On Eastern Shore, For-Profit 'Flagship' Hits Shoals
Local Ventures Launched, Foundered and Failed

By David B. Ottaway and Joe Stephens
Washington Post Staff Writers
Monday, May 5, 2003

OYSTER, Va. -- With great difficulty, the Nature Conservancy five years ago hoisted an abandoned U.S. Coast Guard station building onto a dolly, slipped it onto a barge and shipped it six miles to the outskirts of this little town on Virginia's Eastern Shore.

For $3 million, the 210-ton Cobb Island Station was then converted into a rustic 12-room inn intended to anchor a high-end tourism venture. The inn was part of a collection of for-profit ventures the Conservancy launched here in the 1990s to convince the dwindling local population that small business could be profitable and preservation-friendly.

Now, the Conservancy has determined the Cobb Island Station project was a waste of money. The restored inn is shuttered and for sale.

One by one, the other Conservancy-backed business ventures at the group's 45,000-acre Virginia Coast Reserve failed. In October, auditors tallied the cost -- millions in losses and a slew of failed companies. They also found that the project -- which envisioned a locally based sweet-potato-chip company, an oyster-and-clam operation, even a real estate development -- was beset by incoherent planning, "management issues" and properties that were a "sink for resources."

The subject headings in an independent report commissioned by the Ford Foundation, one of the project's financial backers, list more succinct reasons for what went wrong: "flawed concept," "flawed business plan," "flawed execution."

The troubles demonstrate the difficulty of the Conservancy's strategy of blending for-profit businesses with community-based conservation.

The reserve's financial mess led to the resignation of its longtime director and the reassignment of the Conservancy's one-time acting president, W. William Weeks, the project's primary promoter. It spurred an internal assessment reappraising the Conservancy's ability to engage in money-making businesses. The Conservancy audit found that despite the reserve's $53 million in assets and multimillion-dollar budget, it had "not traditionally employed a person to focus explicitly on its finances." The assessment charged that in pursuing expensive real estate, managers had lost sight of ecological goals.

In addition to tourism, the Conservancy had planned to use the Virginia reserve for "eco-friendly" seaside farms and waterfront homes. But it now believes liquidating the business is the only solution. In recent months, the Conservancy has put most of its 15,000 acres of seaside farms on the market.

The Washington Post began investigating the Conservancy's Virginia reserve business project -- which the group had called its "flagship" for-profit venture -- after sources within the Conservancy raised concerns. The Post visited the site and obtained the previously unreleased Ford study.

After repeated inquiries, the Conservancy released to The Post an internal 28-page program assessment of the reserve's operations completed in August. The Conservancy refused to release its full audit report. Instead, Conservancy officials provided a two-page summary.

The main promoters of the Conservancy's business experiment were Weeks and a former president, the late John C. Sawhill, an energy official in the Nixon, Ford and Carter administrations.

In a 1997 book called "Beyond the Ark," Weeks argued that the best way to conserve land was to convince local communities to stop selling forests and farms to subdivision builders and instead choose less intrusive development.

At Weeks' suggestion, the Conservancy in 1995 established the Center for Compatible Economic Development, with an annual budget of $1.5 million and total autonomy. Weeks and everyone else referred to it as his "skunk works."

It launched more than 30 ventures nationwide with seed money provided by Conservancy donors and foundations. Some of the businesses were for-profit, others initially tax-exempt but expected to soon become self-sufficient.

In Virginia, the skunk works set up its flagship operation near the Virginia reserve, a collection of 14 pristine barrier islands owned by the Conservancy. The center launched the for-profit Virginia Eastern Shore Corp. as a holding company for as many as 15 enterprises. The activities included real estate development and tourism, clam and oyster farming, arts and crafts and Hayman Potato Chips, a local specialty sweet-potato chip. Investors included the Ford Foundation, which contributed $1 million of the initial $2.25 million in capital.

