The Tipping Point

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September 12, 2017
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The Tipping Point

September 12, 2017
Mission lenders are helping to revitalize Detroit by providing local developers with relief from the area’s post-crash credit shortage.

Timothy Thorland drives past the northwest corner of Porter and Hubbard most days on his way to work. Although most who see the abandoned row houses there as urban blight, Thorland envisions attractive residential units that could meet a public need, breathe new life into Detroit’s Mexicantown neighborhood, and prove to traditional lenders that it’s a viable real estate market worthy of long-term investment.

Like nearly all Detroit neighborhoods, Mexicantown began declining in the latter half of the 20th century and fell off a cliff when the housing bubble burst in 2008. But it sits adjacent to Downtown Detroit, which has experienced significant revitalization in recent years. The hope is that this positive growth will spread into surrounding neighborhoods.

But simply waiting for the downtown boom to spread won’t save Detroit’s neighborhoods. It takes financial creativity, long-term vision, and risk-taking from organizations like Thorland’s Southwest Housing Solutions to push tipping-point neighborhoods like Mexicantown in the right direction.

The building containing the row houses—known as the Murray—is one such opportunity in a city full of them. And as these opportunities go, so go the neighborhoods that contain them.

Thorland bought the Murray for $230,000 in December 2007, hoping to secure project financing, redevelop it, and inject capital into the neighborhood. But while Southwest Housing Solutions has developed nonresidential properties in Mexicantown, the Murray still waits. And it is not alone.

The problem started more than half a century ago.

Detroit’s population drastically declined over a long period. In 1950, the Motor City was the fourth-largest city in the United States; 65 years later it had lost 63 percent of its residents.

Most retreated to suburbs. As droves of people left, many homes became unoccupied: 30 percent of the housing across Detroit’s 139 square miles sat vacant in 2015.

Detroit’s mass emigration stems from a complex confluence of factors, including poor city governance, racial tensions, technological changes, austere fiscal policies, and better job opportunities in competing cities. Perhaps the biggest driver is the trend toward self-segregation along economic lines.

Those with less remained in Detroit, and those with more moved to the suburbs. Detroit’s population declined roughly 28 percent between 2000 and 2015, while residents in the surrounding six counties grew 3 percent.

And though the Detroit metropolitan area is hurting as a whole, those living in the city are acutely suffering. In 2015, 12 percent of Detroit’s working-age adults were unemployed and 40 percent of the population lived below the federal poverty level. Whereas, in the six surrounding counties 12 percent of residents lived below the federal poverty level and 5 percent were unemployed.  

Taken together, low employment rates, the hemorrhaging population, and the ensuing housing vacancies depressed the prices of residential, commercial, and industrial properties. By the mid-2000s, finding loans in mainstream financial markets to develop new and existing real estate became a rarity.

As is the case with the Murray, most existing properties weren’t valuable enough and too risky in the estimation of traditional lenders, who want more collateral to protect them on loans. And without developing projects like the Murray, tipping neighborhoods in a positive direction is hard.

You can see the effects of this credit shortage across Detroit’s neighborhoods, and solving this issue is one of the biggest keys to rebuilding this great American city.

But over the past decade, developers in Detroit’s core neighborhoods found some relief from an unexpected source and may have discovered an important remedy to revitalize the core and rejuvenate surrounding neighborhoods.

Map of Detroit

Sources: Motor City Mapping and the City of Detroit's Office of the Assessor.
Note: Commercial category also includes mixed-use properties.

The Core

For the first third of the 20th century, Auburn Automobiles produced sleek, fast luxury cars—symbols of American ingenuity, ambition, and success. But with the Great Depression came the end of many pioneering companies like Auburn Automobiles.

On the southeast corner of Cass and Canfield, in the heart of Detroit’s Midtown neighborhood, the Auburn service center became the Fred K. Wolf Building, a parole office. Decades later, the staff moved to a new location, and the building sat vacant and became a shell of its former self. By the mid-2000s, its roof drew support from only two cables; had either let go, the whole building would have collapsed.  

This is where the rebirth of the Auburn—and, to a greater extent, Midtown—began.

(top) The Auburn now lies across the street from a popular neighborhood dog park.  (left) The Auburn is just one block east of Woodward Avenue, the epicenter of redevelopment in the Midtown and Downtown neighborhoods. (right) One block to the west on Canfield Street, new retail activity has come to life. Photos by Matthew Johnson.
(top) The Auburn now lies across the street from a popular neighborhood dog park. (middle) One block to the west on Canfield Street, new retail activity has come to life. (bottom) The Auburn is just one block east of Woodward Avenue, the epicenter of redevelopment in the Midtown and Downtown neighborhoods.

