Consortium of Black developers taps Wall Street vet to help close Philly real estate opportunity gap. The collaboration is a response to the challenges faced by Black developers in raising the capital needed to accelerate the growth of their businesses.
A consortium of Black Philadelphia developers is teaming up with a Wall Street emerging-markets veteran to raise investment dollars for real estate projects. It’s a strategy meant to address the yawning wealth and opportunity gap among the city’s developers.
The Collective, as the group is known, has hired former Merrill Lynch executive John Morris’ 17 Asset Management to help raise capital from institutional funds and wealthy private investors seeking to make a positive social impact alongside market-meeting — if not market-beating — financial returns.
The Black Real Estate Impact Fund is to be formally announced at an online event on real estate as an engine for social change on Thursday. The Collective and Morris are seeking to attract $100 million for its initial funding round.
The collaboration is a response to the challenges faced by Black developers in raising the capital needed to accelerate the growth of their businesses, which has left them and other marginalized groups underrepresented in the industry’s leadership.
“What we’re trying to do is even the playing field and equalize their access to capital so that those barriers are easier to overcome,” said Sandra Dungee Glenn, a founder of the Collective.
The Philadelphia chapter of NAIOP, an association of commercial real estate developers, has no local demographic data on industry participation but cited a 2013 study showing that just 1.3% of senior-level commercial real estate jobs nationally were held by Black men. For Black women, the number was less than 1%.
The disparity is symptomatic of a broader wealth gap in the United States that makes it harder for Black developers to establish themselves, said Ken McIntyre, chief executive of the Real Estate Executive Council, a trade group of nonwhite commercial real estate professionals.
White families in the United States had a median wealth figure of $188,200, almost eight times the median wealth of $24,100 for a Black family, according to the Federal Reserve’s most recent Survey of Consumer Finances in 2019.
This translates into a far smaller pool of potential financial backers for beginning Black developers seeking seed capital from within their social networks, a common source of funding for early-stage real estate entrepreneurs, McIntyre said.
Because of this, Black developers’ businesses tend to be slower growing and less profitable, which makes it harder to attract investment from more institutional sources, he said.
As a further hurdle, banks are prone to offer loans to developers they’ve worked with in the past — who tend to be white — and are often skittish about lending for projects in the underserved neighborhoods where many Black developers may be best equipped to build, McIntyre said.
“You’re walking into a room where the predisposition is what you do is risky, who you are is a higher risk,” he said. “Even if you get access to capital, you don’t get access to capital in the amount your peer would get, so you can’t do a level of work to generate the same profits.”
The Collective grew out of meetings over the last couple of years among Black Philadelphia developers who have been struggling with such challenges, said Dungee Glenn.
Its seven member companies include Leslie Smallwood-Lewis, a founder of Mosaic Development Partners, one of the companies leading the next stage of development at the Philadelphia Navy Yard, and Anthony Fullard, whose projects include the new rowhouse development at the site of 1985′s MOVE organization bombing on Osage Avenue in West Philadelphia.
Another member, Lorraine Wilson-Drake of Wilson-Drake Development LLC, said she could be building more of the type of home she specializes in — moderately priced rental units in “neighborhoods with challenges” for mostly Black or Latino tenants — if she had more cash to invest.
Bank loans have been a challenge because property in the communities where she operates, such as the Fernhill area of Germantown, don’t appraise at high enough values for her to get mortgages for the increasingly ambitious projects she’s been pursuing after 20 years of mostly building duplexes and triplexes.
No other ready capital sources have been available so far, either, which makes her especially enthusiastic about the Collective’s fund-raising with 17 Asset Management.
“I don’t have a rich uncle,” she said. “I went to Columbia Business School and I still don’t have that network of people who are going to lend me capital to risk. And if they do, it’s going to be very expensive.”
Morris, of 17 Asset Management, had spent about 25 years at Merrill Lynch, eventually chairing its Latin America operations, before founding wealth management firm Snowden Lane Partners.
Later, after immersing himself in what’s known as social-impact investing as a part-owner of SOCAP Global, a company that organizes conferences on investment strategies aimed at bringing about positive social change, Morris founded 17 Asset Management.
That firm was formed with the aim of allocating investment in line with the United Nations’ Sustainable Development Goals, which include alleviating poverty and addressing global warming. Its first two targets were parts of Jordan, in the Middle East, and nations within the Caribbean region.
After meeting Dungee Glenn and the developers of the Collective, Morris and his staff analyzed Philadelphia’s real estate market and economic conditions and decided to make the city another of its targets.
The firm has since been hired by the Collective to design a corporate structure for the group that could absorb private capital, while also accepting grants from nonprofit groups and government programs. The organization is now made up of the Collective Investment Group, a for-profit company, and the Collective Network, a public benefit corporation.
Duties of 17 Asset Management, whose final financial relationship with the Collective is still being worked out, will also include soliciting funds from institutional investors and family offices.
Morris said his financial service background in lower-income, developing nations — known as “emerging markets” — is applicable to economically depressed parts of Philadelphia since they both feature undervalued assets such as real estate that may yield big gains with the right investment approach.
Black developers are more likely to know their way around such communities and to understand the needs of their residents, so funding their projects gives investors direct access to those neighborhoods.
The alternative would be to wait for those communities to gentrify enough for mainstream developers to enter them with big, block-dominating projects aimed at new, more affluent residents, Morris said.
Morris said he and the Collective aim to offer backers returns that meet or exceed market averages for commercial real estate investments, which he placed in the low- to mid-teens. He anticipates opportunities to raise $1 billion for development in the city by 2030, the U.N.’s self-imposed deadline for meeting its development goals.
But the Black Real Estate Impact Fund will have the advantage of also helping investors live up to social impact commitments that many have been making with increasing frequency, he said.
Backers will be provided with metrics on their investments’ social impact — such things as neighborhood income growth, growth in home and business ownership by community members, and increased commercial activity — that they can use to show their actions match their words.
“This will allow them to show accountability for what they say they are doing,” Morris said. “For investors who would like to see a stronger Philadelphia, this is a way to achieve that.”
(Via the Philadelphia Inquirer)