Mobilising millions to build black wealth

Welcome back. As we noted in a recent edition, there are signs that corporate enthusiasm for racial justice — seemingly so passionate three summers ago — is waning. As rightwing Republicans continue their crusade against “woke capitalism”, and with the Black Lives Matter movement having largely receded from the front pages, business leaders no longer seem quite so vocal about the structural disadvantages that hold back many people of colour.

So it’s worth reminding ourselves just how serious and entrenched those obstacles are — not least in the multitrillion-dollar US real estate market, the focus of today’s edition. But, as we highlight, innovative financial approaches are starting to have an impact. Let us know what you make of them, and which other angles on this subject we should be looking at: you can reach us at moralmoneyreply@ft.com. — Simon Mundy

Novel ways to tackle the racial wealth gap

When Lyneir Richardson’s investment group sealed the acquisition of a Baltimore shopping centre last year, with the aim of developing a flourishing hub for local black entrepreneurs and consumers, a section of the legal covenants attached to the property gave him pause.

“At no time,” said the covenants that had applied to the tract of land since a sale in 1945, should any part of it “be occupied by any Negro or person of Negro extraction”. An exception, it conceded, could be made for the black servants of white occupants.

While the Supreme Court has since ruled that racially restrictive covenants cannot be enforced, they remain attached to thousands of title deeds across the US.

Richardson’s lawyers have now had the language expunged from the Baltimore plot’s covenants. Addressing the wider racial disparities in the US real estate market, with its legacy of systematic discrimination, is proving far more difficult. But it’s a problem in which some black-led investment companies, including Richardson’s Chicago TREND, are starting to make a dent.

Property ownership was at the heart of the extended boom in middle-class living standards that began under Franklin Roosevelt’s administration, which established the Federal Housing Administration to insure home mortgages, and the Home Owners’ Loan Corporation to refinance them. But it was a boom from which most black households were shut out.

Both the FHA and HOLC became notorious for systematic “redlining” — excluding from their operations supposedly high-risk urban zones, which happened to map closely to majority-black areas.

Even if a black family had the means to move to a mostly white area — and was willing to risk being hounded from their home by a racist mob — they could not count on government support. The FHA’s manual for its underwriters explicitly encouraged restrictive covenants, which “to be really effective should include . . . prohibition of the occupancy of properties except by the race for which they are intended”.

The legacy of these policies remains conspicuous, with many low-income households still in effect excluded from the conventional mortgage market, where lenders have little interest in low-value properties, says John Green, managing principal of real estate investment firm Blackstar Stability.

Instead, many families — disproportionately black — have resorted to broadly unregulated “contracts for deed”. Financed by the seller — often at inflated valuations and interest rates — these instruments transfer ownership to the occupier only when the final instalment of the loan is paid. In the meantime, the occupier is responsible for all repairs and maintenance. If the occupier misses a single payment, they can be swiftly evicted — and if they want to move before the loan is repaid in full, they must forfeit every dollar paid to date.

“The best judgment we have is that these are paid off one in five times,” Green told me. “It’s an instrument that’s designed to fail.”

Green’s firm aims to offer these families fresh options through a new fund that held its final close last month with $100mn of investment from a mix of foundations, family offices and faith-based organisations.

Blackstar is using this money to buy CFD-encumbered properties and convert the contracts into conventional mortgages. With government scrutiny of this “predatory” market increasing, Green says, many CFD lenders are willing to sell the properties at steep discounts. This enables Blackstar to sell the houses on to the occupying families with mortgages that reduce their monthly payments (by about 30 per cent on average, in the 86 mortgage conversions so far), while still generating a return for its investors.

The new mortgage debt is never greater than the current market value of the property — and in 85 per cent of cases, Green says, it is well below it, meaning the families immediately gain equity in their home.

The real estate market is central to the US’s yawning racial wealth gap. In 2021, the National Association of Realtors estimated that just 44 per cent of black households owned their home, compared with 72.7 per cent of white ones. After decades of surging property values, median white household wealth stood at $187,300 in 2019, according to the latest data from the US Census Bureau, against just $14,100 for black households — reflecting the lower average value of black-owned homes, and the smaller amounts of equity accumulated in them, as well as the lower ownership rate.

Efforts to tackle this problem should not be restricted to the residential property market, argues Richardson of Chicago TREND. Since 2020, his business has been building a model to buy and develop shopping centres in majority-black areas, with a blend of capital from impact investors and local residents, who can contribute as little as $1,000 each.

The institutional investors are promised a sub-market concessionary return of 5 per cent, or more depending on performance. This enables TREND to target a higher return of 12 to 15 per cent for the community investors, while also providing attractive terms for black-owned local businesses operating in the shopping centres it acquires.

Only 3 per cent of black households own commercial real estate, with an average value of $3,600, according to a Brookings Institution report last year — against 8 per cent of white households, whose commercial property was worth an average of $34,000.

Richardson argues that, by helping families to own a stake in local commerce, his fund can boost community cohesion as well as household finances. He’s aiming to attract catalytic capital from “impact investors who say, ‘I don’t want to do grant-making. I want to make neighbourhoods better, reduce crime, close the racial wealth gap — but I want my money back.’”

So far, Richardson’s fund has raised $10mn from backers including the family foundation of former US commerce secretary Penny Pritzker, with a medium-term target of $50mn. Green, meanwhile, says Blackstar’s approach to residential property is massively “scalable”, with outstanding CFDs amounting to about $200bn.

The racial disparities in the US property market are a grim legacy of some of the ugliest elements of the country’s history. But this is an area where smart, targeted financial investment could have a powerful impact. (Simon Mundy)

Smart read

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