Buying back the block with Lyneir Richardson

David.

I'm David bank and from Impact Alpha. This is an Agents of Impact podcast.

0:00

When is the last time that someone knocked on your door and invited you to have an ownership stake of something that you patronize in your neighborhood? And our investment thesis is that if people have a little ownership stake, they'll patronize and protect and respect it in a different way.

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That's Linea Richardson of Chicago Trend, which acquires and improves shopping centers in low and moderate income neighborhoods. The twist, investment structures that enable local residents to become co owners on the same terms as institutional investors. I spoke with Lanier about how such local buy in bolsters the properties, why even a thousand dollar stake in commercial real estate can change a family's trajectory and how broad based community ownership can help close the racial wealth gap. Chicago Trend has been an active and early user of Impact Alpha Edge, Impact Alpha's premium databases and other investment tools for fund managers and other agents of impact. Let's jump right into our conversation. Lanier Richardson, welcome to the podcast.

0:22

Thank you for having me.

1:05

We've been tracking you around the country. Linear, you know, from Baltimore to Chicago to Newark and Columbus, Ohio and I think Minneapolis. Now what are you doing in all these places?

1:07

So we are democratizing ownership of commercial real estate. What that means is we're buying shopping centers and mixed use properties in low and moderate income communities and we are intentionally inviting low and moderate income people to invest alongside of us.

1:17

And those are just so folks know, those are what some people call strip malls. Those are little shopping centers in commercial districts of neighborhoods that. What kind of, what are we talking about? What kinds of stores are there?

1:35

Yes. So we own what I call community serving shopping centers. So don't think of the shopping mall. 30% of our tenants are healthcare, urgent care, eye doctor, ear doctor, pediatric dentist, athletic physical therapy, Dallas Center Pharmacy. 30% of our tenants are food, carry out pizza, carry out chicken, the Chinese food place. We have two grocery stores. And then the balance of our tenants are service oriented. The nail salon, I call them non amazonable. Amazon doesn't do manicures. Yet we have the real estate office, the UPS store, things of that sort. So these are places that people drive by every day. And the thesis of our work is that the neighborhood shopping center, particularly in a low and moderate income neighborhood, is your first impression of a neighborhood. So if it's blighted or disinvested or under leased in some way, it brings down property values, it could attract crime. And that's the work that we're doing. People Know these places, they see them every day, they visit them. Daycare, you know, the daycare operators there, those type of tenants.

1:47

Now the innovation here is that the local residents have a shot at investing in Trend and in these local businesses, local shopping centers. So that's, that's, that's kind of what makes, that's what sets Trend apart. So tell us about how that works.

2:56

That's correct. So literally, I'll tell you, there are two parts to our story. One is we now have over 460 low and moderate income individuals who've invested on average $2,242 or something like that. 70% are people of color, 44% are women. Very different than traditional commercial real estate investors that are largely white men. And I always say when I make my presentation, when is the last time that someone knocked on your door and invited you to have an ownership stake of something that you patronize in your neighborhood? And our investment thesis is that if people have a little ownership stake, they'll patronize and protect and respect it in a different way. So that's our community investor piece. We also raised a fund and always remember that our anchor investor is a family foundation formed by the former US Commerce Secretary, Penny Pritzker. I tell the story, you may have heard this before that there was this article in the Wall Street Journal where the, quote, penny Pritzker at the time was the president of Harvard's land company and Harvard issued this RFP and they required that a portion of the equity be made available to diverse entrepreneurs and diverse individuals. And Penny's quote in the Wall Street Journal was one of the reasons that there's a racial wealth gap in America is that people don't get invited to participate in good deals. So I read that. I immediately sent an email. I had a friend who worked there and he got me a meeting. Have this meeting, zoom call. I go through my work. Here's what we're buying. These community shopping centers. We invited local people. So the Wall Street Journal article was talking about they had LeBron and Jay Z and these Wall street executives. Again, I love to have LeBron and Jay Z invest in my deals too. But what I communicated to Penny Pritzker and the foundation team was our investors are the school teacher, the church member, the grandmother who lives in the neighborhood. And I remember Penny Pritzker saying, I like this. So, you know, so what are you trying to do? And at the time I said, well, I just try to do our first little couple more deals. We need $6 million and she said, okay, we're in for 25%. And I was like, damn, I should have said 60 million, you know? So MacArthur then invested, Kresge invested, McKnight foundation invested. Cerna foundation has been one of our favorite investors. And David, you may have heard me tell the story before. We have an order of nuns who also invested. And they're my favorite. It was one meeting and they said, oh, I kind of like this. And they invested $500,000. And I remember leaving that meeting going, I gotta get to know more nuns, man. The sisters are pretty good. So that's our capital stack. We use institutional large capital and we create opportunities for local people to invest on the same terms.

