Earlier this month, the Urban Land Institute (ULI) New York hosted a sold-out program, "Creating the Roadmap: Access to Capital." The event, which consisted of two distinct panel sessions followed by more-intimate roundtable discussions, discussed why access to capital remains one of the biggest barriers for women and BIPOC real estate developers. In discussing why inequity continues to plague the real estate industry, speakers shared the most common barriers faced in real estate development, including limited balance sheets, short track records, lack of wealthy and influential connections, and a need for more meaningful involvement from partners.
Many challenges to women and BIPOC-led developments persist, starting with financing projects
Nicole Fenton, Counsel, Real Estate, Kramer Levin, facilitated the panel discussion "Creating a Pathway to Equity: Challenges & Opportunities," which focused on the challenges diverse developers face and strategies for breaking down these barriers. Fenton was joined by Baaba Halm, Vice President and New York Market Leader, Enterprise Community Partners; Karim Hutson, President and Chief Executive Officer, Genesis Companies; Ermias Nessibu, Principal, GCM Grosvenor; and Michael Zito, Managing Director, Belay Investments.
In preliminary conversations with the speakers, Fenton stressed the importance of the discussion in order to break a cycle of wealth disparity. Fenton pointed to a statistic published by the New York Times just last year, sharing that out of 112,000 U.S. real estate development firms, 111,000 are white-owned. This number underscores how effective barriers faced by diverse developers have been in keeping them from accessing the same opportunities as their white counterparts, starting at the relationship level as developers look to finance projects.
Fenton opened the ULI program conversation asking what major roadblocks and barriers persist for diverse developers today. "Development is not, as many of you know, about if there is a problem but when there is a problem," said Ermias Nessibu of GCM Grosvenor. "Naturally, it requires a certain level of trust and conviction. There's a sentiment (unfounded) that diverse developers are inherently riskier, so when you take the risk associated with development and you overlay that sentiment, the barrier becomes almost insurmountable."
Nessibu elaborated on this, stating that from a process perspective there are additional hurdles embedded in capitalizing a development deal, beginning with tying up the land. "You need to convince the seller that you're a creditworthy entity, which often requires a large personal balance sheet to fund the deposit and/or predevelopment due diligence cost. So immediately the groups that don't have the balance sheet and/or don't feel comfortable expending funds predevelopment are filtered out. More often than not, many of the groups that are eliminated at this early stage are the diverse developers. This is well before considering the additional funds needed for any guarantees facing the lender (completion, carry, net worth, liquidity, etc.) and your required co-investment to show proper alignment with your investors. Those who have overcome these barriers tend to be those who have a sufficient personal balance sheet or access to friends and family capital."
Karim Hutson, the founder of Genesis Companies, shared that today's opportunities for diverse developers are limited because of a long history of limitations that prevented minorities from building generational wealth. "The issue of ownership, specifically property ownership, is the most important issue when it comes to tax-efficient investing and generational wealth," stated Hutson. "The fact is that women and minorities have not been able to participate in ownership, which has interrupted our ability to create wealth for generations. This is a fact, so we need to find ways to correct that."
Access to capital means opening doors to experienced and influential capital partners
Fenton noted that there is a common theme that real estate is largely relationship-driven in what is already a legacy industry. Advancing firms and their developments means tapping into networks and identifying experienced capital partners. This can be the end of the road for firms that don't have influential contacts to leverage. What's more, many emerging developers don't have the portfolios needed to attract investor attention.
Hutson underscored the importance of partnerships and also how they, in and of themselves, can act as barriers. "In terms of relationships in real estate, it's very difficult — people become gatekeepers in a lot of ways, at the corporate level and in government, and that doesn't incentivize diversification."
"When we speak about stewardship, some people don't have the records or ability to speak to their experience, their financials aren't in order, and they don't have the team you want to see to feel confident in what you're investing in," said Baaba Halm of Enterprise Community Partners. Halm shared that they're working to pair developers with people who have the experience and that they often leverage city agencies to connect with city-funded projects that are more cost-effective, removing early-stage financial barriers.
Michael Zito spoke on behalf of Belay Investments, a firm that focuses on bringing programmatic equity to small and midsize real estate partners nationally with the goal of effectively mitigating some of the more difficult factors that are a part of being a developer or operator. Zito reiterated how common transactional barriers are. Belay takes a direct approach by earmarking a designated amount of capital in their product, typically $25 million to $100 million, and works with operating partners to develop a strategy and target that works for them so they don't have to focus on chasing capital and can instead put their efforts into scaling their business and capturing a pipeline.
While getting access to capital partners is one of the largest hurdles to overcome, Nessibu cautioned against being shortsighted when signing on with partners. "One of the common pitfalls that emerging developers often fall for due to their immediate capital needs at the onset is not fully appreciating that picking a capital partner may be a permanent decision. So in your time of need, you need to stop and understand who that partner is and what their intentions are, and how your needs are going to vary at different stages of your business life cycle. You don't want to give up a permanent ownership stake in your operating business to someone who is not obligated to support the growth of the organization."
Successful partnerships go beyond capital and include meaningful impact
With so much focus being placed on developers' resumes and portfolios, it has created an opportunity for capital partners to have an active role in providing what Halm called "meaningful impact."
Fenton shared that in her seat as a real estate lawyer, it's not uncommon to see "a sponsor or a developer who doesn't have leverage because they either don't have the capital or they don't have access to the knowledge, which puts them in a relatively weak bargaining position. I think what you want to do because of that is partner with someone ... you can trust who is there to teach you and support you as well."
Halm explained that when assessing partnership potential, BIPOC and MWBE developers should negotiate for meaningful impact that includes decision-making around the project, exposure to the things you need more experience in, and how that partner can help you grow and better position yourself for the next deal.
The industry needs to focus on taking barriers down for developers at all stages of their life cycles
"There are different needs of developers along these life cycles, and it shouldn't just stop at the emerging development point," said Hutson. "It needs to continue on because there are obstacles specifically for folks who are very accomplished in their work, and we need to focus on taking those barriers down."
Zito stressed that there is real opportunity in working with developers who know and understand the communities they're working in, and more often than not, Belay has found these are women- and minority-led firms. Zito stated that he and his team "know what's going on block by block, and as we go out into the various communities, we find that a lot of the groups we're meeting with are diverse- and women-led businesses. They really know what they're doing, really know today's market and have for the past 10+ years. Those are the groups that are really close to the real estate and have that intimate market knowledge, so it's been an important and organic area of growth."
Still, the upfront restrictions and limitations placed on diverse developers present daunting barriers to entry. The equity, liquidity, net worth and lender requirements are making it impossible to close the opportunity gap in real estate.
"We have to question the metrics upon which firms should get financing and should participate," stated Hutson. "We have to ask why, in affordable housing where defaults are minimal, do we have to have such high liquidity net worth requirements? What is the actual risk, and is this priced correctly? We can't make any real progress on real diversification without looking at the criteria of the people investing and questioning their requirements."
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