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The Rainier Hotel run by the Portland Hotel Society in the Downtown Eastside in Vancouver, November 21, 2013.Rafal Gerszak/The Globe and Mail

Shock, sadness and a fervent hope for no drastic changes to services were the emotions that filtered through the Downtown Eastside with the news that the founders of a legendary non-profit housing group had been forced out by the province.

"It's really sad for me. And I've seen a lot of crying faces today – staff and residents that are really concerned. I wish it could have been worked out in a different way," said Sarah Blyth, a housing manager at PHS Community Services Society. The organization's leaders, Mark Townsend and Liz Evans, revealed this week that they had agreed to resign under provincial pressure.

They, two other managers and the entire board of the non-profit will leave by the end of the month. The province is appointing a new board to oversee an organization that runs housing for 1,000 people, a host of social enterprises, the country's only legal supervised-injection site, and several health services.

PHS's two major funders, BC Housing and Vancouver Coastal Health, had raised questions about the way the agency was spending its administration fees, which accounted for about nine per cent of its $17-million in funding from those two organizations.

The questions concerned money used to send staff on vacation trips, for expensive hotel rooms at international conferences, and for an office run out of Mr. Townsend's and Ms. Evan's house.

Health Minister Terry Lake said on Wednesday that no services would be disrupted or cut, and that the ministry had to act because of the problematic expenses.

"We're transitioning over to a different system to ensure that, in fact, all of that money goes to people whose needs need to be met," he said. "We can't criticize the great work that has gone on in the Downtown Eastside, but it's very important for British Columbians to know that all of that money is being used appropriately."

But for many of the people who worked for PHS, the organization's unconventional methods were its strength. And they raised doubts about the motivation for the change.

"It seems like people are doing these kinds of audits to discredit the work of non-profits," Ms. Blyth said. "It's more like they didn't like people speaking up."

Mr. Townsend got into a very public campaign against BC Housing in 2011, when the government agency tried to close one of its shelters. He also upset the president of Coastal Health so much that he threatened to terminate PHS's contracts.

The director of another housing non-profit in the Downtown Eastside said her biggest hope is that PHS's operations can be held together and continued with a renewed organization.

"The services were cutting-edge. They filled a gap," said Karen O'Shannacery of Lookout Emergency Aid. "And many of those services were the result of hard-fought battles."

She also said she was concerned by the province's ongoing restrictions on administration expenses.

Lookout, like PHS, is allowed about 10 per cent for administration of any program. The amount must cover a lot of costs, from legal fees to office supplies to auditors, she said.

"We all have to be responsible for the funding we receive, but it's challenging to do all the things we're expected to do with that money."

Vancouver councillor Geoff Meggs said he and others at the city are relieved to know the province has a strategy to protect PHS programs.

And, while he praised PHS as a group that had demonstrated "tremendous advocacy skills," he observed that it tended to operate on its own in the Downtown Eastside rather than building a coalition – something that might have made it more vulnerable.

Frances Bula is a freelance reporter.