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Fast Company Magazine Online
November 25, 2008
Edward Norton's $9,000,000,000 Housing Project (that's $9 Billion)
By Ellen McGirt
Edward Norton, the two-time Oscar nominee, stood at the podium at the Hilton Washington this past May and tried to be humble. The actor was in the capital to present a major civil rights award to someone he knew well -- his grandmother. It was gearing up to be a nice moment. "I work in a profession," he told the crowd of social workers, lawyers, and community organizers, "that gets a totally disproportionate amount of attention relative to its true contribution to our culture." Suddenly, from the front row, the no-nonsense clerk of the U.S. House of Representatives, Lorraine Miller, snorted, then began to clap, slowly and theatrically, beat by sarcastic beat.
Startled, Norton looked up from his notes and peered into the dark ballroom. Then he shrugged and started to laugh along with the audience.
Tough crowd, D.C. Not even the Hulk can get a break -- which, in this case, wasn't really fair. Norton went on to honor 82-year-old Patty Rouse for her role in Enterprise Community Partners, an affordable-housing organization that she cofounded with Norton's grandfather, real-estate developer James Rouse.
But Norton's appearance wasn't merely a cameo, a movie-star drive-by. On the contrary, he has been an active participant in Enterprise since he was a kid. His first job after college was an analyst spot there; he sits on the board and has donated more than $1 million. What's more, he has played a key role in encouraging Enterprise to embrace green building -- a shift that has enabled the business to keep moving despite the housing crisis and mortgage meltdown. In fact, Enterprise is arguably the one bright light in an industry dominated by excess and foolishness. Its model offers clues to how we all might climb out of our real-estate mess.
Enterprise may be one of the most influential organizations you've never heard of. A for-profit/not-for-profit hybrid, Enterprise has invested $9 billion in equity capital, predevelopment lending, mortgage financing, and development grants to house low- and moderate-income Americans. It has revitalized some of the country's poorest neighborhoods, from Fort Apache in the Bronx to the Tenderloin in San Francisco. Perhaps its most important accomplishment was helping to create the low-income-housing tax credit (LIHTC) that for 25 years has provided a way for the business world -- developers, bankers, and boldface names like Warren Buffett -- to address the pressing social need for affordable housing while still making a profit. That credit has had a bigger impact than the Department of Housing and Urban Development, accounting for some 90% of the affordable rental housing in the United States.
Norton is hardly the only contributor to Enterprise's success. It has been an ensemble performance, including former CEO Bart Harvey, who was tapped this fall to join the reconstituted board of Fannie Mae; his successor, Doris Koo; and Charlie Werhane, who runs the organization's tax-credit business. There is no assurance that the credit storm will not undo two-and-a-half decades of Enterprise's good works. But it's instructive to look at Norton, Enterprise, and their behind-the-scenes role -- even in the current drama, in Congress, and at the White House -- to see what is possible when responsible business and a farsighted social mission dovetail in a search for creative solutions.
From the beginning, Enterprise has used a combination of market forces, good data, and political savvy to create mechanisms -- no, not subprime mortgages or mysterious derivatives -- that help nonprofit developers and cities build high-quality housing for low- and middle-income people. Now, with the neighborhoods it has helped resurrect under pressure, Enterprise has launched a new round of financial innovation. Armed with mounds of real-world construction-related data about energy efficiency, carbon emissions, and public health, and dismayed by the vulnerability of traditional credit schemes, the Enterprise team is marketing regional green-building investment funds to companies anxious for both financial returns and environmental cred. It has also launched the first carbon-offset fund designed to raise money for affordable housing. At the end of the day, Enterprise's mission has always been to provide people with clean, safe, affordable homes and create communities that work. But if its efforts can help buoy the whole real-estate market -- and save the planet as well -- so much the better.
With the stock and credit markets in full meltdown mode -- and Congress, the media, and taxpayers melting along with them -- late September was not a good time to be in the housing sector. But some good news went largely unnoticed. In Los Angeles, Mayor Antonio Villaraigosa announced an ambitious five-year, $5 billion plan to build or restore 20,000 affordable-housing and mixed-income units in neighborhoods threatened by mass foreclosures. To pull it off, the mayor will need public and private financing, but he had one critical piece in hand: a $700 million check from Enterprise Community Partners.