Midtown is home to Wayne State University and lies northwest of the Downtown business district. These two core neighborhoods are connected by Woodward Avenue, which forms a spine running through them, all the way to the Detroit River, which separates the United States from Canada.

These neighborhoods—known as the core—have been ground zero for efforts to bring Detroit back from the brink, because they too were at a critical tipping-point. An important story often lost in the big picture is the outsized role mission lenders played in making these efforts possible.

Mission lenders include loan funds, community development banks, credit unions, philanthropies, and local, state, federal, and quasi-government agencies. Those chartered by the US Department of the Treasury’s Community Development Financial Institution Fund are commonly called CDFIs.

A big distinction that separates mission lenders from their traditional counterparts is their willingness to look at potential returns on community investments over a longer period.

In some cases, they are willing to take a loss on an investment to seed a market with strategic investments, prove a concept, and watch subsequent ventures pay off after traditional lenders get back in the game.

So it has been in the core. When Detroit’s housing market crashed and traditional credit lines for real estate development dried up, mission lenders filled a crucial lending gap and helped the Woodward Corridor weather the storm and spring to life in the aftermath.

During the Great Recession, mission lenders provided a quarter of the loans made available for commercial, industrial, multifamily, and institutional real estate development. And most of that happened in the core.

Mission lenders provided technical consulting to community development corporations, which execute the physical work on projects. They took bigger risks on loans, and they were more flexible than traditional lenders with underwriting and loan requirements.

 
Sources: City of Detroit's Office of the Assessor; Motor City Mapping; CoreLogic, Real Capital Analytics;  Transaction Level Report database; Opportunity Finance Network; and self-reported data from the following CDFI organizations working in Detroit: Capital Impact Partners; Cinnaire; Enterprise Community Loan Fund; IFF; Invest Detroit; and Local Initiatives Support Corporation.
Note: “Mission” loans include leveraged mainstream and private loans, which have been excluded from those categories.

The Auburn is a textbook case in how this work happens.

When Invest Detroit acquired the Wolf Building from a foreclosure sale in 2011, president and CEO David Blaszkiewicz saw an opportunity to tip Midtown in the right direction.

Like other CDFIs, Invest Detroit primarily works in underserved communities. Although Midtown is a prominent neighborhood, by 2011, 43.9 percent of its residents lived below the federal poverty level, and unemployment was 4.4 times the national rate.

Blaszkiewicz recognized that if Detroit was going to survive the downturn, Midtown had to come back.

“Our job at Invest Detroit is to work ourselves out of a job,” he said. “By that I mean we are trying to allow the market to recover to the point where the market just takes over…rates start going up, subsidy starts going down, and the market can again take over, and we go on to the next place.”

So to Blaszkiewicz, that old run-down building on Cass and Canfield was more than it appeared to be. It was an opportunity to infuse a strategic intersection with attractive places to live, work, and shop, all of which would become reachable by a proposed new transit line. And if this block came back to life, there could be ripple effects throughout the neighborhood.

It was a risk, but one that had to be taken, he said, because no traditional lender was going to touch this project. And if it was going to happen, it was going to require a lot of money, creativity, and collaboration to get it done.

 

Layer Cake

The first call Blaszkiewicz made was to Sue Mosey, president of Midtown Detroit Inc., a nonprofit that promotes redevelopment efforts in the neighborhood and connects residents and local businesses to projects. They presented the opportunity to community stakeholders over several months, took feedback, and made a list of requirements.

Atop the list was meeting the community’s need for a retail hub that could foster productive, homegrown businesses and building smaller housing units suitable and affordable for students and young professionals.

In lieu of fast food joints and “party stores,” Cass and Canfield would become home to pet and book stores, as well as local clothing and furniture retailers. Instead of more single-family homes, the block would house people starting out in life.

Next, Blaszkiewicz and Mosey requested designs from two Detroit-based developers that could meet these needs. And when the proposal came back from David Di Rita, a partner at the Roxbury Group, the search ended.

David Blaszkiewicz (right) surveys Midtown’s retail and commercial development from the Auburn’s rooftop with Michael Martorelli (left), the building’s property manager. Photo by Matthew Johnson.

The design laid out a modern residential building that would include 12 affordable units, 46 market-rate condos, and 8,659 square feet of occupied retail space for up to 11 stores.

