Private equity real estate firms have been gobbling up single-family homes to turn them into rental units. The nonprofit Brick by Brick is buying them back in order to transition them back to individual home ownership.
As President Trump (and others) take aim at the concentration of homes in the hands of institutional investors, Brick by Brick demonstrates the opportunities (and the challenges) in unwinding such concentration and spreading ownership more broadly.
Brick by Brick has raised $90 million across two funds to acquire and begin the rehabilitation of 345 single-family properties previously owned by Pretium, the New York-based firm behind Progress Residential, one of the country’s largest single-family landlords.
“What we are doing is managing a rental portfolio with the goal of providing home ownership opportunities to tenants that are in that portfolio, as well as the larger community,” says CEO Scott Fergus. “Our mission is first and foremost is to provide affordable housing, whether it’s rental or for sale. But our primary focus is for-sale housing, because we believe housing remains a key part of creating generational wealth, which is all-too-lacking in the affordable housing community.”
Brick by Brick won the bid to acquire the homes last year, after the settlement of a lawsuit by Minnesota Attorney General Keith Ellison, which alleged that the private-equity owners had under-maintained the rental homes and for years had made false promises of maintenance services. A report estimated that Pretium’s ownership extracted more than $40 million in wealth from working-class families in North Minneapolis.
Fergus saw an opportunity for Brick by Brick to build a scalable, long-term model for converting investor-owned rental portfolios into owner-occupied housing.
“Our goal is to be able to place these 345 homes back into the community one way or another, so that they could become owner-occupied and added back into the housing stock in our neighborhoods,” he tells ImpactAlpha. “And they would be repaired. They’d be in good shape.”
Local foundations, such as McKnight and the Pohlad Family Foundation, alongside other backers such as Land Bank Twin Cities, Grounded Solutions Network and the Housing Partnership Network, stepped in with grants, program-related investments and patient, flexible debt capital to help Brick by Brick acquire the portfolio.
“We couldn’t put the capital together in 2007 and 2008 to buy these houses,” says McKnight’s Chad Schwitters. “This [was] our chance to participate in repositioning this portfolio of really problematically-managed homes and get them back into the hands of local ownership.”
The strategy also allows them to “figure out what it would take for us as a housing community to reabsorb these back into community ownership and position us better for the next time something like this happens,” Schwitters says.
Brick by Brick’s model takes aim at a growing challenge in US housing markets: the concentration of single-family homes in the hands of large corporate landlords, often backed by private equity firms, Real Estate Investment Trusts, or REITs, and other institutional investors. Most of them follow an extractive playbook of cutting costs and raising rents to maximize short-term profits.
By acquiring portfolios at scale and rehabilitating single-family rental properties, Brick by Brick aims to create affordable homeownership access for current tenants and other qualified first-time buyers at a time when affordability is growing more out of reach for many renter households in the US.
Brick by Brick has rehabilitated 100 homes out of the 345-unit portfolio thus far. Fergus says the majority of those properties have been sold to first-time buyers, though sales have slowed amid rising mortgage rates, insurance and property taxes. Nearly a dozen tenants are in the process of buying their residences, although no such deals have closed.
“We still have approximately 240 rental properties that we are going to continue to own and steward with the long-term goal of taking properties and selling them to tenants through subsidy assistance, through partnerships with our local nonprofits,” Fergus says.
Road to Housing Act
Pretium is among large private equity real estate firms, including Blackstone, Brookfield Asset Management and Carlyle Group, that have aggregated large portfolios of single-family homes. While they own just around three percent of single-family properties nationwide, their footprint in high-growth, metro areas like Minneapolis are much larger. They’re also major backers of build-to-rent developments.
The “21st Century ROAD to Housing Act,” sponsored by Republican Sen. Tim Scott and Democratic Sen. Elizabeth Warren, passed in the Senate by a vote of 89-10 earlier this month. The legislation includes limits on the access of large institutional investors’ to the single-family housing market, including build-to-rent homes.
“In the past 15 or so years, housing has not gotten as much attention in Congress as it has today,” said Dennis Shea of the Bipartisan Policy last week in Washington, DC, at the National Renter Wealth Coalition, convened by Lafayette Square Institute to create a legislative framework to allow renters to participate in shared ownership of multifamily homes (see, “‘Tenant equity’ models start to give renters access to housing wealth”).
“Right now, the name of the game is the 21st Century ROAD to Housing Act,” he said during a keynote. “The Senate bill, before it was brought to the floor, added a provision, which would ban institutional investment in single-family homes. There’s an exception for build-to-rent, but language was added that required institutional investors to divest from those single-family rentals after seven years.”
The “American Homeownership Act,” a separate bill recently introduced by Senate Democrats, aims to eliminate tax breaks for large corporate landlords buying single-family homes and reinvest that revenue into new affordable housing construction. The bill cites that states and metro areas that have seen the largest increases in cost to renters also have the largest share of private equity-owned rental properties.
Even President Trump has signaled concern about institutional investors’ growing footprint in single-family housing. In January, he signed an executive order directing federal agencies to restrict government-backed financing, such as loans, guarantees or securitization, for single-family home purchases by large institutional investors.
“I think something needs to be done, because private equity has certainly squeezed out enough people, but I don’t think it’s going to serve a useful purpose in the long run,” says Fergus, who is concerned that the legislation, if passed into law, could create disruptions for organizations like Brick by Brick.
“It will likely impact financing for nonprofits, because if you can’t show a clear exclusion in the legislation, how do you paint financing for a new purchase? I think it’s going to have a lot of unintended consequences,” he adds, “and I fear the unintended consequences more than I fear the current market.”
Operation Metro Surge
In Minnesota, the large-scale deployment of federal immigration enforcement agents, known as “Operation Metro Surge,” has intensified housing instability across the state, as lost income from business disruptions leaves renters struggling and nonprofits scrambling to provide emergency assistance.
“We were already facing a housing shortage, and now with the cost of Operation Metro Surge, the affordability is getting even worse,” says McKnight’s Schwitters. “People still aren’t going to work. People are afraid to leave their houses. Businesses, especially immigrant-owned businesses, are still struggling.”
Brick by Brick, he adds, is working towards creating a more equitable and resilient path forward where more Minnesotans can build wealth and share in collective prosperity.
“We want our neighbors to have housing. Our communities and economies are stronger when everyone has safe, stable housing,” Schwitters says. “Projects like Brick By Brick, working with the nonprofit developers, working with philanthropy and nonprofit organizations that are community centered, is a way of scaling the level of care that we have in Minnesota for each other.”
Brick by Brick wants to help 50 of its current tenants become homeowners over the next 18 months. The homes in the portfolio are non-subsidized, naturally-occurring affordable housing, with an average property value of $285,000.
“It’s really going to take very dedicated work on the part of our partners and ourselves,” says Fergus “It’s something that if you start today, for many of them, it’s going to take a year to be in a position to be able to buy. It’s connecting them with counseling services, a savings plan and [then] we start lining up down-payment systems.”
Brick by Brick offers financial counseling to tenants through its partnership with the Housing Partnership Network, which includes local affordable housing and community development organizations like Twin Cities Habitat for Humanity and the Minnesota Homeownership Center.
Through its partnership with Grounded Solutions Network, Brick by Brick has sold properties that are community-owned by local Minnesotans through community land trusts. “We are working with them and we’ll continue to work with them,” Fergus says. “Minnesota has a long tradition in community land trust organizations, and that really does become a shared equity model.”
