CUED

A Study of the Feasibility of Forming a Construction Company for the
18th Street Development Corporation

It is our opinion that the proposed construction company is feasible. The ESDC board of directors has decided that the construction company should start out as a wholly-owned, for-profit subsidiary of the ESDC, with at least some sharing of directors (of the respective boards). We see this organizational structure as advantageous for four reasons: 1) it improves the Pilsen community's ability to guarantee that its social objectives (i.e., the employment and training of Pilsen residents) are met in the company's early stages of development; 2) it increases the likelihood that the company can obtain equity and/or debt capital from the public sector; 3) it takes advantage of the support the ESDC can provide the company, particularly in the start-up stage; and 4) it helps insure the development of a responsive management structure. Over time, this organizational structure might be reconsidered as conditions indicate.

We recommend that at the outset the construction company operate primarily in the Pilsen community, and work on the rehabilitation of both 1-4 unit and 5-10 unit residential structures. The crew should consist initially of six people - two skilled carpenters and four apprentices. In the case of the 1-4 unit buildings, the construction company should normally act as the general contractor to individual property owners. It may be advantageous for the ESDC to own or be a partner in the rehabilitation of the larger properties as a means of gaining access to this market.

We also recommend that the construction company and the ESDC work closely with the City of Chicago's Department of Housing, which can provide a steady initial supply of housing rehabilitation projects through such programs as the Chicago Financial Assistance to Property Owners Program (CFAP), the Multi-Family Residential Rehabilitation Program (also known as the 50-50 Program), the Section 312 Home Improvement Loan Program, the Chicago Home Purchase and Rehabilitation Loan Program, and others. With a steady supply of contracts, the construction company can focus its attention on quality workmanship and on making the company a financial success, thereby providing an opportunity for the company to expand and create additional jobs. These public programs are particularly important as a source of contracts since many landlords in the Pilsen community are in the low income category and thus have restricted access to private conventional financing.

Our recommendations, then, can be summarized as follows:

1. The ESDC should establish a wholly-owned, for profit construction company employing Pilsen residents for the rehabilitating of deteriorating housing.
2. The company should consist initially of a single construction crew of six people, and should probably expand in multiples of six, if and when appropriate.
3. The company should initially confine its work to rehabilitation construction. After it is well established, the company may want to expand into other types of construction.
4. Similarly, the company should concentrate its work on the Pilsen rehabilitation market.
5. The company should primarily act as a general contractor to individual property owners, but may also work on properties owned by the ESDC.
6. The company should seek contracts from the City of Chicago's Department of Housing as its initial means of ensuring a steady supply of rehabilitation contracts.

The ESDC's first step in setting up the construction company should be to identify sources of financing for the initial capitalization. This should be a mix of equity and debt capital, although it is essential that sufficient equity capital be injected into the company at the start to ensure an orderly start-up and allow sufficient time to experiment, work out problems, and become productive and profitable. We estimate that $85,000 is desirable for initial equity capitalization. Government and philanthropic organizations are the best potential sources of equity capital for this community-based enterprise. These same sources must also participate in arrangements to cover debt needs during the first two years. After that, conventional capital markets should be willing to provide the requisite debt capital.

Concurrently, the ESDC should develop a Business Plan for the construction company, setting forth in some detail the company's facility, material, personnel, and budget needs; projecting expenses and case needs over a five-year period; describing the plan for marketing the company, identifying properties and property owners, securing contracts and commitments for services and financing; and outlining start-up plans. Elements of the Business Plan have been considered in this feasibility study, but they will have to be refined and elaborated on for effective start-up, and monitored continuously as the company grows.

Once financing is secured, the company can incorporate, establish classes of shareholders, and select the first set of directors. The officers of the company should be selected with considerable forethought. The selection of the general manager, the day-to-day operating head of the company, will also be particularly important. The individual selected should be resourceful, knowledgeable, an able leader, and experienced in the operation of a small business. Additional personnel can then be recruited, negotiations for the initial contracts completed, and actual construction work by the company can begin.

The balance of this report presents the analysis underlying these recommendations. The next section contains a discussion of our methodology, followed by sections setting forth the facts on which our conclusions are based.

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