch what you can’t see, can you?

 

This test of a non-profit’s functionality matters because so much affordable housing, in the US and around the world, is developed, managed, operated and owned by non-profits, about whom myths and stereotypes abound. 

 

Non-profits are widely considered a ‘better’ long-term owner of affordable housing because people think non-profits care about the mission more than for-profits do.  Affordability always costs government money, and government, which is understandably and correctly chintzy about its expenditures, instinctively expects non-profits to do more with the same dollars.

 

That better not be your sole business model

 

As a generality, non-profits are more likely to place caring ahead of budget-balancing.  Non-profits have a mission orientation; the board of directors is in it for something other than monetary gain, something paid intangibly — altruism, morality, status, prestige, or self-esteem — that causes them to give of their time to help others.  It leads to a predisposition to aid that is not innate in for-profits (nor should it be). 

 

Conversely, affordable housing always has that dual mission: social outcomes, but also economic viability.   As I’ve written on the main AHI site:

 

Tradeoffs?  What tradeoffs?

 

 

Conjure me up some money, willya?

 

Properties that lose money fail no matter who owns them.  Failing properties harm residents no matter who owns them.  (Economic starvation has brought public housing to its current untenable situation, where the future is bleak, and bold action is overdue.)  A non-profit is an owner too [Post on this subject to come — Ed.], and it must defend the property’s economic imperatives against all comers, including both residents and government. 

 

I’m protecting the financial goal

 

Yet a non-profit is an enterprise too.  By the law of economic gravity, enterprises have to prosper.  This applies at two levels, both the property and the non-profit itself.  A landlord is nobody’s friend but the property’s [Also a blog post topic sentence — Ed.]. 

 

[Out of this premise falls the conclusion that the cost of long-term affordability must be borne by government, as a subsidy in one form or another.  This concept is too little understood, especially by government that wishes not to understand.]

 

There are many times when the right decision is unpopular with everybody else: the residents (who bear some of the rents increase), the government (which pays the rest), the community (which likes the benefits but expects not to pay for them), the local officials (present for the ribbon-cutting and absent for the cost hikes).

 

What makes you think I need friends?

 

For-profits are better at making tough decisions; they’re used to them.  Next to being able to generate new business, it’s the survival skill above all others.  This doesn’t make for-profits immune to mission; they just instinctively rank it second.

 

Good non-profits expect to make money in their core business area, because profit is the price you pay for competence.  The same is true of non-profits — or, at any rate, of those that last a long time.  Everybody loses money now and then, so you had best make money some of the time, to cover the losses you make some other times.

 

For-profits and non-profits are thus alike in their pursuit of profit from core activities, and here arises the divide: what do they do with profits?

 

“You mean we have to make a choice?”

 

Some excess capital is retained as reserve or working capital.  Some is reinvested in the business, infrastructure, people, whatever.  Both for-profits and non-profits do these things; they’re not a distinguisher.  What about the genuine excess profits?

 

For-profits pay it out as dividends (huzzah).

 

Dividends keep widows happy

 

Non-profits hold on to it and deploy it into some further charitable mission.  They use their profits as the source of funding for their charity, which is they themselves.  For example, in the US, many housing non-profits push into resident social services, for which there is no viable business model today.  In the UK, housing associations tend to take excess capital and acquire uneconomic properties, expanding their mission the hard way.

 

The vulnerability for non-profits is that their desire to help outruns their financial capacity to help, and they imperil the successful business in pursuit of the next charitable expansion.

 

Many a non-profit has foundered on over-expansion, or unwillingness to cut back on its mission charities when its core activity suffers a reverse and operating profits drop.

 

Most non-profits were and are founded out of zeal to do good.  From there to professionalism is a long road.  Generally, the older a non-profit, the more it has internalized the need to be operationally profitable, and professional.  Some non-profits, large and old and established, like universities and hospitals, that have vast endowments, become little or large factories in themselves.  (Harvard’s endowment is well over $25 billion.)

 

A converging path has been taken by for-profits, many of whom came to plunder and stayed to nurture.

 

 

Which is better?  The for-profit that must remind itself to care, or the non-profit that has to remember to make money?

 

In truth, they’re complementary.

 

Which part is better?

 

Successful affordable housing achieves dual goals simultaneously: good social outcomes, good economic outcomes.

 

Which end of the bridge is more important?

 

Balance, harmony.  Profitability and contribution, fused together.

 

Successful non-profits have figured out that profits and purpose are not either-or, but both-and.  Each sustains and complements the others. 

 

Not all non-profits are for-profits glued to charities.  But all the successful ones are. 

 

We’ve learned to live together

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