To Assist Black Builders, Applications Begin With Entry to Capital

To Help Black Developers, Programs Start With Access to Capital

Harvey Yancey has been building and renovating marketable homes, affordable apartments, and commercial space in Washington, DC for 15 years. During that time, his company H2DesignBuild has overcome funding challenges and found its way into profitable businesses.

But all along, Mr Yancey, who is black, said he was aware of the racial homogeneity of the industry and the restrictions he was exposed to because of his skin color. "It was always the quiet conversation in the room," he said.

Commercial real estate to this day is an area where the vast majority of developers are white. Few reliable statistics are available, but the industry association NAIOP reported in a survey from 2013, the most recent year available, that 4.4 percent of commercial real estate professionals were black. That year, only 5 percent of the Urban Land Institute members identified themselves as black or African American.

The inequality has many causes, including many African Americans' ignorance of the area and the resulting lack of connections. However, according to Black developers, the biggest challenge is getting access to capital, including loans, loan guarantees, and equity. This can be due to limited balance sheets, short track records, or a lack of wealthy and influential networks. As a result, their businesses struggle to grow and stay on the sidelines as cities across the country see their inner cities being reshaped by other deeply pocketed developers.

Observers say this is not a new problem.

"Real estate has a long history. It's been systematic and pronounced for decades, centuries," said Christopher J. Mayer, professor of real estate at Columbia Business School. doing something is much younger. "

The assassination of George Floyd last May and the subsequent protests against Black Lives Matter have increased the focus on racial differences across the country. Over the summer and fall, lenders and other financial services firms announced initiatives aimed at eradicating racial inequalities. As an industry, financial services themselves are overwhelmingly white, even though their leaders commit to change.

Banking giants like Bank of America, Citigroup, and JPMorgan Chase, as well as smaller institutions, have announced multi-billion dollar initiatives focused primarily on communities and entrepreneurs with color. A portion of the funds are earmarked for affordable housing and commercial development in low-income communities, from which all real estate developers will benefit.

Longtime practitioners and analysts in the field say that if new dollars are to eradicate the racial imbalance in the industry, funds must be carefully designed so that more money gets into the hands of black developers.

In October, JPMorgan Chase announced a $ 30 billion racial justice initiative that included significant commitments for minority-run small businesses and black and Latin American households. The announcement also listed $ 14 billion in new loans and investments over the next five years to expand affordable rental housing in low-income communities.

Observers welcome the size and breadth of these initiatives, but some point out that funding such as this is often not directed specifically to color developers.

And when the funding isn't for minority developers, "history has shown us that it ultimately goes to majority developers," said Ken McIntyre, executive director of the Real Estate Executive Council, a trade association for commercial real estate managers in paint.

This is a disadvantage for the black developers who are focused on affordable housing – and for the communities themselves, McIntyre said. Black developers are more likely to hire black contractors and other workers, some of whom may live in these neighborhoods, so the money can be turned over multiple times and an area can be gradually improved. But when the developers are white, "they take home equity at the end of the day," he said.

"If you don't tell the money to go to the community in a way that you know will stay there, it goes away and you do the same," he said.

JPMorgan Chase will continue to build on its efforts to identify and strengthen the Black developer pipeline, said a bank director who spoke on condition of anonymity because the details were not public.

In September, Citigroup announced $ 200 million in equity and funding for affordable housing projects from minority developers.

Proponents say it's important to make sure that capital goes to companies that need it.

"It's a lot easier to tie up the money than to deliver it," said Alicia Glen, founder of real estate development platform MSquared and former deputy mayor for housing and economic development in New York. "You have to find the people who have the relationships, either with minority developers or in minority communities."

This could mean that capital is channeled through lenders known as financial institutions for community development. These are tasked with deploying funding in marginalized communities and tend to have close ties with developers and color communities.

For example, City First Bank, a Washington lender, has strong relationships with its borrowers and finds ways to raise capital to promising but young companies. The bank is seeing a surge in interest from larger financial institutions, said its chief lending officer, Sonja Wells, "but everything is still smaller than it could be."

Regardless of how well the initiatives are designed, most black developer loan funds tend to focus on the same thing: affordable housing. Many proponents agree that developers should look like the communities they are building in, but steering color developers solely to low-income homes or workers diminishes their potential influence – and profits. Margins on affordable housing are limited, which makes it difficult for developers who only work in this area to grow.

"I have found that the resources that are in place for color developers drive you into or are limited to lower affordability," said Moddie Turay, founder of City Growth Partners, a Detroit development company.

However, market price projects require more private equity. And that has traditionally been a challenge for black developers, who often have fewer connections to generational wealth. Before the pandemic, the net worth of a typical black family in America was one-tenth that of a white family, according to a study by the Brookings Institution. Black developers say it's often impossible to raise millions of dollars in equity for friends and family because their networks don't have that money.

"Equity is not readily available," said Craig Livingston, managing partner at Exact Capital and chairman of the New York Real Estate Chamber. He and his colleagues may have an incredible track record, he said, "but we don't have the same financial base or access to venture capital when competing with second- or third-generation developers."

A number of initiatives have emerged to address this problem. In June, for example, Morgan Stanley and the Ford Foundation launched a $ 26 million fund to provide equity to emerging minority and women-owned companies. The fund, which is the result of nearly a decade of strategizing how best to help color developers, is managed by TruFund Financial Services, a community development financial institution.

And Blue Vista, a Chicago investment management firm, is creating a $ 100 million private equity fund for minority and women-owned real estate companies. Moved by the racial justice protests that summer, Robert G. Byron, co-founder of the company, examined the company's history. In doing so, he found that the deals in which the company had provided capital to new ventures run by people of color and women had been successful in a Good Getaway.

In response, Blue Vista structured its new fund with a plan to provide seed capital and mentoring to a handful of talented new developers. Within a few years, recipients are more willing to raise capital from more established sources.

Blue Vista’s program is similar to what Don Peebles, a successful Black developer in New York, announced in 2019. Mr. Peebles aims to raise $ 450 million in investments for undercapitalized developers in several key markets. According to Byron, there doesn't seem to be any real competition among private equity firms to find and invest in these developers.

"Just by scratching the surface without marketing, we found really capable people – smart, talented, experienced," said Byron. Investors are also enthusiastic.

"What I hear from both investors and potential users is, 'That's exactly what we asked for," he said. "It's a no-brainer."


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