April 19, 2019; Post and Courier
A city can’t make a loan, so it funnels the loan to a nonprofit. The loan works out and the nonprofit gets repaid. So far, so good.
But what happens to the money next? This question is causing a stir in Charleston, South Carolina, where the city is suing a nonprofit known as LDC (the letters stand for Lend. Develop. Create).
Technically, LDC is a “doing business as” name (d/b/a) of the Charleston Citywide Local Development Corporation, which has operated continuously since 1979. In 2017, the Post and Courier reports, LDC “helped create or retain 158 jobs and provided 2,209 people with technical assistance, according to its annual impact report. That year it also closed 35 loans totaling more than $1.3 million.”
Again, what is the problem? Well, while the city wrote a check for $10 million to LDC in 1984, the city claims it only “made available” the $10 million in Urban Development Action Grant (UDAG) grant money to LDC, with the understanding that the money would be lent to the developer of Charleston Place, a downtown development area—and that money would be returned after the loan was repaid.
Of course, the city couldn’t write that down because under state law, the city was not allowed to make direct loans to corporations. Only the nonprofit could make the loan. The city did enter into a UDAG agreement with LDC that specified that funds only be used within the city of Charleston.
The loan was made, the development was a success, and in 2016 LDC got back $10 million in principal and $12.8 million in accrued interest. At one point, according to the city lawsuit, LDC and the city agreed to split the money—with $10 million being returned to the city and the remainder staying with LDC, but that deal fell through last October (the city’s complaint says it was the nonprofit that backed out of the deal).
Now the city says it wants the $22.8 million to spend on its own; it justifies its claim by saying it paid for at least some nonprofit salaries and provided the nonprofit with free office space in city offices. Not surprisingly, LDC has other ideas and suggested that the city “prepare and submit a formal application for funding.” In March, the city filed suit against the nonprofit, seeking the $22.8 million.
It’s not just about who will be in charge of the money, but about how it will be used. Charleston has an affordable housing shortage and the city sees an easy way in the paid-off loan to fill a $13 million gap between the money requested to solve it and the money available. LDC has been expanding its business beyond development in Charleston to other municipalities and wants to use the money to continue offering loans to small business ventures. The city’s lawsuit claims that LDC intends to leverage that $22.8 million to become a $100 million CDFI (community development financial institution), which of course might not be such a bad use of the funds.
The city had a brief window of hope for change in the upcoming board election. According to LDC’s Form 990, “The corporation has general members that elect board members in the organization’s annual meeting each April.” That meeting will take place April 30th. But last week, LDC, fearing a hostile city takeover, added 15 new general members all at once, bringing the membership from 35 to the maximum allowable 50. Board Chair Chad Younce, who also heads the nominating committee, said he had informed all the new members about the dispute with the city.
Affordable housing is part of Charleston Mayor John Tecklenburg’s four-year plan for the city, which has been experiencing remarkable economic growth, including of local businesses. That growth is good for Charleston’s economy, but the median income of its residents has grown more than 27 percent since 2012, and affordable housing is increasingly in demand.
Charleston isn’t the only city to feud with a former partner over control of municipal development funds; Civic San Diego recently split from the city over concerns about conflicts of interest and differing visions of downtown development.
So far, a trial date has not been set, so the LDC board election will likely take place before the trial—meaning new board members may have quite a lot on their hands.
Of course, settling this in the courts may not be the best mechanism to resolve the matter. Charleston probably needs both affordable housing and small business development. Here’s hoping that the city and the nonprofit find a way to patch up their differences and develop a joint plan to deploy the $22.8 million in a manner that benefits Charleston residents.—Erin Rubin and Steve Dubb