Meanwhile, in Chicago, Mayor Richard Daley said that the city would launch a green retrofit program for thousands of units of low-income housing. The initial funding will come from Enterprise.
And in D.C., Enterprise was busy on Capitol Hill. Back in January, newly minted CEO Koo warned the Senate Committee on Banking, Housing, and Urban Affairs that looming foreclosures were going to hit cities hard. "The Center for Responsible Lending has estimated that 44.5 million homes adjacent to subprime foreclosed properties will lose value," she testified, "and $223 billion in neighborhood wealth will be lost." She walked the senators through an earlier Enterprise-inspired program that had helped the Federal Housing Authority dispose of 40,000 homes in the last foreclosure crunch, and she made the case that a $10 billion fund to shore up neighborhoods could also generate new revenue and more jobs. Chairman Christopher Dodd, among others, took note.
As the reality hit that Fannie and Freddie were near collapse, Enterprise stepped up its campaign to turn the idea into reality. By June, as the 600-page Housing and Economic Recovery Act worked its way through Congress, Koo's proposal morphed into the Neighborhood Stabilization Fund, a $3.9 billion block grant to help states and local governments buy or rehabilitate foreclosed properties. The bill even included language championed by Representative Barney Frank that favored use of the fund for green housing.
But at the other end of Pennsylvania Avenue, the bill's momentum evaporated. A "fact sheet" from the White House raised the "bailout" objection: "The principal beneficiaries of this type of plan would be private lenders, who are now the owners of the vacant or foreclosed properties, instead of struggling homeowners who are working hard to stay in their homes." President Bush was adamant. Take the fund out, he insisted, or the bill dies on my desk.
It was not the first time Enterprise had felt push-back from the White House. In 2003, a Bush administration tax proposal threatened to gut the low-income-housing tax credit, the basic financing vehicle for affordable housing across the country since Harvey, then a senior executive at Enterprise, helped establish it in 1986. Bush proposed that companies could either use tax credits or increase dividends to shareholders, but not both. "It would have entirely removed the incentive for corporations to invest in any tax-credit program," says Stockton Williams, senior vice president and chief strategy officer for Enterprise. In the midst of the battle, Karl Rove called with a message for Enterprise: Stand down. "It was a very intense experience," says Williams diplomatically. Ultimately, moderate Republican senators scaled back the tax cuts and, in the process, killed the troublesome provision.
This year, it was Fannie and Freddie's plummeting fortunes that got Bush to blink. According to two people familiar with the matter, Treasury Secretary Henry Paulson went to the president in early July and told him in Washingtonian terms to hold his nose about the stabilization fund and sign the bill. "Paulson was no fan of the provision," says Williams, but by then, the magnitude of the mortgage crisis was stark.
For places like troubled Tarrant County in North Texas, relief arrived in record time. The county, which includes Fort Worth, was facing a dramatic year-over-year spike in foreclosures; in one zip code alone, 38 of every 1,000 homes have been posted for foreclosure. In September, the county was awarded a $3.3 million allocation from the new Neighborhood Stabilization Program. (By contrast, provisions in the behemoth housing bill to help individual homeowners renegotiate their existing loans to avoid foreclosure didn't go into effect until October.) Says affordable-housing expert Frank Alexander, a professor at Emory University Law School: "The neighborhood stabilization grants are the only good news coming out of all of this for the affordable-housing marketplace."
Washington-based emergency measures aren't the only innovations Enterprise is championing in this volatile climate. It has smart long-range plans, too. And, surprisingly, to understand them, the best person to start with is Edward Norton.
Early on the day of the awards ceremony in May, Norton testified on Enterprise's behalf before the House Select Committee on Energy Independence and Global Warming. Well-prepared with facts, figures, and a detailed 10-point policy plan -- the Beltway equivalent of a supercharged PowerPoint presentation -- Norton politely made the case for green construction. An investment of only 2%, he told the committee, could reduce energy costs by 20%. "We can make progress on all these issues, create green jobs, and lock in long-term environmental benefits by making green affordable homes a national priority."
