To Advance Community Self-Determination, Funders May Need to Leave Their Comfort Zones

The East Bay Permanent Real Estate Cooperative conducts an education module for some of its resident owners. Photo: EB PREC

Back in January, I spoke with Angie Kim, president and CEO of the Los Angeles-based Center for Cultural Innovation (CCI) about the pandemic’s effect on underserved arts communities. The crisis, Kim said, revealed how the 501(c)(3) system failed to provide artists with “financial self-determination in order to preserve and support their cultural identity and artistic expressions on their own terms.”

Kim argued that individuals and organizations emerging from the crisis need equitable access to capital, debt reduction and asset and wealth building.

When I asked her which CCI grantees were driving meaningful impact outside of the traditional c3 system, she cited the East Bay Permanent Real Estate Cooperative (EB PREC), an Oakland-based 501(c)(12) cooperative that is putting property in the hands of community members, and the Center for Economic Democracy’s Boston Ujima Project, a democratic community investment fund.

I recently checked in with leaders at these organizations about their work and what they’re doing to get institutional funders to support models that don’t fit the conventional grantmaking paradigm.

“We’re always struggling to make that cultural work legible to foundations and mission-aligned lenders,” EB PREC executive director Noni Session told me, “because of the fact that when they look at our institutional status as a California cooperative corporation, their conventional tools stump them.” Investment and fundraising director Annie McShiras said that funders are often bewildered by the cooperative’s multi-stakeholder model “even though we do charitable work through a fiscal sponsor.”

These comments speak to Kim’s larger point about how funders often pass on organizations aligned with their mission because those potential recipients don’t fit a preconceived grantmaking framework. And while organizations certainly appreciate grantmakers’ unrestricted support throughout the pandemic, even unrestricted support can put “Band-Aids over prior and prevailing conditions that the bureaucratic gamut refused to adequately deal with” before 2020, Session said.

Below, I’ll take a look at how EB PREC’s cooperative ownership model works and how the organization operates in nontraditional fundraising terrain. A follow-up piece will focus on how leaders from the Boston Ujima Project are confronting these challenges.

How the process works

As the first and only permanent real estate cooperative of its kind, the EB PREC is a fiscally sponsored project of the Oakland-based 501(c)(3) Sustainable Economies Law Center (SELC). In 2017, the center incorporated the EB PREC in collaboration with the People of Color Sustainable Housing Network. EB PREC’s mission is to buy and preserve real estate to keep tenants of color in the notoriously expensive East Bay, to remove housing from the speculative market, and to address the root problems associated with poverty concentration and neighborhood disinvestment.

Here’s a somewhat simplified version of how the process works. People invest $1,000 in EB PREC’s collective fund. Then EB PREC buys commercial, residential and mixed-use properties. People living or working in those properties who’ve invested in the fund get to stay there while generating a return on their investment. EB PREC trains these individuals to manage the property cooperatively, without landlords. Consequently, residents, investors, community members and EB PREC staff co-own and co-steward the property. (Click here to see some of the cooperative’s properties.)

Session and her team have consulted with more than 25 nascent organizations taking similar approaches both in the U.S. and abroad, Sessions said, “so that this idea scales on the planet and not just West Oakland.”

The EB PREC is a California cooperative corporation, and it has a for-profit structure with a nonprofit or social good mission. Session told me she and her team chose this model because 501(c)(3) organizations cannot sell securities “to bring in capital in the manner that was necessary for the vision we had.”

That said, most of EB PREC’s work focuses on nonprofit activities like technical assistance, outreach, education and capacity building. A relatively small proportion of EB PREC’s work falls under the for-profit label, and “it’s for collective profit, because of the collective ownership structure,” Session said. “However, this idea of profit in any sense, let alone collective profit, is almost anathema to the philanthropic-capital convention.”

The foundation divide

EB PREC runs on two streams of capital. The first is non-extractive capital for the acquisition of property. (Broadly defined, “non-extractive capital” means that the returns to the lender do not exceed the wealth created by the borrower using the capital.)