The reserve's director, John M. Hall, lived rent-free on the reserve in the renovated 17th-century Brownsville Home, which had once been used for community tours and meetings. The Conservancy's internal assessment later criticized the living arrangement as "not appropriate," but Hall said the on-site housing was provided as a condition of his job. (Conservancy officials now say they do not permit employees to live at Brownsville.)

Hall began buying seaside farms and waterfront properties, using the Conservancy's Land Conservation Fund. Some properties were used for business projects, others resold to buyers who agreed to limit development. The farms were consolidated into 15 large holdings covering 15,000 acres around the towns of Nassawadox and Oyster.

On the 360-acre Philips Creek Farm, Conservancy officials plotted one-acre wooded, ocean-front lots, priced at $125,000 each. The Conservancy advertised in the local paper and received 400 inquiries. But the project was halted before any lots were sold.

Hall also spent millions to develop and renovate properties. At his urging, the Conservancy's board approved a $3.5 million bond issue to help cover costs of the elaborate project to convert the former Cobb Island Station into a country inn.

In mid-1999, the Conservancy's flagship Eastern Shore Corp. suddenly went belly up. Its collapse set off alarms at the Conservancy's headquarters in Arlington. The Ford Foundation commissioned an independent inquiry in late 2000.

Parts of that report, obtained by The Post, document how the Eastern Shore enterprise burned through 86 percent of its initial capital over the first two years before collapsing in "a sea of red ink" in August 1999.

The report excoriated Eastern Shore's management for systematically refusing to listen to outside advice or warnings. The report blamed hubris. The Eastern Shore Corp. "would do what no one else had ever done -- and show the rest of the Nature Conservancy, not to mention the world, how to do it," the report asserted.

Instead of aiding farmers, artisans and business people, the Eastern Shore Corp. had micromanaged everything. "In doing so, it became more of an intruder than a catalyst to local action," the report said.

The report said the Conservancy's attempt to go into business was "the story of a fish out of water."

Direct operation of businesses, the Ford report said, "was a step too far" for the Conservancy.

The Conservancy's own assessment noted that too much money was tied up in properties of no ecological import. The project failed in its core mission, the assessment found, and the efforts had not slowed destruction of the feeding grounds for millions of migratory birds.

The assessment also found that the Conservancy's support of the local clam industry with loans and leases led to "unintended negative consequences": the farms polluted the ocean as the "scale of operations begins to exceed sustainable levels."

The conclusion: "Compatible economic development may create as many problems as it solves."

Ruminating on the Eastern Shore experience, Conservancy President Steven J. McCormick recently expressed doubts about the organization's ability to handle commercial ventures.

"We're a nonprofit organization," he told The Post. "We don't tend to think like a business. . . . That's okay, probably even appropriate, but it means we're very inexperienced in running a business. We've learned from experiments that it's real hard."

In late 2001, the Conservancy merged its Virginia Coast Reserve operations into its Virginia chapter. The Conservancy's executive summary of its internal audit report said that as of March 31, 2002, the reserve had liabilities of $24 million -- $20 million of it owed to the parent Conservancy, mainly for land purchases. Conservancy officials said that that internal debt has since been reduced to about $13 million through the sale of several seaside farms.

Hall, who headed the Virginia Coast Reserve for nearly two decades, resigned in October 2001. He said in an interview he had never seen the Conservancy's audit report or program assessment. But he said when he left, "we were in very good shape financially" and "way ahead in paying off our debt."

He said "mistakes" had been made, but added that "we made a lot of little steps in the right direction."

Weeks, once number two in the Conservancy hierarchy, served for a while as a senior adviser to McCormick with no specific duties. He left the Conservancy on April 25.

Reflecting on lessons learned, Weeks conceded his primary goal -- establishing successful and environmentally compatible for-profit businesses -- had proved elusive.

"We didn't make that business work," Weeks said. "The lesson I take from it is, do a better job managing the business if we're going to do that kind of thing again."

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