“The Roxbury Group really listened to what we and our community development partners were looking for and provided a design that really accommodated most of those requests,” Blaszkiewicz said. “Now we have got a concept, we’ve got a developer. So the three of us…sat down and started putting the pieces together and layering up this layer cake.”

But pulling together funds for a project like the Auburn is as daunting as the preceding steps. Maybe more so.

Redeveloping the Auburn required seven layers of financing totaling $11.8 million. A typical deal structured by a traditional lender consists of just two layers: a senior lender and equity.

Crucial to the Auburn’s more complex structure was the use of the Treasury Department’s New Market Tax Credit program, which provides incentives for investment in, and revitalization of, low-income communities.

Using the tax credit allows the investors providing an eligible project’s equity to receive tax credits from the federal government. The Auburn project received $2.3 million this way.

The Auburn opened at the end of 2012, and today the residential units are filled and nine local businesses occupy all of the retail space.

In addition to little turnover in the Auburn, there has been significant retail and residential development elsewhere in the neighborhood.

Photo of Mays

Sonya Mays returned to her hometown, Detroit, from New York City where she was an investment banker at Deutsche Bank. She was an emergency financial manager during Detroit’s 2013–14 bankruptcy and now leads Develop Detroit and serves on the Detroit Public Schools board. Photo provided by Sonya Mays.

Just one block down Canfield, a Detroit-based watch and bicycle manufacturer called Shinola bought a commercial strip, opened a retail store, and added other local vendors to the mix, including Jolly Pumpkin Artisan Ales, RUNdetroit, and Jack White’s Third Man Records.

“All of these things have followed on from that initial seeding of retail, creating a little bit of an epicenter for retail activity, and that’s moved up and down the street,” Blaszkiewicz said.

Although Midtown is doing better, nearly all deals in Detroit still require this level of financial creativity, investment, subsidy, and gutsiness.

That is a big reason that Blaszkiewicz also serves on the board of Develop Detroit, a nonprofit real estate development organization formed six months after Detroit filed for Chapter 9 bankruptcy in 2013.

With the support of key city leaders, community lenders, and philanthropic foundations, Develop Detroit aims to strategically infuse neighborhoods with development resources and encourage both greater inclusivity and investment in these neighborhoods.

“The idea was that we would be a relatively well-financed team of people with very technical real estate capability who could go out and do catalytic projects outside of the core,” said Sonya Mays, president and CEO of Develop Detroit. 

For projects like the Murray and neighborhoods like Mexicantown, this vision and these efforts are lifeblood.

 

Beyond the Core

Mexicantown is three miles southwest of Midtown. But in ability to finance real estate projects, these neighborhoods are worlds apart.

Developers in Midtown are not flush with credit, but thanks to successful real estate deals in recent years, traditional loans are more readily available, and you can see the difference. Midtown is coming back. Outside the core, development is slower and less apparent. That is why the work of organizations like Invest Detroit and Southwest Housing Solutions is as important as ever.

Timothy Thorland has led the Southwest Housing Solutions redevelopment efforts in Mexicantown for nearly 18 years. Photo by Matthew Johnson.

The Murray is a perfect case in point.

In 2013, Southwest Housing Solutions tried to develop the Murray as affordable housing, even though a seven-unit property is not ideal for that kind of project. The effort was hobbled from the start.

Many neighborhood stakeholders saw a budding rebound happening in the core and came out against developing the Murray as affordable housing. They appealed for more patience and for the development of market-rate residential units.

Under current market conditions, developing residential properties in Mexicantown as affordable housing is the most practical way to move projects forward.

Without affordable housing designations, mission lenders cannot make use of the Treasury Department’s low-income housing tax credit. A financing gap would persist, and projects wouldn’t pencil out.

Nearly all lending institutions, including most CDFIs, base the amount of capital that can be loaned on the value of the property involved and analysis of similar recent deals in the neighborhood. That is problematic for places like Mexicantown because the value of its housing stock is low and there are no completed deals comparable with the Murray.

But a CDFI called IFF uses a unique lending model that looks beyond a project’s appraisal. The Chicago-based lender focuses on getting to the same debt coverage ratio other lenders target by valuing all the subsidies, tax abatements, expected revenues, and other applicable layers and then lending cash to fill the remaining gap.

“If I go to IFF, IFF is going to say ‘we are not interested in your loan-to-value ratio, we’re interested in loaning at cost,’” said Timothy Thorland, executive director of Southwest Housing Solutions. “‘We trust your analysis of the market, and we are willing to share the risk with you.’ That works.”