Norton grew up in the town his grandfather built, Columbia, Maryland. The family spent many nights gathered around Jim and Patty Rouse's kitchen counter, cooking, doing dishes, and talking relentlessly about their mission. For the Rouses, a clean and decent home was a civil right, a starting point for all citizens. "Here we are, the wealthiest country in the world," Jim once lamented in a speech, "and we let millions of our people live in these deplorable conditions." And he held no illusions about fellow real-estate developers, who were driven all too often, he said, by the "determination, at whatever cost to the community, to make a profit." Enterprise was the Rouses' vehicle to help poor and working-class people and save American cities.
"Social entrepreneurs run on rocket fuel," Norton says. "I've seen my grandfather and Patty talk through waves of younger people who would fall away and go to sleep. They never stopped. Ever." He sums up: "You might not fully appreciate how exhausting it was!"
Something about the late nights -- or perhaps it was a young man's quest for a dose of spiritual rocket fuel -- was embedded in Norton. Discussing his role at Enterprise, he told me after his congressional testimony, "The thing I've been most proactively working toward is the notion of converting our model into a green program." The son of an environmental lawyer, Norton has long been a green activist. But, he explains, "we didn't have a whole lot of data within Enterprise for how high-cost premium items like solar would impact the low-income context. I came up with Solar Neighbors as a mechanism to gather data."
The Solar Neighbors program, in concert with energy giant BP, encourages famous folks -- like actors Don Cheadle, Brad Pitt, Alicia Silverstone, and Will Ferrell -- to install a solar system on one of their homes. BP then donates a solar installation to a low-income family. Twenty-nine celebrities have participated since the program began in 2003; in return, BP has provided 41 systems, 39 of them to low-income single-family homes, mostly in south Los Angeles. The recipients have offset their electric bills by 30% to 80%.
The program has been a financial boon for the rich and famous, too. Actor Larry Hagman, who embodied housing excess as J.R. Ewing on Dallas, became one of the first Solar Neighbors in 2003. The annual electric bill for his 46-acre Ojai farm has dropped from $37,000 to $13, he says. According to the California Public Utilities Commission, Hagman and his wife, Maj, own the largest residential solar-power system in the United States; it sends 10,000 kilowatt hours a year back to the grid. Six L.A. families received solar units in Hagman's name in 2004.
For 25 years, the low-income-housing tax credit (LIHTC) has worked as a business because it gives profitable companies from Sherwin Williams to Disney to Deutsche Bank an incentive to invest in below-market-rate housing, and make money doing it. What Enterprise got from Solar Neighbors -- beyond PR pop and solar panels for a few units -- is real-world data about the economic benefits of going green that Enterprise could use to devise new ways to fund affordable housing.
"Our priority has always been getting people into homes, not saving the environment," Williams says. Sitting in Enterprise's spare D.C. office, he and colleague Dana Bourland are trying to explain how they ended up in the climate-change game. "We were focused on the social issues related to the environment, like asthma," Bourland says. Then, around 2003, Williams recalls, "we were seeing the excitement around the Al Gore slide show on climate change that eventually became An Inconvenient Truth and realized we had a contribution to make." Because many of its not-for-profit developer partners were open to the idea of green construction, Enterprise was in a position to collect data measuring the impact of this new way of building. "If we could prove the benefit of green building," explains Bourland, "we could create new financial products and a marketplace around it."
The data from Solar Neighbors were a start, but they wouldn't be extensive or rigorous enough to convince investors, so the Enterprise team put together a Green Communities checklist of mostly mandatory specifications covering construction, materials, and design -- the first nationwide green criteria for residential construction -- and set a goal of building 8,500 residential units in five years. Michelle Moore, the senior vice president for policy and public affairs at the U.S. Green Building Council (USGBC) -- which expanded its LEED standards to residential building only in 2007 -- marvels at what Enterprise has accomplished. "Their data really appealed to us because they're focused on affordable housing," she says. "We can't let a green home or school be 'eco-bling.' It's great to demonstrate that a green lifestyle is not just something celebrities can afford. We've learned a lot from them."
