______________
“Economic empowerment is the last civil rights frontier,” said Craig Livingston, managing partner at Exact Capital and chairman of the New York Real Estate Chamber, a group that promotes minority participation in the real estate industry. He said intractable issues for Black Americans, such as poverty, education gaps, home ownership numbers and wealth creation—or lack thereof—are all driven by an inability to access capital.
______________
When real estate developer Don Peebles was in negotiations with the New York Economic Development Corp. in 2013 to buy two office buildings for $250 million, his private-equity partner changed the terms of the deal at the last minute.
“They wanted to bring in a white developer who was a partner of theirs on other deals to develop this project,” said Peebles, who is African American. “Naturally, I wasn’t going to have someone take the lead on that, and I wasn’t going to accept a less-favorable deal economically after taking more of the risk.”
Peebles eventually found alternative funding for both projects, but when he looks back on this failed partnership, he can’t help but wonder how much race played a part in the actions taken by his would-be investors.
“These allocators of capital are almost 100% white men. If I said 99%, it wouldn’t be an exaggeration,” he said. “They allocate capital to who they know and who they are comfortable with, and they allocate it to the same people over and over again. That disparity is just patently unfair, and it’s worse than it was in 1968.”
Access to capital is an issue that transcends economics and lies at the forefront of the national fabric. It’s been given heightened importance in recent months following the death of George Floyd, subsequent nationwide protests and ongoing discourse about racial inequality.
“Economic empowerment is the last civil rights frontier,” said Craig Livingston, managing partner at Exact Capital and chairman of the New York Real Estate Chamber, a group that promotes minority participation in the real estate industry. He said intractable issues for Black Americans, such as poverty, education gaps, home ownership numbers and wealth creation—or lack thereof—are all driven by an inability to access capital.
“If we could have equal access to capital, a lot of the ills that occur in African American communities would be solved,” he said. “We’d have higher home ownership, appreciating homes, and this would create a large tax base to fund education properly.”
What developers know
Black real estate developers are uniquely suited to understand and explain the disparities in capital access. Financial capital is the foundation of their business.
“It’s very tough,” Peebles said. “Real estate is a capital-intensive business.”
Peebles, who has a footprint in Washington, D.C., Miami, Las Vegas and the Bay Area in California, noted that New York is even more capital-intensive than other places. Here, development deals cost hundreds of millions, if not billions, of dollars, depending on the neighborhood.
“A small deal in New York is $100 million,” he said.
“It’s very difficult for us to guarantee our own projects, and there are very few of us who do guarantee our own projects,” said Thomas Campbell, founder and principal of Thorobird, a firm developing a 236-unit mixed-use project in Brooklyn. “Because of this, we have to accept deal terms that are counter to our mission or building capacity.”
Crain’s spoke with more than a half dozen Black American developers in New York, and even the most successful could provide examples of how their race has hindered certain projects.
As they see it, they compete in an environment where it is tough to get third-party financing. Individual family wealth is among the main sources of capital for most developments, but the Black community does not possess a representative share of wealth in the U.S.
A 2017 study by the Knight Foundation found women- and minority- owned hedge funds control less than 1% of total assets under management. Minority-owned mutual funds control less than 0.5% of their total asset class; minority- owned private-equity firms control less than 8% of their asset class.
Regardless of the size, all deals follow the same pattern. After the primary loan from a bank, which covers a majority of the cost, all developers seek mezzanine- equity capital to fund their projects. A developer may put up a few million dollars of his or her own money, but an equity fund must bridge the rest of the divide. It is the lack of access to these equity funds that is problematic for Black real estate developers.
Institutional investors
Institutional ready: It’s a phrase mentioned over and over in real estate development.
But what does it mean to be institutional ready, who are these institutional investors, and what is the institution seeking?
By and large, they are family offices, hedge funds, endowments and asset managers of pension funds for states’ and workers’ unions. They are a tiny, insular, highly connected community—one that is overwhelmingly white. And it is white real estate developers who reap the rewards in an industry where only a few thousand players compete.
“They are no smarter than anyone else; they just have access to capital,” Peebles said. “[Institutional investors] allocate that capital to whom they are comfortable, which is generally people who are like them. That is why you have such little diversity.”
This buddy-buddy system is fueled primarily on a personal relationship basis, one that shuts out minorities.
“If you’re not connected with the managers or the gatekeepers, then you have no window to the actual equity capital,” said Meredith Marshall, co-founder of BRP Development and a successful developer in the New York area. “If they don’t know you, then you don’t know them.”
“Somehow we deserve greater scrutiny,” Peebles said. “Instead of looking at the deal first, as an investor, they look at the sponsor first, and if they aren’t batting 900 to a thousand, they move on.”
As Marshall noted, Black developers not personally linked to these money managers have no access to equity capital. As a result, they are relegated to the affordable-housing development cycle, a universe primarily funded by government subsidies and low-income tax credits, a necessary part of the market but one without nearly the same return on investment as private- capital projects.
What must be done?
The Black developers Crain’s interviewed all agree the federal and state governments can provide greater incentives for institutional investors to provide Black businesses with necessary capital. But the greater, more substantive changes must come from the institutional investors themselves, in how they hire and what they aim to do with their money.
One guiding light can be found at Goldman Sachs’ Urban Investment Group. Led by Margaret Anadu, one of the few Black American women in finance, the fund manages a $4 billion portfolio and invests $1.5 billion each year.
Marshall first tapped Anadu’s Urban Investment Group for $20 million in 2007. Since then his firm has been able to source $1 billion from her team.
“We raised $10 million from a family office, but I don’t think we’d have the trajectory we’ve experienced without Margaret Anadu’s Urban Investment Group,” Marshall said. “It would’ve been quite difficult, quite frankly.”
Anadu’s group has been empowered by her firm to invest capital where it sees fit. But not enough major firms create targeted social-impact funds that seek to deploy capital in underserved communities. And not enough firms have Black women in charge of billions in capital.
Pension funds are another part of the equation. Peebles, Livingston and others stress that the funds, which are financed in part by the contributions of minority workers, need to hire asset managers who reflect their constituency.
Last month Blueprint Capital Advisors, an investment firm founded by African Americans, sued New Jersey, alleging racial bias. The firm accused the state’s pension office of stealing its investment ideas and hiring mega-firm BlackRock to implement them instead.
The lawsuit alleges that board members supervising the pension’s investment said they were not likely to approve a minority-owned asset-management firm.
Livingston called for a paradigm shift in how the heads of pension funds and their asset managers make decisions.
“Until those they invest in look like those who contribute their money, we’re not going to get there,” he said.
More than anything, Peebles stressed, it comes down to the white institutional investors choosing to do business with Americans of different backgrounds, and then choosing investment projects reflective of the demographics of the markets where their capital is going to operate.
“Wouldn’t that be what a fair democracy is?” Peebles asked.