3:11

Gotta love the nuns. Okay, so you've done this first fund, you've got your first few projects under your belt. What have you learned?

6:17

Boy, we're learning a lot. So I am thankful for all of the investors. It's the Sisters and the Pritzkers and the MacArthur's and the Kresge's, because I always call. Our first fund is a fund on training wheels, right? We got a chance to learn what it's like to have an investment committee to do all of the financial reporting, to work with a fund administrator, all of our audited financial statements. We had legal opinions to establish that investing in our fund meets the charitable purpose test for impact investors. I built a team now of eight people who are doing the plumbing. And that fund on training wheels was something that was really interesting to us. We're learning how to invest their criteria. Some of our investors had geographic preference, so we learned how to invest in that in that way. And we're, you know, we're very close to closing out our first fund. And, and we're now, you know, they always say you do it a year in advance. We now are really thinking about our second fund. So our first fund target was $15 million. We've raised just over $13 million of that. And our second fund target is $50 million. And so a lot of people said, oh, I love the work in our first fund, but we don't invest in first time fund managers. Or the other thing about our first fund is people would say, oh, I like the work, but we really want higher returns. And so the first fund has also allowed us to prove up that we can do the two things we promise. We can make neighborhoods better, we can strengthen neighborhoods, strengthen corridors, drive community cohesion, but we also can earn financial returns. And the second fund, we're going to be able to demonstrate we made financial returns and we strengthened neighborhoods.

6:25

So, Lanier, you're almost done raising fund one, and you're about to start on fund two. What's your ask?

8:18

So we have to raise another $2 million to close out our fund one and to meet all of our requirements, all these funders had, you gotta invest some money in Minneapolis. Gotta invest some money. So we're looking for one other funder. And the beauty of where we are right now is we have a fund that's investment ready and due diligence ready. You can imagine MacArthur and Kresge and Pritzkers asked all the questions. So if someone wanted to be an impact investor and be alongside of other impact investors like my order of nuns or Dodge foundation or Cerdna foundation, we can almost answer every question. And we can press a button and give people the information they need. So if someone's sort of thinking about, hey, how do I support a movement? Or how can I get into being an impact investor at a million or $2 million level, we have almost a fund in a box that's ready to go. And then secondly, we're just starting to plan our fund too, right? So fund two, as I said, we want it to be $50 million or more. And folks that want to start to think about that with us a year in advance and help in structuring and helping financial expectations, we're looking for, you know, those early, you know, you know the political moniker, Emily, early money is like yeast. So we're looking for those folks who will be yeast for our second fund.

8:25

Now you're also making financial returns for these small investors. So that's kind of the thing that people key on because of all the attention now to what people are calling the ownership economy and giving folks a stake in something that might appreciate and over time at least, you know, turn into kind of generational wealth, as people say. So tell us sort of of what the ownership and the broad based ownership thesis here is and why it's so important.

