Rethink Real Estate. For Good.

Community

Looking past the bottom line.

The worlds of property development and environmental sustainability are becoming inextricably linked.

Historically, developers and environmental advocates were at odds with each other. They fought (and still fight) over hot-button issues like preserving wildlife habitat, pollution and waste, density, and a whole host of other social, environmental, and political concerns that arise when developing land and property.

Despite this historical animosity between the two groups, concerns about ecological and community sustainability, along with government and nonprofit action has led many forward-thinking developers to embrace partnerships with local communities and environmental advocates.

Growing awareness of the environmental footprint of buildings

Public awareness of the multitude of ecological challenges we face as a society has grown substantially over the last decade. The increasing effects of climate change, pollution, and an ever-rising world population have led to a paradigm shift in how developers, real estate professionals, and governments think about sustainable development. With the assistance of nonprofits like the US Green Building Council and the Energy and Environmental Building Association, community-minded developers are changing the way homes get built, and how they impact our environment.

Fostering an holistic approach to development

The economic mindset of most investors is focused on generating maximum profit from every invested dollar, and little else. This approach has failed many of our communities and led to the endless sprawl and cookie-cutter designs that plague so many of our cities, suburbs, and exurbs. Instead of more of the same, a mindset shift towards sustainable development needs to take place not just in the nonprofit and government sectors but also in the private sector.

What is socially responsible real estate investing?

Defining what “socially responsible” development looks like is harder than it seems. When creating sustainable communities, it is essential to focus on aspects other than the built environment. Social systems in local communities are just as crucial for long-term growth and sustainability, and the built environment helps frame how those forces interact with each other. You cannot solve the problems facing communities with a silver bullet- you need to take an overarching view and realize that everything is connected- and act accordingly.

Housing that follows socially responsible principles

Housing models are popping up all over the globe that embrace sustainability and environmental protection. Co-housing is one such model. This style of cooperative housing first emerged in Denmark in the 1960s and soon spread across the continent to reach every corner of Europe. The movement towards co-housing in the United States is still in its infancy, with roughly 300 communities across the country.

These developments eschew the traditional single-family home model, where every house stands as an island. Instead, co-housing residents live together and share communal responsibilities. Often, there are shared common spaces like kitchens, recreation areas, outdoor spaces and more. These communities often have bottom level shops and restaurants, which are run exclusively by residents. This helps to foster a sense of togetherness and also keeps capital within the community.

The adoption of this model of housing solves many of the problems that plague modern cities. Housing affordability is a significant challenge, and densely-built and shared spaces help drive down the cost per square foot of both rentals and owner-occupied homes. Environmentally, patronizing local businesses and reducing the need for cars is a big help. This has a follow-through effect of reducing car travel, and all of the deleterious effects that come along with it.

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Developers and investors do not need to be at odds with community groups and environmental advocates. By taking a sustainable approach to development, companies can create neighborhoods that are eminently livable and profitable at the same time.

Image from pxhere licensed CC0

Why community capital matters.

When discussing why underserved communities tend to stay that way, insufficient access to capital is the elephant in the room. Traditionally, to secure funding for say, a multifamily apartment building, or a new retail shopping center, one would have to go through conventional lenders, private equity firms, venture capital groups, or independent angel investors.

What all of these groups have in common is their desire to maximize profits, and the fact that they have little to no market incentives to fund sustainable, community-oriented development projects. To get a project off the ground, you need to find a well-moneyed backer to believe in your vision.

This system works well for raising capital for tech firms like Uber and Doordash, but not so well for independent investors who want to help build neighborhoods and communities. Luckily, there is a solution for every problem, and one way that investors and community groups are changing the game is through the use of community capital.

The rich get richer?

When you look at finance as a whole, the best investment opportunities are always available to people who are already wealthy. People who already have the “luxury” of being wealthy can leverage their connections and resources to grow wealth rapidly, while people on the lower end of the totem pole are stuck investing in publicly traded stocks, where companies have already gone through their meteoric growth periods.

Essentially you have a dichotomy where wealthy investors get the best, high-margin/high-return investment opportunities, and the rest of us are left with the scraps- low-return investment opportunities. And so the rich get richer, and the rest of us can barely beat inflation. This isn’t just a theory- the wealth gap in the United States is the highest it’s been since the Roaring ’20s.

Unless we collectively take steps to restore the balance between the wealthy and the rest of us, our cities and communities will continue to suffer from underfunding, crumbling infrastructure, and all of the other social blights that accompany a profoundly unequal system.

Crowdfunding and community capital as a solution

Wealth inequality and neighborhood decay are complex problems and will require a basket of solutions to solve. To create a path towards a more equitable society we need to ensure that everyone can invest. Instead of allowing the upper crust to dominate the investing landscape, lucrative investment opportunities should be opened to those who have been traditionally underserved by capital markets.