Enterprise met its 8,500-unit goal two years ahead of schedule. Showing an analytical fortitude that would make Silicon Valley proud, Bourland is leading the charge to crunch the resulting data and determine what it costs to integrate Green Communities building criteria and what savings can be harvested. By 2008, she says, it was clear that "water savings are 20% above baseline. Energy is pretty close to that. Those are stunning figures." The team also learned that asthma in children could be reduced for a tiny expenditure. "It's a database that exists nowhere in the world," she says.
Those data are driving financial innovation. Enterprise is introducing its first Green Communities Retrofit Fund, which will work with energy-services companies, or ESCOs, to provide affordable-housing operations with in-depth assessments of energy efficiency, construction plans, and loans based on the expected operating savings. Williams says the fund could grow into a stand-alone ESCO, staffed with its own auditors, trained in energy efficiency and home building, and generating green jobs. For the Chicago project that Mayor Daly announced in September, says Williams, "basically we'll be making low-interest-rate loans that will finance the retrofit of affordable-housing developments. We plan to prove that, for the first time, we can scale this across the country."
Perhaps the most ambitious new product is the Green Communities Offset Fund, which plunges Enterprise into the controversial world of carbon trading. Again, the data drove the financial innovation. "We can now look at numbers by region and project type, and know specifically what each improvement costs and what carbon benefits they provide," Bourland says. "And we can sell an offset because our data are measured and verified and real." Developers apply to the fund for financing; once the project is approved, the fund sells credits in the voluntary market, based on the amount of carbon that will be saved by building to Green Communities standards.
The fund is at an early stage. It has raised nearly $500,000 and made its first transaction, for a new apartment building in Albuquerque, New Mexico, for low- and middle-income tenants. Because the fund lives within the nonprofit part of Enterprise, future investors can offset their own carbon-rich lifestyles and get a tax deduction. (In a nice karmic nod, the USGBC plans to offset the carbon associated with its own annual shindig.) With banks and investment banks struggling to regain their footing, "it may very well be that Enterprise will become a major player in the carbon market," says Garry Hattern, a vice president at Deutsche Bank and creator of its community-development financing group. (Over the years, Deutsche Bank has participated in more than $120 million in tax-credit funds.)
Enterprise is also using its green-building expertise to reenergize its tax-credit operations, which have provided about $700 million in capital each year to affordable-housing efforts across the country. Under the rules administered by the Internal Revenue Service, the federal government allocates low-income-housing tax credits to all 50 states based on population. Developers make proposals to the state housing agencies, which review and award credits based on the size of the projects. "Then," explains Werhane, "the developer takes the credits to people like us, and we syndicate it to investors." The marketplace sets the dollar value of the credits.
Most tax-credit investors have been financial institutions with plenty of profits to offset and a comfort level with complex markets. Harvey recalls the first big commitment, from Hugh McColl at NationsBank, later CEO of Bank of America: "Hugh said to me, 'You can invest in these areas and make money doing it? I don't believe it.' He checked with his CFO and came back in and said, 'We'll take a billion.' " Today, with banks in disarray, the value of the credits has fallen -- from about 90 cents on the dollar last year to as little as 75 cents in some regions today -- leaving developers scrambling to make up the shortfall or postponing new projects.
To attract new investors, Enterprise has begun creating green-themed regional funds that might appeal to profitable companies that want to be part of the environmental movement. Think energy companies. Werhane and his team have been plugging away for over a year. "Tax credits are a tough investment to understand. It takes a lot of explaining," says Rich Gross, who plans on closing Enterprise's first California Green Equity Fund for $45 million in mid-December.
