What Killed Mesa, Ariz. CDC Housing Our Communities?

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July 6, 2012; Source: The Arizona Republic

Last week, NPQ noted the closure of Housing Our Communities (HOC), a Mesa, Ariz.-based nonprofit community development corporation (CDC) that served the area for 24 years (formerly under the name of Housing for Mesa). NPQ noted that the agency and other observers attributed its closure, at least in part, to an increased degree of federal red tape. As so often happens in situations like this one, more details are slowly trickling out, and Gary Nelson of the Arizona Republic pieces together more of the backstory. A farewell statement from the president of HOC on the organization’s website attributes this CDC’s closing to “economic conditions and lack of funding,” but Nelson portrays a nonprofit that found itself with six-figure cashflow problems, huge unpaid debts, and seriously critical HUD audits of its use of federal housing funds, which Nelson’s reporting suggests may have been equally—if not more—important in the organization’s demise.

A co-founder of Housing for Mesa in 1988 and now the executive director of the Phoenix office of the Local Initiatives Support Corporation, Teresa Brice said that the collapse of HOC “didn’t happen overnight” and pointed to the organization’s cashflow problems as “the beginning of a (downward) cycle” that a consultant provided by LISC could not reverse. Brice also pointed to delays in government payments as another contributing factor, a problem that the National Council of Nonprofits and the Urban Institute have documented as a nationwide dilemma, as NPQ reported in 2010.

Nelson’s article focuses on HOC’s problems with the Neighborhood Stabilization Program (NSP), the HUD resource for helping cities acquire and rehabilitate foreclosed homes, a huge problem in Arizona, which has been one of the state epicenters for the foreclosure crisis in the U.S. HOC was involved in the NSP programs of both Mesa and Avondale, Ariz. HUD audited the first $4.7 million in drawdowns of Mesa’s $9.7 million NSP program (of which Mesa contracted with HOC for $2.8 million worth of housing counseling, down-payment loan assistance, and acquisition and rehabilitation program functions). In its February 2011 audit, HUD found $22,344 in ineligible expenditures, though a close reading of the text suggests that the culpability for the problems in Mesa’s NSP program were shared by the grantee (the City of Mesa) and the subgrantees.

Nelson reports that “during (the Mesa NSP) audit, HUD became suspicious of how (HOC) was handling its share of the program” and turned its attention to HOC’s role in Avondale. HUD’s December audit of the NSP program in Avondale, characterized by Nelson as “scathing,” slammed HOC for its relationship with a firm called HFM Builders, an affiliated construction firm that HOC used, according to HUD, “as a ‘shell’ or ‘paper company’ to generate inflated construction invoices.” According to the audit, HOC “had an informal relationship with an individual who agreed to act as the general contractor and manage the actual construction work…The only apparent service performed by HFM Builders was to generate inflated invoices…[HOC’s] property development director, acting as an agent of HFM Builders, accepted the invoices from the individual who performed the work and created new invoices on HFM Builders letterhead that included an additional 20 percent charge…[HOC’s] property development director then ‘submitted’ the inflated invoices to himself, acting as an agent for [HOC], and approved the inflated invoices.”

This alleged practice of jacking up the costs of construction led HUD to ask HOC for the repayment of over $787,000 in what HUD determined to be ineligible costs. Although HOC strenuously defended HFM as the opposite of a shell company and objected to HUD’s terminology and the insinuations that HOC staff might have personally benefitted from the HFM markups, the damage was done, and HOC was mortally wounded.

Something strikes us as a little off—not in Nelson’s reporting of the facts, but in the analysis of what led HOC to this point of closure. Did HOC (and HFM) suddenly turn bad in the two years or less of the Neighborhood Stabilization Program funds? Were there problems with HFM’s contracting and billing before the alleged issues with the NSP contracts? Should funders, community development intermediaries, and local governments have seen and noticed problems that would have led to HOC’s demise? What did observers know—or what should they have known—a year ago (or more) that could have told them that HOC was plunging into an abyss? When nonprofits go under, we need to think like a coroner to look for the real causes, not the surface wounds. We need to do an organizational autopsy to pinpoint the exact causes of an organization’s demise and to learn what might have been done at the appropriate junctures to chart a new path.—Rick Cohen