Volume 61: Small Scale, at Scale: The Promise of Real Estate Entrepreneurialism
About ImpactPHL Perspectives:
ImpactPHL Perspectives is a multi-part content series that explores the many facets of the impact economy in Greater Philadelphia from the perspectives of its doers, movers, shakers, and agents of change. Each volume is written directly by a leader in this space, to discuss best practices and share lessons learned while challenging our assumptions about financial and impact returns. For more thought leadership like this, check out the full catalog of ImpactPHL Perspectives.
Tayyib Smith, Principal at Smith & Roller and Chief Strategy Officer at The Growth Collective
Andy Rachlin, President at Spring Garden Capital Group
When we think of real estate developers and real estate development, our minds turn disproportionately to grandeur: skyscrapers, sweeping plazas, vast structures of glass, steel, and stone that define our cities, and the men (and historically, it has been mostly men) who have built them.
But of course, the pedestrian reality is that while these kinds of buildings and builders may hold outsize sway in our civic imagination, the vast majority of our urban fabric exists on a much smaller scale. Rowhouses, mixed-use buildings on commercial corridors, triplexes and quadplexes, old factories, warehouses, neighborhood churches, and schools; these are the structures we interact with the most, and they have been built by people whose names we will never know.
Yet this work holds the potential for impact not just in that it shapes our physical environment, but also in the economic and social outcomes it can drive. Simply put, smaller-scale development can be a lever for wealth creation, for affordable housing generation, and for community revitalization. And, crucially, it can do so at a cost that makes it accessible in ways larger-scale development often isn’t.
“Smaller-scale development can be a lever for wealth creation, affordable housing generation, and community revitalization. And, crucially, it can do so at a cost that makes it accessible in ways more significant development often isn’t.”
Let’s consider a little math. A small developer we know—a Black husband and wife team, as it happens, who work day jobs as blue-collar civil servants and develop in their off hours—bought a dilapidated triplex in North Philadelphia for $55,000 and renovated it for $113,000. The work included new bathrooms and kitchens, new plumbing and electrical work for all units, and new drywall, paint, and flooring. The project took about a year. The property now appraises at $240,000, and all three units are rented for an average of $800 per month.
So, in a matter of months, this young couple generated $72k in durable wealth for themselves (the $240,000 value of the property less the $168k it cost to develop) plus a little cash flow each month from rents. In addition, they have created three housing units that are considered affordable at 40% of the Area Median Income, per the most recent guidelines from the Pennsylvania Housing Finance Agency. And they have brought a blighted property back from disuse, which recent studies from the University of Pennsylvania suggest has enormous positives for the surrounding neighborhood, including reducing gun crimes by over 13%.
Indeed, the cascading effects of small-scale redevelopment are increasingly understood to be profound in the lives of communities. Among other things, because of the mechanics of the appraisal process and its crucial place in the setting of property values, every home sold or financed at a strong price provides an incremental corrective to decades of now-well-documented undervaluation of homes in predominantly Black and brown neighborhoods—undervaluation that a recent study from the Brookings Institution estimated to cost homeowners in these neighborhoods an average of $48,000 in lost wealth.
“There’s some sense of moral equilibrium to this – wealth created in and by a place going substantially to people from that place.”
Another appealing aspect of real estate entrepreneurialism is its (relatively) low barrier to entry. No specific degree is required, and so long as the properties being redeveloped are modest, so too are the capital requirements. Experience and expertise are crucial but are often learned through work in the field. This means that the work can be—and often is—done by people who come from the communities where they are developing. There’s some sense of moral equilibrium to this – wealth created in and by a place going at least in substantial part to people from that place. But there’s more to it even than that. While real estate development inherently and inevitably brings change to neighborhoods, our experience suggests that people who come from the places where they work tend at least to be sensitive to the rapid and dramatic shifts that signal “gentrification.”
Notwithstanding the opportunity for wealth creation, neighborhood revitalization, and affordable housing development, most small-scale development operates without public or philanthropic support. Given all of these benefits, the obvious policy question is: how do we animate more of this kind of activity?
This question is even more pressing because we know that for every success story, there are plenty of “what might have been” stories too. There have been untold numbers of promising real estate entrepreneurs who didn’t grow much or didn’t even get off the ground, often because of historic and systemic barriers like lack of access to financial and social capital. If there were more formal supports for this kind of real estate entrepreneurialism, what might they look like? How much might they accelerate community revitalization and wealth creation among historically undercapitalized populations?
“… the city, has made substantial strides in divesting itself of the thousands of vacant properties it owns, but there is still room for the pace of these efforts to increase and for their requirements to be made more accessible to smaller developers.”
There are already efforts underway offering promising answers to these questions. From the Aequo Fund to Jumpstart, the Black Squirrel Collective, and Tayyib’s work with The Growth Collective, several groups have begun organizing, capitalizing, and providing formal and informal support networks for aspiring small developers. We should encourage and invest in these kinds of efforts.
There is a role for the public sector too, though we remain conscious that the smallest entrepreneurs can struggle to manage the administrative requirements that often accompany government engagement. First and foremost, the city has made substantial strides in divesting itself of the thousands of vacant properties it owns, but there is still room for the pace of these efforts to increase and for their requirements to be made more accessible to smaller developers. In addition, through its Accelerator Fund, the city has made more financial resources available to small real estate entrepreneurs.
Finally, as impact investors, we should be conscious that the surest vehicle for scaling any activity is the market and finding and supporting ventures in this space. At least one of us should cop to some self-interest here. Andy’s company, Spring Garden Capital Group, provides debt and equity capital and consulting services to small real estate entrepreneurs, occupying a niche in the market left vacant as traditional community banks have consolidated.
But they aren’t the only ones. Developers themselves always need capital, especially risk capital, and finding more intersections between small real estate entrepreneurs and capital organizers like ImpactPHL and Investor’s Circle can yield real value. There are also companies working to serve small real estate entrepreneurs in new ways, like Small Change, which helps developers crowd-source capital for impactful projects.
Ultimately, the question is one of scale. How do we enable a generation of small developers to do enough that, taken together, their work has an impact at the scale of our city? There is no singular answer, but given the myriad benefits of a thriving community of small real estate entrepreneurs, the discussion surely merits a place in the regular discourse of our impact investment ecosystem.
Interested in learning more?
Sessions on related topics will be held at the Total Impact Summit on May 1-2, 2023. Learn more and register.
Tayyib Smith, Principal at Smith and Roller and Chief Strategy officer at The Growth Collective, is dedicated to cultural competency and engaging multicultural audiences. He co-founded Pipeline Philly to serve as an inviting and dynamic co-working space filled with professionals from various backgrounds and industries, creating one of the most diverse workspaces in the city. Tayyib has long been a successful conduit between artists and niche brands and founded Little Giant Creative. He sits on the boards of the Prizm Art Fair in Miami, Black Star Film Fest, the Kensington Corridor Trust, All Together Now PA, and a Fellow of the Guild of Future Architects.
Andy Rachlin serves as Spring Garden Capital Group's President he is responsible for new product and market development and helps oversee the firm's origination function. Before joining Spring Garden, Andy was a Managing Director at Reinvestment Fund, a $1 billion impact investment fund, and served as Chief Investment Officer of its Registered Investment Advisor subsidiary. In these roles, he led the organization's originations, credit analysis, and deal structuring teams during a period of substantial growth and also raised more than $80 million in equity and debt capital from institutional investors for innovative impact investment funds focused on opportunities as diverse as bridge financing for performance-based social service contracts and clean energy project finance.