CDC acting in bad faith

by pastor deb bonario-martim
(houston texas)

Reviewed: June 12, 2024

Visitor Question: Who can we turn to when our community development corporation, a 501c nonprofit, acts in bad faith, counter to the interests of our under-resourced community?

Editors Reply: First, let’s break down that “bad faith” term. Sometimes it is used in legal documents. The usual meaning is that one party to a contract, whether written or oral, isn’t living up to the terms it agreed to. In other words, it is dishonest or unfair about its conduct of its part of the contract, or it is acting in a grossly incompetent way.

So the first question would be what type of agreement you have with “your” community development corporation, which some readers will know as a CDC. If you have a written contract for a project or service, or some other written agreement, such as a community benefits agreement, then it is appropriate to talk about bad faith and what remedy, if any, your agreement specifies in the event of one side acting in bad faith. If it is silent on that topic, which some will be, that is when you have to consult an attorney skilled in nonprofit work or real estate work, if the underperformance relates to a real estate or development project.

If you the community simply have an oral agreement or understanding with the CDC, you can use the bad faith rhetoric with them, but you would not be using a term that would carry any legal weight.

Now let's say that it may be more likely that you simply used the term bad faith in your question, without realizing all of these implications and complications about a written or oral contract. Maybe you simply are frustrated that they are putting their own interests, or the interests of some friend of their organization, ahead of the interests of what you see as the genuine interests of your under-resourced community.

While the most enlightened CDCs welcome the existence and functioning of a neighborhood association, many CDCs merely tolerate neighborhood groups, block clubs, and activist groups. At the other end of the spectrum, they may aim to actively kill the neighborhood association or oppose its every move and communication. It sounds like you may be either somewhere in the middle or saddled with a CDC that is actively working against what you (and perhaps others you represent or lead) see as the real needs and desires of the community.

In this situation, there is usually no one you can turn to, to answer your question. Usually a city or state government does not regulate the operations of a CDC, and certainly not the federal government. There may be regulations of specific aspects of their work, but not the whole of it. Since there is no certification that a CDC truly represents a community, there is no one to appeal to when you feel this is not happening.

But we don’t think you are helpless in this situation. Learn as much as you can about their officers and operations so that you can identify where there are possible activities that would be regulated by someone. For example, if they are financing purchase, rehab, or leasing of housing, do you think they are falsifying information? Their financial institution or even law enforcement might (or might not) be very interested in that. Is an officer's business earning money from the activities of the CDC? If so, 501c3 corporations are directly prohibited by the IRS from behaving in that way. So there are an infinite number of possible pressure points.

We are going to assume that you know that the nonprofit's tax return, called a Form 990 or one of the simplified versions of a 990, is publicly available for viewing. It lists some key facts that could help you figure out how to confront the CDC. If you don't know how to access this, ask a librarian to help you or search for information on the IRS's website. Your state's Secretary of State office, or perhaps a differently named office that grants corporate status, may be another source of information.

Another path is to work with your local government on this. While most of them take a hands off approach to CDCs unless their behavior is really terrible, there are some ways that cities could pressure CDCs to act better. They may be granting some local tax subsidies, making sweetheart deals with the CDC to offload tax delinquent properties, or helping the CDC by making street improvements, grants for façade improvements, extra policing and waste pickup for special events, or myriad other situations. If you can convince your local government that this CDC isn't acting right, they may help you bring the CDC into line, even if only on an informal basis.

To pursue this, we recommend starting with your city councilperson. You have to get that person on your side in most cities; if they oppose you and support the CDC, you probably will be out of luck at some point even if you seem to win some concessions from staff members for a short time. If you have the councilperson's support, then you can confidently approach city departments that may be able to help you with your specific concerns.

We possibly saved the best for last. If you have and can maintain and communicate a really lively and active presence for your neighborhood association, or barring that a temporary organization that you set up, that may be your best defense. After all, individuals vote and corporations do not. In reality, your CDC's staff and board members might not even live in your neighborhood, a fact you should point out to your elected officials.

(As an aside, have you met with any neighborhood residents who are on the CDC's board? Usually there is at least one resident included. Try to get those residents on your side, and it should help quite a bit.)

Doing all the things that neighborhood associations do will allow you to build credibility with residents and then allow you to counteract that “bad faith” CDC. If you need help with any of that, see our pages about neighborhood associations or starting a neighborhood association if that is what is needed.

To be honest, maintaining an active neighborhood association often is challenging in under-resourced communities because residents are struggling to keep their household stable. But if you persist in finding the right leadership, people with the time and personality to do the work of organizing, you can succeed.

Best of luck in getting this CDC to come back into line.

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