9:44

Yeah, three things, I'll say. So, A, if people have a little ownership state, they'll patronize, protect and respect it in a different way. I have tear jerker emails and Facebook messages where people would say, I saw that shopping center decline and I always wanted to be a part of its revitalization. I had an email where a guy said, I used to do crime in that neighborhood and now I'm part of the ownership. Right? So that's a B. You know, people for the first time are getting financial education. What does it mean to get a K1, what's a rent roll? How does investment work at its core level? You know, we have these quarterly investor meetings and people ask questions, right? You know, when are we going to make a return? And the coolest thing, the generational wealth, you know, that's a term people talk about all the time. And if someone invests in our shopping center, they're earning returns, they're 15 IRR, 12 IRR. So it means if you invest, you know, a thousand dollars, if we're right, you'll get three, maybe four times your investment cap. We're really right. Five times. But what's interesting is I now have these young people on the call, 11 years old, 12 years old, they're attending the community investor meeting with their parents or their grandparents. And I always sort of chuckle when the young kids, they get really close to the zoom screen and they say, you know, what's a rent roll? Or, why can't we have Chipotle? Or when are we going to make some money? And what I realized is that's the generational wealth creation is these young kids are asking questions to a CEO, just like a Wall street analyst would ask a question to a CEO, and they're thinking like owners. And so the result of that is going to show up two decades from now when these kids are like, I don't just walk past this place or just go to the, you know, the pharmacy or, you know, the drugstore there and buy some candy or the grocery store or whatever. I actually, my family owns that. We own that hashtag, we own that. And we talk about them as owners. So that part when we actually now had an exit where we bought something, we improved it, we paired the roof, we helped the local entrepreneur become a UPS store franchise. We gave them free rent, and then we sold it. And our investors all made more than a 20% IRR. That proof of concept that you can make the neighborhood better and get a return and that individuals can understand what it means in their neighborhood. Maybe they use their money. The only other thing I'll say really briefly is when we started this work, everyone was talking about community investment, and they were talking about it from a standpoint of the nonprofit sponsor and the cdc. And I remember thinking my definition of community was group of individuals. So I wanted to be at a point that somebody in the neighborhood, even if they invested a thousand bucks and they got $3,000 back, that individual, whether he buys a car or goes on vacation or uses it to invest in another real estate deal or send, you know, pay partial college tuition, that there's some individual who actually increased their wealth and got some income and passive income from this, I think is what is game changing.

10:09

And one of the things that's interesting too is that in this ownership economy, people talk about home ownership. That's obviously important. And then employee ownership's having a kind of moment of as more businesses turn over and folks learn that they can transition ownership to their employees, there's obviously retirement assets and other kinds of financial assets. But there's very little opportunity for folks to get into commercial real estate, which has always been actually a pretty decent investment. So you're giving folks access.

13:38

Wealth is created by owning assets. Assets that generate revenue, appreciate over time, have tax advantages. Right. That's how wealth is created in America. It's home ownership. You know, it's the retirement 401k and all that stuff is good small business ownership. You know, here when we started doing this work at Brookings, we started at research. From my professorship at Rutgers to my fellowship at Brookings, it was about, well, who owns commercial real estate and what have been the commercial real estate turns. They've been on par with the S and P and you know, stock market returns. But, you know, 81% of commercial real estate is owned by the 1%. And so less than 3% of people of color have any interest, any commercial real estate ownership that's, you know, less than 70% of of white individuals. So this thought of how do you democratize ownership? And my fundamental belief is I still believe in capitalism. My belief is that we just got to make it work for more people. Right? And so this thought of a local individual can invest on the same terms as Penny Pritzker family foundation caveat or MacArthur foundation, or we have some high net worth families, individuals that have invested in our work. Nobody ever invites the church member or the charter school parent, or the guy who used to do crime in the neighborhood that has turned his life around to have an ownership state in making the neighborhood better. That's what I'm passionate about.

14:06

Now how do you actually find folks like you have to kind of go door to door. You said you literally knock on the door.

15:45

So almost literally. The thing that I've had fun with as I marry, I call it a fintech tool meets old school community organizing. So we've used the crowdfunding platform small change where we register the offering with the securities and Exchange Commission. We put all of the information, who we are, our company, our mission, the details about the project, our investment thesis. We expect to get government grants who the tenants will be what the market rents are. So all that information is publicly facing for anybody to see. But then once it's registered, I do meetings in church basements, in apartment building common areas, in the public library. In our last project in Columbus, Ohio, right before Christmas, I did my first meeting actually in a barbershop, right? And so that's taking it to the people, right? And inevitably there may be 20 people or some meetings, there may be a hundred people and five or ten will invest. But I sit there chest to chest, face to face and take the time and answer people's questions, right? And they see there's earnestness to the work, they understand the rationale and you know, 10 or 20% invest and the others, I say, you know, if you can't invest or you don't feel comfortable, just say a prayer for us, right? The work is hard and you know, we're going to do it over time.

