Community Ownership of Real Estate: A Los Angeles Story

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At a recent professional dinner, I struck up a fascinating conversation with a woman who has spent her legal career working in civil rights, housing, and community development. She posited a viewpoint regarding the social contract that emerged in the West following World War II. She suggested that in Great Britain, citizens were promised free quality healthcare. In most of Western Europe, they were offered job security and living wages, and in the United States, they were offered the federally guaranteed 30-year mortgage, which made homeownership accessible, providing a unique pathway into the “middle class.”

I was intrigued by my dinner guest’s framing of the matter. After all, owning a home in the United States has a unique salience. But the promise of homeownership was never made to all Americans. Subsidized mortgages were often denied to Black families, limiting their ability to purchase homes, and when people of color acquired property in middle-class white communities, block busting and white flight ensured any wealth gained would be limited at best. The country’s inequitable housing system is a leading contributor to the racial wealth gap, and nearly three generations after the federal government approved the 30-year mortgage, white Americans hold approximately ten times more wealth per capita than Black or Latinx Americans.

As I contemplated the concept of “ownership” being at the heart of the nation’s social contract, I was reminded that much of the work that my colleagues and I do in community development finance seeks to remedy the multitudinous impacts of America’s unkept promise of homeownership. Homeownership inequities result in wealth disparities, which cause racial gaps in small business and commercial real estate ownership. Only three percent of Black Americans own commercial real estate compared to eight percent of white Americans, and commercial real estate in neighborhoods of color is devalued. Since real estate speculators typically have more wealth than communities of color, they can acquire property in such communities at low prices then wait for the neighborhoods’ fortunes to change, at which time the value of their properties increases, effectively extracting wealth from the communities. Such phenomena are root causes of many challenges facing urban communities of color today.

 

Increasing Community Ownership

If ownership is such a fundamental part of wealth building and the US social contract, how do we increase property ownership among those who have historically been excluded from such ownership and who, as a result, are generations behind in their accumulation of wealth? One avenue is to expand “community ownership” of property, a strategy that has received increased attention in recent years. The definition of community ownership varies, but I believe such ownership should be broadly defined to include ownership by local nonprofits, small businesses, groups of residents, and community land trusts (CLTs).

Community ownership models are important because they achieve two key goals in the effort to increase ownership rates. First, by working collectively, individuals and organizations can pool resources and talents to overcome gaps in capital access and lack of experience with owning, developing, or operating property. Second, this approach allows participants to tailor ownership models to a community’s needs and goals, such as preventing displacement, creating permanent affordability, or maximizing wealth creation for marginalized populations.

 

Community Ownership on Los Angeles’ Eastside

Beginning in the early 1900s, Los Angeles’ Eastside (including the Boyle Heights neighborhood and unincorporated East Los Angeles) became a gateway for immigrants and one of the city’s most diverse communities, in part because it lacked the racial covenants that were prevalent in most other Los Angeles neighborhoods. The community was an ethnic enclave for Japanese Americans, Jews, and Eastern Europeans. By mid-century, the neighborhood became home to a large Mexican-American community. Today, it is over 90 percent Latinx. Most Eastside residents are still working to achieve the American dream. Only 30 percent of Eastside residents own a home, compared to 46 percent of Los Angeles County residents. And the area’s median income is $49,000, 30 percent below the county average. In recent years, the Eastside has experienced real estate speculation, putting homeownership further out of reach for its residents and small businesses—and putting them at increasing risk of displacement as residential and commercial rents rise.

At Genesis LA, a community development financial institution (CDFI), we have supported various community ownership models in Los Angeles, many focused on housing. But our community partners on the Eastside highlighted the need for community finance to also address commercial real estate ownership in order to provide economic security to legacy business owners and neighborhood nonprofits and preserve the neighborhood’s commercial character and culture. With few precedents in Los Angeles for how to acquire community ownership of commercial real estate, and with an increasingly competitive real estate market that disadvantages low-income stakeholders, we had to be innovative in approaching this work.

