Impact Voices | August 9, 2021

Redefining risk to catalyze capital for community-based real estate developers

Lori Chatman and Rob Bachmann
Guest Author

Lori Chatman

Guest Author

Rob Bachmann

Corporate America’s diversity problem is well-established. The disparities in the real estate industry, which controls the levers of how entire communities are shaped, are particularly glaring.

Commercial real estate is the “least diverse industry on the planet,” according to the Commercial Real Estate Development Association, the industry’s own trade association. White people hold 89% of senior executive jobs in the field, compared to less than 2% held by Black people. 

Even among real estate-focused community development corporations, which develop residential and commercial real estate in low-income communities and often communities of color, the numbers are still stark: 84% of CDCs are led by executive directors who are white, according to NeighborWorks America. Meanwhile, Black people make up nearly half of those living in federally financed affordable homes. 

This has cascading consequences, impacting how neighborhoods, communities and entire cities are designed and how community cultures are formed. Capital is power and power shapes communities. And communities, of course, shape lives. Lopsided representation in our industry means those who build homes in low-income communities and communities of color often bring different perspectives and priorities than those of the people who live there. 

‘Diversity and inclusion’ in cities “starts with who is in a position to contribute to the physical revitalizing of the places and neighborhoods we serve,” says Ernst Valery, a Black developer based in Baltimore. 

Valery is a borrower of Enterprise Community Partners (Enterprise). As a national nonprofit affordable housing intermediary and community development financial institution, Enterprise has a unique position as a bridge-builder – bridging investors with developers; bridging community needs with solutions; and bridging local voices with a national platform. 

How we got here

What explains the severe imbalance in real estate? Several dynamics are at work, but at the root of it all is the long legacy of systemic racism – including the litany of government-sanctioned racist housing policies throughout much of the 20th century – which continue to manifest in various ways today. 

For one, the lack of baseline wealth controlled by developers of color is itself a function of the broader, well-entrenched racial disparities in wealth that continue to compound (the median white household today has over eight times the amount of wealth as the median Black household and over five times that of the median Hispanic household.). 

But another, less documented, reason has to do with pervasive perceptions of “risk” that prevail in the world of real estate finance, which influences who and what gets underwritten, all of which ultimately has led to the perpetual extraction of wealth from communities of color.

Imagine you are a real estate developer of color looking to both grow your business and build in your community. You are vying to win a major bid on a development project, the kind that you know could launch you to new heights. But you also know that in such a competition, the prize often goes to the more established developers (the “incumbents”), and particularly to those who meet normed balance sheet requirements – a minimum $1 million in liquidity and $5 million in net worth (which are actual recommended underwriting thresholds proffered by the Affordable Housing Investors Council). 

“A white developer I know has never put a dime of his own money in his projects,” says Valery,. “He’s always shocked about my situation. ‘How much did you put in? Two million?’ he asked. I said, ‘Yeah, I had to work for years before I could create my own equity’.” 

For developers of color, no matter how capable, breaking into the industry is a Catch-22: You need to work on large projects in order to build your balance sheet and meet investor requirements, but without a hefty balance sheet in the first place it is nearly impossible to build a portfolio. Most developers getting their start build their balance sheet with “friends and family” capital – money that is gifted, loaned or invested by people in your personal network. These “friends and family” networks tend to be racially homogeneous. When combined with the well-documented racial wealth gap, developers of color are at an enormous disadvantage.

It is self-perpetuating, systemic racism in action: while no individual may have racist intentions, the veil of an “inadequate balance sheet” and “insufficient track record” result in a never-ending cycle of extreme racial disparities. And, speaking on behalf of one of us, as the former credit officer and now president of Enterprise’s CDFI, I will own my complicity in perpetuating this cycle, having been responsible for establishing and applying our own underwriting “standards.”

It is time to break the cycle and fundamentally rebalance this dynamic in real estate development. 

Paving an equitable path

With Enterprise’s unique vantage point and our nationwide portfolio of products, projects, and partners, we have come to see how long-entrenched underwriting standards have served to shut an entire subgroup of developers out of wealth accumulation through real estate development. 

