Toward Community-Owned Real Estate: How to Assess Models and Capital Sources
By Erika Brice and Elwood Hopkins, The Kresge Foundation
Impact investors are experiencing a sea change in how organizations and localities are approaching work to meaningfully support communities. For those of us in the field, the movement toward “shared ownership” comes up in conversation after conversation.
Given this explosion in interest—and incoming proposals—related to a variety of models that transfer ownership of assets from outside entities like landlords and corporations to the community itself, we’ve thought carefully about how The Kresge Foundation should best identify where our resources are most needed, most strategically aligned, and have the most potential to be catalytic. Given the relevance of our inquiry for other impact investors grappling with the same dynamics, we wanted to share what we’ve learned so far about this emerging investing opportunity.
At Kresge, we approached this work with a three-legged stool approach. We assessed 1) the models; 2) the markets; and 3) the capital sources. If there’s any misalignment between these three factors, the stool will wobble.
Here, we break down our assessment of two legs—the models and the capital sources, as the market will depend on where investors are working—and will close out by sharing one investment example.
Understanding the Models
There is no “one-size-fits-all” approach when it comes to community-owned models of real estate, which exist on a spectrum. It’s crucial to begin with a firm understanding of the goal at the center—the seat of the stool. Is the goal to prevent displacement, to build community wealth, or something in-between? The answer, paired with assessing the market and other variables, will help determine the best model to implement.
At one end of the spectrum are models aligned with community preservation or keeping people in a place. Anchored in creating or preserving affordability, these models ensure community members can stay in a place, typically through ownership by a single community-led nonprofit. In dense markets with high rates of speculative, private investment, implementing at scale is challenging. But it’s not impossible. Scale works best when public/private partnerships control substantial amounts of land or assets.
At the other end of the spectrum are models anchored in wealth building. These models allow community members to invest in local assets and leverage market dynamics to build wealth through property cash flows and/or valuations when those assets are later sold. Be advised that leveraging market dynamics in communities with outsized private investor interest may lead to a substantial increase in rents and make affordability a challenge for current residents. But this model provides an opportunity for community members to yield financial benefits, like private investors. For-profit/social enterprise models sit at this end of the spectrum.
Hybrid models populate the middle. For instance, if a community wants to focus on both preservation and wealth building, that might mean using a model that doesn’t maximize either goal but does a bit of both. Examples include asset-based funds and Neighborhood Real Estate Investment Trusts focused on a particular geography, which we discuss more below.
The throughline across the spectrum is community agency. That’s what should undergird any model, regardless of the goal. A formal structure for community accountability, voice, and agency is what makes a community-ownership model truly transformative.
Capital Sources and Considerations
Institutional capital sources pooled with community investments should be structured with the end goal in mind. This means weighing the impact of the capital structure on operations, returns to community investors, and potential transfer or sale of an asset. A critical question for investors to ask is: “Does the required rate of return force operators to cut corners, or work with tenants that hurt the community? Does it minimize community investors' return?”
In this vein, investors should examine their return expectations relative to the actual risk of the project. Given that community members are both investors and “customers,” the risk profile may be lower than predicted by standard underwriting policies. Valuations should lean heavily on cash flows. When that is not sufficient to meet financing needs, integrated or blended capital (grants, tax credit equity, TIF, or other funds) may be essential.
Increasingly, local leaders undertake large-scale community ownership strategies aimed at buying entire blocks to mitigate wholesale gentrification. These ambitious efforts, the aforementioned Neighborhood Real Estate Investment Trusts (or Neighborhood REITs), require more capital than can be raised locally. Resident contributions and community development financing must align with pension funds, sovereign wealth funds, impact funds, global REITs, or other institutional investors.
Three years ago, Kresge launched an inquiry into whether institutional investors can, within their existing business models, capitalize Neighborhood REITs without overwhelming resident stabilization goals. This has yielded ideas about the types of local intermediaries needed to balance institutional influences with financial bridge products and the consumer protections resident investors need.
Anchor institutions like hospitals and universities are particularly exciting because they are often strongly identified with places. Instead of indiscriminately encroaching on surrounding neighborhoods, these institutions’ leaders might look for ways to systematically translate their growth into distributive economic opportunities for local residents through vendor agreements, employment pipelines, and even real estate projects. Hospital systems and universities—especially Historically Black Colleges and Universities (HBCUs)—are tapping into their treasuries to invest in local real estate. And to the extent that these deals can include shared ownership mechanisms for residents, prosperity can be shared.
A Pilot Investment
How is Kresge approaching community-owned real estate in our own investing efforts? Given the assessments outlined above, we first created an impact investing blueprint. While it is model agnostic (as we know the right model will depend on the local market and community goal), it outlines how our investments will aim at supplying strategic proof points for the field. They will also align with Kresge’s program strategies and support entities with a history in using shared ownership and with clear technical capabilities.
In terms of capital structures, we created a set of guidance for scenarios when we would use our various capital tools, including program-related investment loans, guarantees, and equity investments (often paired with guarantees). We outlined risk mitigation tactics, including requesting board seats, doing an assessment of community involvement, and requiring quarterly asset management reports. Finally, we shared a set of prioritization considerations, so we could filter through the myriad of options to find those where our limited capital available is most needed and aligned.
With our thesis in place, Kresge committed its first social investment in this space in summer 2022. We hope to share more about that soon.
Every impact investing organization is unique. But no matter what your focus is, shared ownership is gaining ground across the community development and other social system ecosystems for good reason. It’s an area all impact funders need to pay attention to closely. We hope our primer will help spark your own thinking.