 

A Community Steward

I once heard a CDFI leader remark that when the borrowers we need in the community don’t exist, we as CDFIs need to go out there and create them. This is exactly what we did starting in late 2016, when we began working with three nonprofit community development corporations to form a new entity, Community Owned Real Estate, or CORE.

The idea emerged out of lunch conversations with my friend, Rudy Espinoza, who leads the nonprofit, Inclusive Action for the City. Espinoza regularly spoke about how communities like LA’s Eastside lacked the nice spaces that other communities have, that they could not attract the capital that seems to be in excess in other neighborhoods, and when money did flow into places like the Eastside, it usually meant that longtime locals were pushed out as a result.

These are the same challenges that Genesis LA tries to resolve by raising, structuring, and deploying capital to underinvested communities. We started plotting ways to change the dynamics that Espinoza saw on the Eastside. But first we needed an entity to own the real estate, or someone to borrow the capital we would raise. Given Espinoza’s vision and leadership, Inclusive Action needed to be part of that entity; however, the organization he led had never acquired or developed property. So, we needed to supplement his work with the experience of others. Together, we recruited the East LA Community Corporation and Little Tokyo Service Center, two trusted nonprofit community developers with decades-long track records of place-based work in and around the Eastside. The three nonprofits pooled their visions, experiences, and reputations in the community to form CORE, a new entity that would acquire, rehabilitate, and operate commercial real estate on the Eastside to preserve and cultivate small businesses and nonprofit enterprises.

 

Closing the Wealth Gap

From the beginning, CORE’s mission has been to confront the racial wealth gap at the neighborhood level. Because few people of color on LA’s Eastside had the wealth to own real estate themselves, CORE, like other community ownership models, would own real estate on behalf of the community.

In expensive metropolitan areas like Los Angeles, regional real estate markets and speculative trends often push property prices well above what is warranted based on actual rents paid in submarkets like the Eastside. Unless developers intend to raise rents to levels that most local tenants cannot afford, they cannot finance projects with private capital. Thus, community developers need much more equity capital than is typical in market-rate projects, and they don’t need the profit-seeking capital found elsewhere in capital markets, but rather capital that acts as a subsidy, patiently and effectively infusing community projects, and the communities where they are located, with the wealth that has historically been denied (or extracted from) them.

To kickstart CORE, Genesis LA reserved $10 million of a New Markets Tax Credit (NMTC) allocation that we received in 2016. The mechanisms by which NMTC works are complicated, but to simplify, this amount of allocation can result in approximately $3 million of subsidy capital on a $10 million commercial real estate project—not enough to completely close the equity gap, but enough to put us within striking distance and attract other debt and grant capital to make CORE feasible.

 

Completing the Financial Feasibility Puzzle

To raise the remaining $7 million, we needed to first determine how much commercial property could be acquired and renovated with $10 million of financing and then forecast a real estate pro forma to evaluate how much debt financing could be sustained by such a portfolio.

Based on commercial property sales prices on the Eastside and an estimate for rehab costs per square foot, CORE could acquire approximately 30,000 square feet of commercial space. To keep space affordable for local businesses, CORE forecasted rent levels that balanced affordability and the cost of creating quality spaces that CORE was delivering to a market where landlords commonly leased substandard, unimproved spaces without formal leases.

The anticipated rents and operating expenses for a 30,000 square-feet portfolio indicated that CORE could generate enough income to make payments on about $5.5 million in debt, which was sourced from Genesis LA’s CDFI capital and two Program Related Investment (PRI) loans from local foundations, the California Endowment and Weingart Foundation. This left a $1.5 million gap that we filled through multiple smaller grants raised by Genesis LA and the CORE team.

