Why Gentrification Is a Good Thing, with Lennox Jackson

Lennox Jackson

Is gentrification a good thing? And why might affordable rate housing not be the best solution in certain low-income neighborhoods?

Lennox Jackson is founder and CEO of Urban Equities, a Chicago-based real estate developer and advisor that specializes in residential, retail, and commercial projects.

Note: this is Part 1 of my conversation with Lennox. Click here to listen to Part 2, where we discuss Chicago’s Opportunity Zone neighborhoods.

Click the play button below to listen to my conversation with Lennox.

Episode Highlights

  • Gentrification vs. resident displacement, and why gentrification can be thought of as a good thing.
  • Why LIHTC deals and subsidized housing are not an affordable way to deliver affordable housing, and why workforce rental housing may be a much better use of resources in some communities.
  • The importance of establishing strategic alliances with local stakeholders.
  • How twinning Opportunity Zones tax incentives with LIHTC can provide OZ investors with another level of confidence.
  • Why OZ fund investment should attract the philanthropic community to help fill the capital stack gap that may exist on fair market housing developments.
  • How OZ investors not familiar with real estate investing can take the first step.
  • The importance of geographic diversification, particularly with regards to investing in low-income communities.

Featured on This Episode

Industry Spotlight: Urban Equities

Urban Equities

Founded by Lennox Jackson in 1993, Urban Equities is a full-service real estate developer and advisory firm specializing in residential, retail, commercial, and mixed-use properties. Urban Equities provides development, program and project management, and construction services in Chicago.

Learn More About Urban Equities

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. And today, I’m joined by founder and CEO of Chicago-based real estate developer, Urban Equities, Lennox Jackson. Lennox has over 30 years of experience and a portfolio of projects spread across several Opportunity Zones on Chicago’s South Side. He joins me today from his office in Chicago, Illinois. Lennox, thanks for coming on the show, and welcome.

Lennox: Thank you very much, Jimmy, for having me today.

Jimmy: Absolutely. I think this is an important conversation we’re about to have about low-income communities on Chicago’s South Side, some of the most distressed communities in the country. But before we get into that, tell me a little bit about what you’re doing with Urban Equities. Tell me about Urban Equities, and what services your company provides, and what projects are in Urban Equities portfolio.

Lennox: I founded Urban Equities in 1993. It is a real estate development and advisory service firm recognized for executing real estate and construction solutions for projects. We deliver project and development services also for clients, for both the pre-construction and construction execution phases. So, what that simply means is we outsource some of our technical skill sets to those who have gaps along those lines and need assistance. Since 1993, we have been involved in a variety of transactions, including for sale single-family homes, two flats, which, here in Chicago, are two-family residences, as well as larger developments.

We’ve done work directly under our own account as well as we’ve participated in partnerships with larger companies, including what is formerly the LR Development Company, and now is referred to as Related Midwest. I should point out that prior to me starting the company in ’93, I was employed as a Development Officer for a now defunct company by the name of City Lands Corporation, which was the for-profit development arm of the former ShoreBank Corporation. So, ShoreBank Corporation, back in the President Clinton days, was designed to rebuild and strengthen inner city communities which are now referred to as Opportunity Zones.

So, there, I got baptized in the low-income housing tax credit industry syndicating tax credits to support low-income housing, redevelopment of large, vacant, distressed apartment buildings on Chicago’s South Side. So, I share that story there about my time at City Lands Corporation because it helps to inform folks about why I started Urban Equities. There’s a clear tie-in between what I formerly did at City Lands and what I’m now doing, and have done, for over 25 years with Urban Equities. So, in simple terms, we work to rebuild and strengthen what are now referred to as Opportunity Zone communities.

Jimmy: What gentrification concerns do you have about the Opportunity Zones Program? That’s been one of the biggest criticisms of the program to date. And what steps can be taken by developers, investors, and community leaders to help limit resident displacement?

Lennox: Well, see, here, you know, this may cause a few eyebrows to go up. I’m not a Republican. I’m not always a Democrat either, but I will say this, that I believe gentrification is a good thing. Now, in many circles, folks equate gentrification along racial lines. That may or may not be true, but I prefer to think of gentrification along economic lines and educational lines. Now, we need, in these communities, Bronzeville in particular… The median household income in Bronzeville is less than $30,000. Over 30% of the residents in Brownsville live in subsidized housing.