IFF is in its third year in Michigan and has deployed $43 million, including $20 million in Detroit. Much of the focus has been on lending to nonprofit special-use facilities (e.g., health and senior services, schools, and community centers) that rarely have the comparable deals required by traditional lenders.

Using this model, IFF helped Thorland rescue and redevelop a church in Mexicantown in 2015. He is hopeful IFF’s approach will become more common and enable him to work on residential properties in the near future.

In the meantime, hope for another way to develop comparable deals on residential property began to take shape at the end of 2016 when Invest Detroit called Thorland about getting the Murray involved in a new program called the Neighborhood Strategic Fund.

The fund is designed to build on lessons learned by mission lenders over the last decade in Detroit’s core neighborhoods and translate them to projects outside the core.

It looks to make more philanthropic equity available in three peripheral neighborhoods, so that developers like Southwest Housing Solutions can have more flexibility to meet their target community’s various housing needs.

“They recognize that if you are going to move these neighborhoods to the next level, past the tipping point, then somebody’s going to have to take that risk up front and test the market,” Thorland said.

David Blaszkiewicz and his team started with 25 potential projects that could be targeted for work using the fund, but eventually whittled them down to four, with the Murray atop the list.

(left) Mexicantown is home to significant retail activity and some promising housing stock, yet other homes are in desperate need of redevelopment. (right) Over the last 10 years, the Murray has withered and atrophied as Southwest Housing Solutions waited for financing to redevelop it. (bottom) A school bus passes the Murray at dawn, just a block away from Western International High School where it will unload students. Photos by Matthew Johnson.
(top) Mexicantown is home to promising housing stockand in desperate need of redevelopment. (middle) Over the last 10 years,the Murray has withered and atrophied as Southwest Housing Solutions waited forfinancing to redevelop it. (bottom) A school bus passes the Murray at dawn, just a block away from Western International High School where it will unload students. 

Invest Detroit’s confidence in the Murray stems from doing a lot of homework and having faith in a process that served it well when it redeveloped the Auburn.

Similar to the way it conducted its work in Midtown, the Invest Detroit team consulted with people from Southwest Housing Solutions, the Southwest Detroit Business Association, and other neighborhood stakeholders to map out where retail and residential activity was happening; where philanthropic, federal, and city dollars were spent; and where infrastructure was being built.

Even though the Murray only contains seven units, Invest Detroit expects the project to require just as much financial creativity and moxie as the Auburn did. But if it works out, the project will prove that Mexicantown is ready for loans that fund market-rate housing, and more lenders will follow.

More lenders might mean more development and a brighter future in Mexicantown. And with more neighborhoods on the comeback trail, Detroit can again show itself to be a city that people from all walks of life want to live in.

At the project level, Thorland and Blaszkiewicz believe that over the long run, these causes are worthy of public investment, because on the ground, they’ve already seen neighborhoods change.

“The thing that we have working for us…is history,” Blaszkiewicz said. “We’ve done this several times now, and since we’ve done it successfully, we know we can do it again.”

 

Read the Research

Commercial Investment in Detroit: Summary Findings

Coming Back from the Brink: Capital Flows and Neighborhood Patterns in Commercial, Industrial, and Multifamily Investment in Detroit

Opportunity Finance in the Motor City

 


 

Project Credits

Research:  Brett Theodos, Jay Dev, and Sierra Latham

Development: Vivian Hou

Design: Christina Baird

Editing: Matthew Johnson and Elizabeth Forney

Photography: Matthew Johnson

 

This feature was funded by a grant from JPMorgan Chase. We are grateful to them and to all our funders, who make it possible for Urban to advance its mission.

The Urban Institute is collaborating with JPMorgan Chase over five years to inform and assess JPMorgan Chase’s philanthropic investments in key initiatives. The goals of the collaboration include using data and evidence to inform JPMorgan Chase’s philanthropic investments, assessing whether its programs are achieving desired outcomes, and informing the larger fields of policy, philanthropy, and practice. One of these programs is its $100 million, five-year commitment to support and accelerate Detroit’s economic recovery. This feature is part of a larger project identifying general trends in commercial investment in Detroit. We are paying close attention to the neighborhoods and districts where investments are made and the players, both community development financial institutions and other commercial lends, that are making them.

 

 

View this project on Github.

Copyright © August 2017. Urban Institute.

 

As an organization, the Urban Institute does not take positions on issues. Experts are independent and empowered to share their evidence-based views and recommendations shaped by research.

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