With the right financing committed to make the CORE vision feasible, we went into the market to acquire properties. Due to NMTC compliance requirements, CORE first needed to acquire real estate before NMTC financing could close, requiring the use of bridge loans to finance the acquisitions. The loans would be repaid with NMTC money afterward. Between summer 2018 and summer 2019, Genesis LA financed CORE’s acquisition of five commercial properties on the Eastside and by fall 2019 had closed the $10 million gap in total financing to repay the acquisition bridge loans and fund rehabilitation of the properties.

 

CORE’s Impact

Today, CORE’s real estate properties are home to nearly 20 small businesses owned by entrepreneurs of color and local nonprofits led by people of color. Most of these tenants previously lacked formal leases or would have been displaced by rising rents when their lease terms expired. Through CORE’s community ownership model, these tenants now enjoy long-term leases with predictable and modest rent escalations.

Moreover, CORE paid for tenant improvements that do not exist in the Eastside market. Inclusive Action’s first office on the Eastside was a barren storefront with no air conditioning, substandard electrical service, and deferred maintenance that the landlord did not address. These conditions are typical in the neighborhood. But CORE invested millions of dollars to improve its 30,000 square feet of space, which in turn helped small businesses and nonprofits to improve their operations and better serve the community.

Over the next few years, CORE hopes to support its tenant businesses to transition to an ownership position in the CORE portfolio—in other words, building tenants will become building owners—advancing the vision of community ownership and wealth building on the Eastside. The structure of such a transition will come into focus following the seven-year NMTC compliance period, but ideas include offering the businesses the right to acquire their spaces, selling shares in the larger CORE portfolio to tenant businesses, and selling shares to other community members. My preference is for CORE’s current nonprofit owners to remain the properties’ primary owners to ensure ongoing stewardship. This could be supported by selling shares to community stakeholders (including the tenant businesses), with proceeds from the sales financing additional property acquisitions and expanding CORE.

The road from those lunch meetings with Espinoza in 2016, to realization of the CORE portfolio today, was not smooth. The pandemic created significant delays and cost overruns. Existing tenant businesses stopped paying rents, leasing plans were abandoned, and vacancies mounted. But the thoughtful structuring of financing and the ongoing commitment to the vision of community ownership ensured that CORE would prevail when many other commercial real estate projects would have failed.

CORE’s journey also offers lessons that can shape similar models going forward. First, our financing sources were critical to making CORE viable. Both our foundation partners and the flexibility that Genesis LA extended enabled the provision of early capital commitments so we could close financing with no pre-leasing for over half of the 30,000 square feet. Because small businesses typically do not pre-lease office and retail spaces, commercial properties serving them cannot raise traditional capital, which often requires about 80 percent pre-leasing before financing can close. In fact, these pre-leasing requirements help explain why most of the nation’s storefronts are chain stores.

Instead, Inclusive Action’s relationships with small businesses and nonprofits in the community created a network of potential tenants that could fill vacancies once spaces were ready for occupancy, a non-traditional leasing model that works and is needed to make similar projects viable.

Second, renovating properties that suffer from decades of deferred maintenance required more expensive improvements and took longer to complete than expected. It is likely that more subsidy is needed to absorb these costs on future projects, more time is needed for renovations, and higher contingencies should be budgeted.

Third, projects like CORE require committed team members to ensure long-term success. While partnering with existing community developers was a wise approach, such organizations must be adequately resourced to dedicate staff or hire new staff who can manage the project. Innovative approaches like CORE don’t fit neatly into most organization’s development models and thus require more time and focus that should be planned for in advance to ensure long-term project oversight.

Events of the past few years have again focused the country’s attention on economic inequities. Across the nation, communities are mobilizing to create new neighborhood development models that increase local ownership of real estate and keep more of the profit and wealth generated in their communities. For the social contract to reach all Americans, community ownership models like CORE must be utilized to close the racial wealth gap and deliver the economic opportunity that has been denied to far too many Americans for far too long.