So, when retailers who are considering this marketplace, when they go to the data, they’re not seeing spending capacity. And so, we’ve gotta change that. The same thing applies in Inglewood, Austin, Avalon Park, Roseland. We need higher incomes from households that will move into these communities. Why is that such a big deal? Well, what that does, it increases the amount of cash or income in circulation. It enables retailers to develop that confidence necessary to take a risk and open up a store, which then in turns hire someone from the neighborhood, which in turns strengthens the community.

We can’t do that without gentrification. You know, I really believe that we’ve gotta look at balanced development. We’re not looking… And now, my position here is not one to suggest that I’m talking about displacement. I’m simply saying is and, and both. I’m saying that we need the current residents who need some assistance, and, therefore, live in subsidized housing. But we need to kind of pull back from doing those deals. You know, as much as I started my career doing low-income housing tax credit deals, that is not an affordable way to deliver affordable housing. It takes a lot of freaking money to deliver tax credit rental housing.

We could use those resources much differently and create what I will refer to as workforce rental housing. And those are folks who are getting up every day, going to work, and trying to make ends meet. They are, oftentimes, recent college graduates who are just starting their lives out. We need to give those folks a leg-up. We need to provide them with a community that is economically healthy and balanced. And the only way to achieve that is to attract and retain households that generate higher household incomes. So I may have gotten me in a little bit of trouble with my response, but I’m hoping people understand where I’m coming from.

Jimmy: Well, you’re not in any trouble with me. I understand what you’re saying. I think gentrification is a really charged word, and its definition changes depending on where you’re coming from. And it can mean a couple of different things, too. A lot of people… In a way, I don’t know, I’ve referred to it, with some of my friends, as being a dirty word for revitalization. I think when you refer to economic revitalization, and that’s kind of the entire goal of the Opportunity Zones Program, everybody agrees. “Oh, yeah. We need economic revitalization.”

Well, economic revitalization can be equated to gentrification, but I think what we’re really trying to avoid is resident displacement. And, oftentimes, the topic of resident displacement gets conflated with the term gentrification. So, I think gentrification is good, or it can be good if thought of in the correct way, but it’s the resident placement that we want to avoid.

Lennox: Yes. And, unfortunately, you know, some of that is, or a great part of that is driven by the economic environment. And this is happening, even like in Woodlawn. You know, when the announcement was made about where the Obama Presidential Library was gonna be situated, the market started to take on its own energy and personality. And so, what does that mean in real basic terms? That means that investors, many of whom are not even located in the state of Illinois, started buying up real estate, multifamily apartment buildings.

And, over time, they’re gonna be charging rents at levels that are prohibitive from people who are currently living in some of those buildings. And which is why, in some circles, there’s conversation now about rent control policies in Chicago because there is such a need for affordable rental housing. But I’m of the opinion that we don’t need the same level of attention given to subsidize housing versus affordable workforce rental housing. That’s different.

Jimmy: And that’s what you’re pushing for, is more affordable workforce rental housing?

Lennox: Yes. Yes. And folks who can pay the fair market rent, and, again, using the word fair, right? And so, this is where, me personally and my company as a culture, has tried to maintain a mindset of, “We’re capitalists with a heart.” And what I try to communicate in that is, you know, if the company can’t earn revenue and therefore profit, we can’t exist, and we can’t employ people, and, therefore, we can’t make change.

But there’s a natural requirement, as I see it, to look for ways to create good, you know, as refer to good profit. What are we doing to change lives? What are we doing to change communities to enable them to have sustainable trajectories for long-term growth and improvement? We play a part in that. And so we’re not looking to try to charge these ridiculous rents because, over time, it actually goes counter to what we’re trying to do for redeveloping these communities.

Jimmy: And tell me a little more about that. I wanna hear more about your community redevelopment involvement. And how are you working with local leaders and community organizations to deliver impact to the neighborhoods where you’re developing?

Lennox: Well, we’re always looking, Jimmy, for partnerships, right? And what I mean by partnerships…I’m not necessarily speaking of that in form of equity, cash partnerships, but strategic alliances with organizations that, quite frankly, are better at doing certain things than we are. So, for example, we have just recently entered into a strategic alliance with the Quad City Development Corporation, QCDC, which is a not-for-profit organization in the Bronzeville and Kenwood-Oakland community, whereby they provide professional services to help us identify and recruit commercial tenants for one of the particular properties that we’re looking to develop.