So what alternative strategies can we, as investors, use to raise “community capital?” One option is to educate and encourage a broader swath of people to look into real estate crowdfunding as a way to benefit from the economic expansion and to invest directly in their communities. Crowdfunding platforms and direct public offerings can help community leaders and other interested parties to raise development capital without having to go to traditional lenders or venture capitalists.

Crowdfunding + impact investing

Raising money is the hardest part of most projects; doubly so if that project is in an area that traditional investors have overlooked, possibly due to uncertain risk profiles, questions about returns, and all of the other reasons big finance has found to not invest in these areas.

With crowdfunding, we can go “straight to the people” to raise capital, and we have the freedom to develop projects that work best for the community, whether that is a mixed residential/commercial development, micro-homes, low rise apartments, or whatever the community in question needs to get ahead.

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There is no silver bullet for the multitude of challenges sustainable, community-oriented developers face. With that being said, crowdfunding solves the most significant problem: finding financing. As crowdfunding platforms rise in popularity, it is likely we will continue to see more and more projects that aim to develop a community, instead of just a structure.

Image from Pixabay

Opportunity Zones for everyone.

Opportunity Zone funds are a hot topic in the real investment world. These funds appeared as a result of the 2017 Tax Cuts and Jobs Act. This legislation included a provision that designated 8,700 census tracts in the United States as Opportunity Zones – areas with less than average direct investment and economic growth.

Investing in these zones offers interested parties a number of tax benefits for both business and real estate investments within the designated Opportunity Zone. These tax benefits are intended to spur investment in those areas, to bring them up to par with national economic growth, or even to exceed the national numbers.

Critics of the program have charged that the legislation only helps the very wealthy since the program allows investors to lessen their tax burden using rolled-over capital gains. If you look at the majority of rolled-over capital gains in the United States, you’ll find that those at the high end of the economic spectrum are the ones who stand to gain the most from Opportunity Zone investments.

How the wealthy use Opportunity Zones to invest

It would not be entirely out of line to assume that Opportunity Zone Funds were set up to benefit wealthy investors. They stand to gain the most from the program, and unfortunately, their priorities are not always in line with the aims of the program- to improve the lives of people who live and work in these areas.

Opportunity Zones are by definition in, or next to, socioeconomically disadvantaged areas. Those communities fear that much of the Opportunity Zone investments being planned are in constructing luxury housing which do not necessarily serve the local community’s needs. In fact, it may even force long-time residents out of the area, as their rents and expenses will increase with the completion of new high-end housing and commercial developments.

Early data from the first year of the program, 2018, has shown that home costs have risen by 20% in Opportunity Zones, even when compared to other low-income areas that did not receive the Opportunity Zone designation. What this likely indicates is that gentrification is occurring in these communities, and at least partially driven by wealthy people deploying capital in these areas to receive tax breaks.

A potential solution?

Although the Opportunity Zone provisions were written with ultra-wealthy investors in mind, anybody is potentially eligible to receive Opportunity Zone Fund tax benefits. If you can create an Opportunity Zone Fund that is open for investment by the community, and that accurately represents the voices of the community, you flip the script, and this program becomes a force for good, rather than a detriment.

Community-driven investment through Opportunity Zone Funds

Taking a democratic approach to land usage and community development is possible through the use of an Opportunity Zone Fund with locally minded, neighborhood-oriented investors. A locally funded development, with stakeholders as investors will create the kind of projects, or development, or housing, that the community wants and needs. Additionally, when these funds are profitable, those profits will circulate within that area, since the initial investment capital will have originated in that community.

This isn’t to say that raising capital locally in low-income areas is a walk in the park. As many development projects rely on economies of scale, they often require significant amounts of capital to break ground. It is a challenge to come up with that much capital, but it is not far from impossible. Every community has resources, even if they do fall into the low-income category. Even if 50% of the community is below the federal poverty line, look at it half full- 50% isn’t.

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Well-meaning government programs like Opportunity Zones can hurt or help local communities. While it may be impossible to stop gentrification and the growing affordability crisis, community-oriented investors can use these same programs to benefit current residents, rather than wealthy elites.

Philadelphia. Image courtesy of Small Change

Peeling the onion.

Why communities succeed or fail

It’s impossible to solve a problem as complicated as community development without a full understanding of what makes communities succeed or fail. When most investors look at a neighborhood, they check standard metrics like employment rates, crime prevalence, school district numbers, etc. These numbers provide a picture- but not the full picture.

Underutilized metrics like childcare affordability, access to community services, presence of full grocery stores, community leadership and others can help investors gauge the health of an area in a more precise manner. Instead of taking a neighborhood at face value, make sure you are “peeling the onion” and looking at the layers beneath the layers.

Why they fail

Let’s get the bad stuff out of the way.  Communities fail for many reasons, sometimes due to macroeconomic factors out of their control. Think of the coal industry dying, or the hollowing out of the manufacturing base in the rust belt. Other times they are mismanaged into oblivion. Underserved areas typically share several similarities, including low employment, high crime, poor school performance, and flat or negative population growth. 