15:54

And come shop at the center.

17:18

And come shop at the shopping center. Center. Exactly, exactly. Right.

17:20

Now you were telling me that there's an interesting kind of matching incentive program you're starting up.

17:24

Oh, I just got my. Our newest investor in our fund, you know, they wrote, you know, all the investors in our fund have on average invested about a 1 to 2 million dollars. So when I talk about the regards to them, Kresge, there's also some high net worth individuals, the other enterprises, polarized capital impact, charitable, you know, you know, other smaller investors, the Dodge Foundation, Geraldine, our Dodge Foundation. Well, one of those investors actually invested capital in the fund, as I said, on average a million dollars. But they gave us a grant that allows us to match any local community investor that invests. So it amplifies their investment. So when I really go and sort of target the low and moderate income people that live in the zip code right around the property who you really want to incentivize to invest, right? They're there, they see the improvements. They only investor calls, you know, our investor calls are really funny people like, oh, you need to repaint the speed bump or you know, the stop sign at the corner or, you know, they're still loitering around the shop. We hear that and we like that. This matching allows the next, you know, 50, 100 people in that zip code that invest. When we have the offering open, if they invest $1,000, we can match it with a grant of $1,000. So now they have real impact, you know, and their financial returns are doubled. And so we're anxious to innovate this and we're hoping that it might be a model that goes, you know, further in terms of again, closing racial wealth gaps, you know, encouraging, you know, commercial property investment, democratizing ownership. Again, all of these themes. What I'm most excited about of our work is there's a lot of conversation about community ownership vehicles. But We've now bought eight shopping centers. We've got seven shopping centers about to buy our eight. So we've done this right a.m. we're learning, we've had returns. It's not easy. Every day I struggle. Mission, money market opportunity, right? It's like how long can I keep a vacant space open so that I don't have to lease to an extractive tenant, a check cashing or furniture rental or blood plasma or dirty dollar store, right? What? But on the other hand, I can't wait forever, right? So we're learning every day how to do this work and how to get returns and how to communicate with, with the community investors and with our institutional investors as well. And man, it's hard work, but it's my passion.

17:30

Now every project has to have at least 5% community ownership. But it could be more, right?

20:08

Yeah. So the way our projects are structured is we do the due diligence in the financial underwriting and overall deal structure. We line up our first mortgage financing and if there's going to be any public subsidy and then we determine, all right, this project, you know, we bought a shopping center for $17 million. It needed four and a half million dollars of equity. We invested three and a half million for the fund. We raised 454,000 from 200 community investors. We bought our first shopping center, needed $700,000 of equity, 49% came from community investors, 51% from us. So as little as 5%, you know, of community equity, that could be 50 people with a thousand bucks. We want some buy in, but as much as 49%, right. We still keep 51% because I have to guarantee the first mortgage and sort of be in charge of making sure that the overall project goes well for our lenders investors. But we're happy to have, you know, at least 5% is the requirement. And we're, I think with these matching type of programs it's going to become more like 10 and 15 or 20% of the on average.

20:14

Now you raised your academic credentials there at Rutgers and I know you've been researching this for a long time and Brookings as well, and you put out a playbook for buying back the block. So this is, you know, sort of you going Broader than just trend, but to the whole kind of movement for ownership, economy and, and, and, and wealth building. So what are some of the, you know, top three things folks can do to kind of push the squirt?