So here’s an opportunity for us to engage another boot-on-the-ground entity that is tied-in with retailers who are interested in coming to the community and locally based entrepreneurs who are trying to position themselves to open up little small business, and then we are engaging them and seeking to pay them a fee, I should add, to assist us in identifying those folks. And what that does, it enables us to put ourselves in more of a position of success to get buy-in by the local community. Another strategically that we’ve identified is the Bronzeville Community Development Partnership, which is a 30-plus-year-old entity that has just an incredible, very in-depth set of knowledge and understanding about the Bronzeville and Washington Park communities.

We are working with them to advance a number of economic and community development strategies. CAPs, which is the Community Assistance Programs Organization, which is that workforce development and training entity I referenced earlier, they are working very intimately with the City Colleges of Chicago as well as the Illinois Department of Corrections, all for the purpose of helping to provide a bridge for persons that have been incarcerated or persons who have been having a hard time connecting with that bridge to lead them to a better life and better outcomes. So, we’re looking to work with these types of organizations so that they can bring a perspective to the deal and to the strategy that we may overlook.

Jimmy: Good. I think that’s important to have partners within the community, the boots on the ground, so to speak.

Lennox: Yes.

Jimmy: So. I wanna circle back to low-income housing for a moment. I’m not sure if you’re doing any affordable-rate housing. It sounds like you’re focused on market-rate or fair market-rate workforce housing, but I know that that is a focus in some of these Opportunity Zone communities, affordable rate housing that is. What are your thoughts on twinning the Opportunity Zone tax incentive with Low-Income Housing Tax Credit, LIHTC?

Lennox: Well, you know, from a deal point of view, it makes sense because it provides another layer of…the tax credits, that is, provides another layer of funding to meet that capital stack as well as it provides the Opportunity Zone Fund investors another level of confidence and safety net related to their investment. On the flip side, I would say that these communities…I’m staying consistent with what I said earlier, Jimmy. These markets don’t necessarily need a lot of subsidized housing.

Depending on the community, they may need a little bit. But, predominantly, these communities need workforce rental housing, housing that’s of good quality, that can be rented at a reasonable level. And I would like to think that the Opportunity Zone Fund investment allows for delivering product to the market that doesn’t have to be overly priced. And I’m hopeful that perhaps what we’re trying to do now is to attract the philanthropic community. So we are in communication and talks with the MacArthur Foundation about accessing some of their social impact dollars.

We are scheduled for an upcoming meeting with Benefit Chicago, which is another philanthropic organization here in Chicago, to attract, again, some social impact dollars because those dollars help to minimize and reduce the burden, the debt burden, on a project, which then enables you to deliver the units at affordable prices without the need for tax credits, and, therefore, without the need for the regulatory guidelines that come with tax credit deals. So, you know, I think pairing tax credit resources with Opportunity Zone funding may work in certain locations. However, I’m not a big proponent of that combination being used in a large number of communities.

Jimmy: Understood on that. So you’re working with philanthropic organizations instead to help bridge that gap, so to speak?

Lennox: Exactly. That’s a great way to describe it because, again, here’s an opportunity for a collective of sources to work together. The philanthropic community, like the Opportunity Zone funding manager and investor, they’re looking for a return on their investment too. I mean, this is not a giveaway, and I respect that. But what they do have the ability to do is to sort of curtail some of what the private market is unwilling to do. The philanthropic community has an opportunity or has the capacity, I should say, to sort of contain their expectations on…

They can also go out a little bit more longer on term before I have to repay their money because they’re driven by a different mission than the Opportunity Zone Fund investor. Now, the legislation is geared towards…its a mission, among other things. The Opportunity Zone Fund legislation is mission-driven. But, you know, let’s face it, some people are not gonna drink the Kool-Aid around the mission. They’re looking to defer, if not reduce, their tax liability, and they wanna make some money. And along the way, if they can do some good in these communities, that’s cool, but that’s not a real guiding principle for them.

Jimmy: You know, I think you’re right. I think this tax benefit, this tax incentive, is really just attracting a new class of investor to impact investing. You know, it’s no longer gonna be the domain of philanthropic organizations, philanthropic individuals, it’s now gonna bring in market-rate investors who are looking for the tax benefit. But, you know, I say, “Hey, the more the merrier,” when it comes to impact investing. However, we need to get some market-rate investors into the game. So be it.