Recognizing the need to tackle this injustice, we put our stake in the ground.

In December of last year, Enterprise launched “Equitable Path Forward,” an initiative designed to rebalance the racial disparities in the community development real estate industry with respect to who is represented and who holds the capital. Our goal: demonstrate that the “risk” traditionally associated with diverse developers is often misplaced. At the same time, through these development partners, we are driving capital towards communities in a way that reflects the needs and desires of the people who live there. Specifically, in support of Black, Indigenous and People of Color (BIPOC) housing providers, we are:

  1. Providing $350 million in flexible and patient capital – as well as guarantees – which will attract an additional $3.1 billion of capital based on our ability to leverage public and private resources, all to help ensure that they can more efficiently secure deals to catalyze their continued growth;
  2. Offering nonfinancial support alongside our capital investments, from guidance to our partners around their asset management or operational sustainability to HR and workforce strategy, to IT infrastructure and cybersecurity standards required by institutional investors; and
  3. Establishing a real estate analyst training program modeled after rotational programs found in the corporate world to create a pipeline of people of color who will carry the community development industry into the future.

Underpinning each aspect of Equitable Path Forward is the acknowledgement that yesterday’s excuse – certain investments are too risky – has perpetuated the racial disparities that confront us today, and that they are no longer acceptable.

Catalytic capital

One of our first investments through Equitable Path Forward was in a Black-led community developer Quest Communities, which has served the westside of Atlanta for over 20 years and is deeply connected to the community. As a highly capable organization that is attuned to the voice of the community, Quest is emblematic of the type of partner we are inspired to support through our initiative. Quest brings a strong track record, having developed and managed 380 affordable homes and three commercial buildings serving the community. Yet its ability to grow significantly is inhibited because the aforementioned underwriting benchmarks result in capital providers requiring Quest to partner with larger developers, who take the lion’s share of fees. 

This cycle has left Quest unable to amass the capital needed to more efficiently access predevelopment financing, risk capital for acquisitions, and balance sheet equity to guarantee financing for major projects, which creates a perpetual ceiling on its growth.

Through Equitable Path Forward, Enterprise provided an unsecured revolving term loan that Quest can use as it sees fit to help spur growth. These funds will fill gaps in financing for real estate projects; help secure competitive positions for bids; augment its balance sheet, eliminating the need to partner with for-profit developers; and help hire top-quality talent, among other possibilities. 

Equitable Path Forward is creating dozens of opportunities like this in support of BIPOC developers across the country. Together, they will begin to shift the way our industry works.

Community voice 

The story of racial wealth inequality in America is a story that cannot be told without the history of real estate ownership: of who’s been able to purchase a home, and who hasn’t, of how wealth built from that homeownership has been transferred from generation to generation, or how, for some, it hasn’t. A parallel history can be told not just in who’s buying real estate, but in who’s building it. 

Enterprise’s founder Jim Rouse, the visionary, civic-minded developer who was behind iconic developments like Faneuil Hall in Boston and Baltimore Inner Harbor, as well as the driving force behind the development of Columbia, Maryland – an intentionally integrated community – often told a story that helps to illustrate why this shift is so important. After the city’s formation, “Mr. Jim,” as he was often called, who was white, was walking one day through one of Columbia’s village centers, which were mixed-use communal areas comprising retail stores, residences and more. A Black mom living in Columbia stopped Mr. Jim to thank him for everything he had done in Columbia – the affordable homes, the stores, the feeling of community. “The only thing, Mr. Jim, is that my son doesn’t have anywhere to get a haircut.” 

Jim had neglected to include within his masterplan a proper barbershop — a community anchor that offers much more than the actual service it provides. Mr. Rouse would tell this story to Enterprise staff years later because to him, that encounter signified that for a developer, nothing replaces being closely attuned to the needs and voice of a community and ensuring that voice permeates its places and spaces. 

For the sake of our communities, it’s time we give more developers that chance. 

Lori Chatman is president at Enterprise Community Loan Fund and Rob Bachmann is Enterprise Community Loan Fund’s senior director of impact investing.