21:20

So, so literally when I talk about being at the high point of my career, I'll be 60 this year. And these last 10 years have really been the high point of my career because I get to teach and think and write and I get to do right. So I've always been most inspired and got most energy from being a doer. But because of support from Kresge, the Robert wood Johnson Foundation, MacArthur and others, Cerna, I've been able to write. So from my academic perch, we've written a playbook, Buy Back the Block. We've done a case study on actually how do you form a community investment vehicle? How do you do the underwriting? And I love this philanthropic support because I'm not on here hyping up. You got to buy my book. Got to buy a book. I thought, I think I'm going to write a book. But it's available. These playbooks and these academic case studies and practitioner based articles are all available, right? How do you get site control? How do you advocate for capital? How do you communicate with people? Some of the things I'm telling you about today, how do you form a pro forma, how do you form an investment thesis? So my work, there's so many different community investment models, as you know. Some are about preserving affordability for small businesses or creating space for artists or governance. You know, one person, one vote. Our model is about we're going to make the neighborhood better and the people that invested are going to make a return. Right? That's my North Star in our work. And so I actually am now featuring all the models that people are doing great work. The guys for Partners in Equity have a model. The guys from Community Investment Trust, Kensington Corridor Trust, the Guild. I'm forgetting some local code. All these guys have models and it just depends on. I'm writing more about the strengths and weaknesses of every model and people can choose. I'm trying to do this so this model works better for me. So the thought of doing and teaching and writing and sharing, you know, that's how we're going to democratize ownership. You democratize information, you make the education and the resources available to people.

21:47

Roll it forward maybe 10 or 20 years. You said this is a generational kind of work to be done. What does the economy look like? Say if these ownership models take off, people always Talk about the. The downside of the wealth gap. What's the upside of the shared prosperity?

23:59

So I'll. I'll do personal and then micro and macro. So my dream, you know, we've had an exit. And I don't talk about it a lot because my dream is, you know, it's for us. The first real sign will be sort of 2032, 2033, right? That I really am in a room with 400 people that said, I believed in this. I got an investment return. I see the neighborhood is better. We got grocery store, more health services. You know, there's no loitering and drug dealing in a parking lot. And we got it. That's my first North Star that people can say, I got to return in this work. So that's when I'm going to be most happy about this work. That's. That's what my dream is. Right? But then the generational part is you now have 460 people and again, an extension of them. Maybe it's a exponent of them 10x to people like, my family knows what it means to own. I have a stake in my neighborhood. You know, we got a financial return. My kids think about this not as a place where they just, you know, are just customers or they, you know, drop trash in the parking lot. They understand they have a pride of ownership. I had a lady once tell me at the end of a meeting, I've lived in this neighborhood for 40 years. I call it my own. But I've been a renter here. I never owned anything until I invested a thousand dollars in your shopping center. Then she said, now you got to do right by me, baby. Right? So it comes with responsibility that I take very seriously. Right? And so what I'm hoping is that lady will say, you know what, I gotta return. I see my neighbors better. And you did right by me. Right? And my grandkid, my grandson now knows what it means to own and is thinking about a career in real estate or knows a real estate professional, a real estate lawyer, an appraiser, environmental, not, you know, the construction team, a property manager, a leasing agent. They'll see people of color and people from their neighborhood. I built a team now eight people. And we're going to add two more people to our team that have the same experience as me. I live. I grew up on the west side of Chicago, so I got a lived experience in the neighborhoods that we're working in. I went, thanks to my parents, sacrifice to the best schools. I worked at big companies, and I now have a team of people with the same pedigree lived education worked and they're bringing that passion back to these neighborhoods to try to make them better and to try to get a return for people who often don't have an opportunity. That's what we're doing. So we're rounding out our fund one and we're about to raise our fund two and I'm having fun with it.

24:15

Well, Lanier Richardson, I'm sure you're gonna do right by all of them and we're gonna be watching as this all plays out. So come back and tell us how it's going. And thanks so much for joining us. Joining us.

27:05

Thank you very much.

27:15

That's going to do it for this Agents of Impact podcast. Big thanks to Lanier Richardson and Chicago Trend, to our producer Isaac Silk, to the whole team at Impact Alpha and to all of you agents of Impact with gratitude for all that you do.

27:17

Sam.

27:40