The second stream is philanthropic capital to fund operations. EB PREC has received funding from LIFT Economy’s Force for Good Fund, the San Francisco Foundation, the Full Circle Fund, the Chan Zuckerberg Initiative (CZI), Capital Impact Partners, Solidaire Network, the Kataly Foundation, and, as noted, the Center for Cultural Innovation. Many of these funders are private foundations that “can deploy capital in any manner they choose and exercise some tax benefits from different tax shelter pathways,” Session said.

For smaller infusions of capital, EB PREC relies on what Session called “radical movement-building foundations who are willing to do workarounds with us,” often through its sponsorship relationship with the 501(c)(3) SELC.

All told, “a lot of private foundations are really interested in the strategies we’re building,” she said, contrasting them with “the old-school foundations who just want to see a list of programmatic work and that guarantees that they exercise all decision-making over our programmatic work.”

Traditional, non-operating foundations like MacArthur and Ford have a “profound challenge with supporting work like ours that is not firmly rooted in the 501(c)(3) organizational identity,” Session said. She shared an anecdote in which the cooperative was at the top of the list for a $1 million grant from an unnamed foundation. The foundation’s program manager subsequently told EB PREC’s leadership that “the second the lawyer saw we were a cooperative, they went to the next organization on the list.”

This isn’t to say old-school foundations are hopeless cases. McShiras told me that the cooperative and the SELC are “educating foundation partners on the rules of expenditure responsibility—legal ways that foundations in the typical model, like Ford, can use their grant funds to support non-501 (c)(3)s.”

The perils of “mission drift”

Session said that she and other leaders at organizations seeking to advance self-determination need to be cognizant of “mission drift.” Donors are “entering into this field expecting organizations to support their vision for the world,” she said, “when, from the direction of dismantled communities, that is not what dismantled communities need, especially if the donor isn’t from the dismantled community.”

Funders should be philanthropic partners, rather than “a hierarchical kind of gatekeeper for capital,” Session said, citing EB PREC’s collaborative relationship with the Kataly Foundation. “At our initial meeting, once we were able to build interest in our project, what we agreed to was that we were not going to be doing a monthly check in order to prove to them that we were worthy of support,” she said. “But rather, we were going to walk hand-in-hand in preparing for our first extremely large capital infusion.” This work involved building out due diligence documents and reviewing the project prospectus.

Session also underscored some of the weaknesses of the “strings attached” grantmaking model. By incentivizing organizations to jump through hoops or create projects to attract funding, grantmakers encourage “mission drift” and distract leaders from their larger goal of galvanizing financial self-determination.

Redefining a return on investment

Session’s comments seemed to fly in the face of anecdotal evidence gathered over the last year. Haven’t funders cut the grantmaking strings during the pandemic? “Yes, I’ve experienced that in some ways,” Session said. “It was great to have unrestricted dollars.”

That said, a recent study by Candid and the Center for Disaster Philanthropy found that funders’ COVID-era flexibility hasn’t quite lived up to the hype. Take MacKenzie Scott’s grantmaking out of the equation, and “flexible support reflected only 9% of all dollars awarded to named recipients,” the report stated. That finding followed a December CEP report that found that 44% of foundation leaders were either “undecided” about permanently “making new grants as unrestricted as possible” (29%) or ruled out the idea completely (15%).

In a similar way, now that the pandemic is receding, foundations also seem to be sidestepping last year’s demands to permanently increase the 5% minimum endowment spending requirement. “I want to challenge this idea that foundations need to stay around for perpetuity because they’re so important,” McShiras said. “But at whose expense? That means others may not be able to stay around for perpetuity.”

McShiras also encourages grantmakers to revisit the 95% of their endowment currently generating interest through extractive practices in the surging stock market. McShiras previously worked for the Responsible Endowments Coalition, which works with students, alumni and other university stakeholders to make endowments a force for social, racial, environmental and economic justice. “That same theory of change applies to foundation endowments,” McShiras said.

Foundation leaders need to “push themselves on conventional assumptions around what is a return on investment,” Session said. “Is the return simply a capital return? Or is part of the return rescuing our cities? Rescuing our nation? Are we really [going to] stand by and let our urban centers decline to the point that we are creating an increasingly desperate and hungry population as Americans?”

Organizations like EB PREC and Boston Ujima “are providing opportunities for foundations to really do something about it,” Sessions said. “But they have to make a choice.”