Gross has set his sights on tech companies for another California Green Equity fund to close next year; he has been working closely with the Silicon Valley Leadership Group, an organization designed to advance the local public-policy initiatives of more than 200 businesses in the valley. "Enterprise is unlike other tax-credit syndicators in that we offer technical assistance and expertise to developers," which prospective investors seem to like, he says, adding that he's optimistic that the Googles and HPs will come on board. "California now accounts for about 25% of Enterprise's green affordable housing. The new fund can really grow that number."
Like Enterprise, former CEO Bart Harvey has shifted gears. "It's been a very difficult time," he says of his new role on the board of Fannie Mae. "Job number one is to make sure that Fannie is healthy and that it's making sensible loans and policy around those loans." Although the government has sent a clear signal that affordable housing is a priority, Fannie and Freddie will not be purchasing housing tax credits anytime in the near future. Will the affordable-housing market survive the onslaught to come? "I'm definitely ..." he chooses his words carefully, "concerned."
But Harvey is also mindful of what Enterprise has accomplished -- and optimistic about the team that Jim and Patty Rouse's vision has attracted, from family like Norton to pros like Koo. Harvey still credits Rouse as the inspiration for Enterprise's success. As a child in Baltimore, he recalls, "I watched Rouse take the decaying downtown of a written-off city and bring it back to life." But when Harvey was asked to join Enterprise from Dean Witter, where he was managing director of corporate finance, he wasn't sure about Rouse's new venture and the idea that affordable housing for all was possible. "I thought Jim was crazy, out of his mind," he says, laughing. Who is going to invest in those neighborhoods? What are the financial products? "You'll have to invent them," Rouse replied. Harvey pauses. "So we did."
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Correction: A previous version of this article stated that Community Enterprise Partners closed their first California Green Equity Fund for $50 million with PG&E on board.
High Point: Seattle's Green Community
Article location: http://www.fastcompany.com/magazine/131/a-high-point.html
November 25, 2008
Tags: Ethonomics, Doris Koo, asthma, Enterprise Community Partners
By Fast Company Staff
"When George shows you his water trick, be very amazed," whispers Enterprise Community Partners CEO Doris Koo. "It's his favorite." We are at High Point, a 120-acre mixed-income project in Seattle, waiting for George Nemeth of the city's housing authority. He arrives bearing charts, graphs, and a bottle of water. About 10% of the water runoff from High Point ends up in a 4-mile salmon stream called Longfellow Creek that has been stressed by overdevelopment, Nemeth tells me, and High Point was designed to be a natural-water channel and filter: "We attempted to re-create what nature has always done." Vegetated drainage channels replace gutters and curbs, and sidewalks are made of a material that allows rainwater to seep quickly into the ground. Nemeth pops open his bottle of water and dumps its contents on the sidewalk on a steep incline. The water magically disappears into the ground -- and I am amazed. This single feature has saved millions in engineering costs and even more in environmental damage -- and provided a template for urban development around the country. ("I plan to steal those ideas," San Francisco's enviro-mayor Gavin Newsom told me.)
It took $8.5 million from HUD and $27 million in financing from Enterprise -- Bank of America was the lead tax-credit investor -- along with state and private funds to transform what was once one of the grimmest housing projects in Seattle into an idyllic neighborhood. High Point is part New Urbanism, part environmentalism, and part civil-rights triumph, designed from the beginning to seamlessly mix subsidized low-income housing, Habitat for Humanity projects, apartments specially designed for the elderly, and 252 market-rate townhouses and single-family houses built by private developers to meet Enterprise's Green Communities standards. There are also 35 Breathe Easy homes designed and built with asthma and pulmonary patients in mind. Developers created new protocols -- everything from no smoking on the job to airtight construction, insulated windows, hydronic heating instead of forced air, blinds instead of curtains, and HEPA vacuum filters -- all for about $6,000 per unit. Six-year-old Ozie Whitfield IV hasn't had an asthma attack since his family moved in 18 months ago.
Koo, who was a housing advocate on New York's Lower East Side when she first met Enterprise founder Jim Rouse, says she feels his influence in every blueprint, financing gizmo, and clean home. "Jim knew that dignity is everything," she says. "When everyone is invested, everyone is a neighbor."