These problems often feed on each other- when schools are bad, employers can’t find skilled employees and move elsewhere. The tax base dries up, schools get worse, and the cycle continues. It is easy to lay blame at the feet of elected officials, but in reality, it is a combined failure of government officials, the local business community, and yes, fly-by-night developers.

Why they succeed

Communities succeed when the stakeholders- developers, residents, and local government- embrace innovation and new ways of thinking to solve the challenges they’ve always had, and challenges down the line. This often takes the form of changing how cities build housing and commercial space. With housing, it comes down to building for the needs of a community. Different regions require a different touch. Before entering any new market, a developer should “peel the onion” to understand how their future tenants or buyers will use their property.

In parts of Arizona and the Southwest, apartment complexes often have three, or even four bedrooms, which is a deviation from the national norm. The areas contain a large Latino population, and they tend to have larger, intergenerational families. This has led developers to respond to that particular need in their market. And this is prime evidence that developers and investors need to consider what the market wants- not what it can bear.

The ability of people to work, live, and play in their immediate surroundings is what differentiates good communities from great communities. For a long time, we have expected people to fit their lives to the way we build cities. While it might make economic sense to developers on the front end, it results in stagnant areas that act as warehouses for workers, who then commute to more vibrant areas.

The role of small business

Local businesses play a tremendous role in fostering a healthy community. They give locals a place to congregate and circulate money through the neighborhood. Thriving commercial centers increase an area’s walkability score and can help increase the value of nearby property. Developers can encourage the growth of small business by including mixed-use commercial spaces in or near housing plots. It is possible to further incentivize local business ownership by granting special commercial lease terms to residents or even reserving commercial spaces for residents only.

In cities across the country, from Portland to Phoenix, developments are popping up where the focus is on blending entrepreneurship and community. If developers, communities, and residents are all stakeholders in the success or failure of a community, it stands a much better shot of sustainable growth over the long haul.

Image from pxhere licensed CC0

Investing capital in building community.

Urban areas face unique development challenges

Property development in urban areas faces a wealth of challenges. City permitting, construction and noise ordinances, and outrageous land acquisition costs all come to mind when considering urban development and renewal. One hurdle you face more often in older cities is that older areas were primarily developed in the 1930s through to the 1950s.

At the time, developers tended towards very small-footprint buildings, constructed very close together with individual ownership of each property on the parcel. It is not uncommon to see a single parcel of land with multiple homes and homeowners.

This situation is challenging for large-scale developers because they are unable to buy up all the parcels and homes they need to scale. On the flip side, smaller, more agile projects are possible. With that possibility comes the potential of neighborhood preservation. Instead of a monoculture mega-development with new construction, there might be room for the redevelopment of older buildings, and the local and independent businesses that call them home.

Why circumstances necessitate a change

The reason we see so many cookie-cutter megaprojects is that developers tend to develop where they are going to make money, not where it makes sense for residents. This has led to islands of homes out in the middle of nowhere, with terrible walkability scores, and few commercial businesses to pierce the monotony. This problem is particularly glaring in the suburbs. How have young and community-minded residents responded? By moving into cities, where walkability and mixed-use neighborhoods are the norm.

A new model?

It should be clear by now that we will not find a “silver bullet” when it comes to effective land-use, especially within high-density urban areas. A patchwork approach is far likelier to succeed, and there are a few programs across the country that have had some successes in this regard.

This calls to mind a new real-estate development in East Portland, Oregon, which might provide a model worth following.

Essentially, a nonprofit organization went into an underserved neighborhood, purchased several properties, renovated them, and put them back on the market as affordable rental housing. The goal was to eventually allow the properties to be purchased by the residents, who would then gain a stake in ownership of both the building and their community.

Another creative, and effective, step they took was to set aside the first floor of each building as a commercial space, reserved for resident-run businesses. This move provided an income stream for residents and added to the overall vibrancy and economic health of the neighborhood and the community at large.

The goal of this entire endeavor is to foster a form of self-reliance and ownership in that community, and ideally provide residents and homeowners a springboard to more economically prosperous lives.

A solution in rural areas

Alternative modes of development have the potential to improve the lives of rural residents as well. Despite media portrayals of urban areas as poverty and crime-ridden, some of the worst poverty in the United States lies within rural areas. There are many reasons for this, but one major contributor is the fact that the delivery of services is magnitudes harder in rural areas, due to the lack of infrastructure.

Instead of livable, mixed-use areas where density rules, rural areas have far fewer people per mile. This means that rural businesses do not benefit from economies of scale, and their transportation costs eat into their ability to generate revenue.

Setting up similar, self-sustaining mixed-use developments in rural communities could alleviate some of those issues, and maybe lure back much of the talent that leaves those areas for bigger cities. Instead of constantly rushing to meet heightened demand in cities, perhaps we can solve affordability by focussing development close to rural communities.

River Terrace in DC. Image courtesy of Small Change.