So, that’s why I like I like the program overall. A lot of real estate investment typically goes into primary markets. We were talking about this earlier in the program. I know that investors aren’t necessarily very familiar with low-income markets, particularly those investors who aren’t used to making impact Investments. What is your advice to this new class of investors being attracted to Opportunity Zones who may not have real estate investing experience in these distressed areas?

Lennox: Well, first of all, they can call me on my personal cell at 312-619-7444.

Jimmy: There you go.

Lennox: So my phone is gonna start getting blown up, I guess. But what I would also say, Jimmy, is that, I think, they should go through the proper due diligence in vetting companies like mine and others that can be good partners, entities that have a demonstrated track record working in these markets, who can then, you know, succeed in helping them to mitigate some of the risk around this. I think that that’s the only way it’s gonna happen.

They’re gonna need to identify boots on the ground in these communities. Now, what many of them are doing so that it doesn’t become heavy lifting for them, they’re taking the path of least resistance. They’re going to the Local Initiatives Support Corporation, they’re going to other intermediaries, institutional intermediaries, and they’re dumping the money there and making the assumption that these intermediaries have access to the boots on the ground also.

So they’re making the assumption that these entities, these intermediaries, can do what they’re, perhaps, unsuccessful in doing, or, perhaps, they don’t really wanna devote any meaningful time and attention to getting some traction in that area. So, either way, at the end of the day, somebody somewhere is gonna have to deploy the capital, and they’re gonna have to do it within the time guidelines outlined in the IRS regs. And so, at some point, somebody is gonna have to take a risk in a zone with a group of partners sooner rather than later.

Jimmy: And can you speak about the importance of geographic diversification, particularly when it comes to the secondary and tertiary low-income markets where investors are not as familiar?

Lennox: Yeah. So, I think, by having folks who are close to the ground and have some knowledge about these markets, he or she can help them identify markets that are stronger than others, but both of which can offer the types of benefits that folks are looking for in these Opportunity Zones. I think the developer partners such as my company, for example, need to be able to answer the question of, “What is the exit strategy? How do I get my money back?” I have to be able to answer those kinds of questions.

And I need to be able to demonstrate that with the city Chicago, quite frankly, as a partner of sorts, they are looking to do these particular things in these market areas. So, they are helping to create a landscape that will enable us to be successful. Now, one of the things that I believe is necessary, and this is what I’m discussing with Opportunity Zone Fund investors, I need you to ride it out no less than 10 years. And the reason that becomes important, Jim, is because it takes a little more time for these assets to appreciate in these markets than in some others.

And so there needs to be ample maturation time made available to enable that asset to appreciate in value so that, in year 10, it has enough value in it where we can refinance and then pay the partners or the equity investors their money back as well a preferred return on that investment. So, I think that it helps to be able to know folks who are familiar with these markets and can provide pretty good guidance on where it makes sense to sort of go first and maybe where it makes sense to go second and third.

Jimmy: Good. And start with the end in mind, right? You need to have some sort of an exit strategy. That’s when you actually get to reap the benefits of the third tax benefit, which is, exclusion of capital gains within the Opportunity Zones. So, that makes perfect sense to me. Well, Lennox, we…

Lennox: And I would also add, Jimmy, that…you know, and this is some advice I would offer to others in Chicago and outside of Chicago who are looking to cut the deals in Opportunity Zones. It helps if it’s not a one-off deal. It helps if that deal is part of a portfolio because it’s not always easy to deliver on one-offs at the ROI levels, or return on investment levels, that folks are gonna find attractive. And when I say attractive, I’m trying to hit 8.5% and higher. And so, that’s one of the reasons I’m approaching this from a project portfolio standpoint because now I hedge my bets on being able to deliver at that 8.5% or higher, not contingent upon just one project.

And so, I think that as folks are looking to put together deals in various locations, they need to think about bundling several projects together. And so, with my portfolio, I’m looking to be just south of $50 million in terms of capital investment. That’s all capital. That’s debt and equity. And so, I think that’s the way to position yourself to get the attention of the Opportunity Zone investors. And they’re looking for deals that are of size. They’re not looking for small deals. And so, that’s another reason to sort of bundle them together.

Jimmy: Good. Just to clarify that 8% to 10% number, is that preferred return or is that the investor level IRR?

Lennox: That’s the investor level IRR.

Jimmy: Gotcha. Very good.


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