Real Estate - Urban planning

Sins of Our Forefathers

The property industry's role and responsibility in racial equality

By Franco Faraudo

In the years following the end of the first world war, America was establishing itself as the world’s manufacturing powerhouse. The country’s industrial cities swelled with new inhabitants, both Europeans fleeing economic and political turmoil and African-Americans fleeing the segregationist policies that were still in place in many Southern states. This inflow caused many cities to grow exponentially in both population and size as they built new factories to work in and new neighborhoods to house the people eager to work there. This time period was one of economic growth, urbanization, community building, and upward mobility.

But not everyone was happy with the changes that were happening to the country. Large, dense, chaotic cities were threatening the small-town lives that many had come to associate with American ideals. One of those people was a lawyer and politician named James Metzenbaum. He lived on the main street in a town called Euclid, Ohio, in an area of town called Millionaire’s Row. He was disturbed by the changes happening to his town as the eastern suburbs of Cleveland, one of the most racially diverse areas, started to encroach upon his idyllic town. He was fearful and disturbed by the gas stations, industrial buildings, and apartments that were going up around him. So, when a local developer sued the town after it prohibited anything but single-family homes on a large parcel that they owned, he represented the city in the court filings. 

Initially, the court ruled in favor of the plaintiff, Amber Realty, on the basis that these kinds of zoning rules were unconstitutional and that they could result in the segregation of cities. Judge David Westenhaver, who was formerly business partners with the owner of the land in question, wrote this in his opinion, “The true reason why some persons live in a mansion and others in a shack […] why some live in a two-family dwelling and others in an apartment, or why some live in a well-kept apartment and others in a tenement, is primarily economic. The result to be accomplished is to classify the population and to segregate them according to their income.”

But, this ruling did not stand. Metzenbaum appealed on behalf of the city and this time had a much better judiciary appointment. Justice George Sutherland, one of the most conservative judges in a time of rather conservative judges, wrote the opinion for the majority about the overturning of the previous ruling. He explained that safety was one reason for zoning (industrial complexes had long been zoned away from living quarters in many cities) but it wasn’t the only grounds for separating property types. He focused on apartment buildings with his colorfully worded opinion, “by their height and bulk with the free circulation of air and monopoliz[e] the rays of the sun which otherwise would fall upon the smaller homes. [Apartment buildings] bring with them the disturbing noises incident to increased traffic and business, and the occupation, by means of moving and parked automobiles, of larger portions of the streets.” He added that “the residential character of the neighborhood and its desirability as a place of detached residences are utterly destroyed.”

This decision for the famous Village of Euclid, Ohio v. Ambler Realty Co., became the basis for what is now known as Euclidean zoning. This separation of single-family homes from just about every other use type has created the suburban sprawl that America is now known for and has insulated many communities from the type of development that would make them affordable places to live. The zoning out of poor citizens from affluent neighborhoods has kept immigrants and African-Americans isolated in certain parts of inner cities, far from the desirable parts of town that have seen the most appreciation in land value, and has created enormous wealth for American homeowners. 

It is hard to say if Euclid today looks how James Metzenbaum would have wanted. It is now just one more indistinct suburb of Cleveland. It still has mostly single-family homes and some open spaces but, for the most part, it resembles any other generic midwestern sprawl. It has strip mall shopping centers on almost every corner. Its most notable attraction is the Polka Music Hall of Fame, even though it is majority African-American. The unemployment rate is over 20 percent, and the median house price is only $80,000, almost half the median price for the state of Ohio. This ordinary town was not spared from the gas stations, industrial complexes, and apartment blocks as Metzenbaum had hoped. But, it was the precedent for America’s zoning system and all of the segregation, inequality, and injustice that has resulted from it.

“I can’t breathe.”

Those are the horrific last words of George Floyd as he was pinned to the ground by a police officer’s knee to the back of his neck. We all know what happened next. The civil unrest over the last few weeks has made us all witness to police brutality and woke us up to the racial inequality in our country. It has also brought about a palpable change in the way that the nation feels about racial discrimination. No matter what the outcome of this movement, those words will forever be engraved into all of our memories and are stained onto the already bloody pages of the history of racial tension in the United States. 

Those words also seem to perfectly embody the feeling around the country right now as we watch one shaky video after another of protests, riots, and the police response. These scenes are enough to take the breath away from anyone, and they come at a time when we are all going through our own existential crisis in one way or another. Now, as a country, we are gasping for air, fighting to understand how we will breathe again once we get our wind back. 

I have to admit, I did not want to write this article. It felt disingenuous for me to talk about racial discrimination since I have never been victim to it. I hoped one of our contributors would send me a powerful op-ed that I could savor, help polish, and maybe even cry over. But nothing came in. I knew that this was a conversation that we as an industry needed to have, but I didn’t want to risk being the one to bring it up, didn’t want to be called a poser or profiteer. After all, I am not black. I have not experienced the embarrassment, anger, and shame that accompanies the outright damage of discrimination.

But, once I had started thinking about the legacy the real estate industry had on racial injustice, I couldn’t stop researching it. I kept finding more and more shocking examples of institutional racism, ones that seemed to have slipped out of the positive narrative that the real estate industry likes to focus on. So, reluctantly, I opened a Word doc and titled it “inequality.” I told myself that I would write about this in an objective way, that I would be careful to not write myself into the story as not to bias it. I have always thought that inserting yourself into a story you’re writing is a bit of a crutch anyway, for lazy writers who aren’t able to shed their prejudice and step into someone else’s shoes.

The first person I booked an interview with was John Jones. He had recently contributed a rather compassionate article called The PropTech Solution for Aging that went a bit viral as it became the sounding board for an immigration policy debate. I wanted to speak to him because I knew he had a background in public policy as the former Director of National Security Policy for Senator Chuck Schumer and Chief of Staff for Congressman Emanual Cleaver. I also wanted to speak to him because he is black—I can’t ignore that this was part of my motivation. He got his education at historically black universities and is now a thought leader in the predominately white-male-dominated world of property technology. 

I had never spoken to John in person before our phone call, and I was a bit nervous about what exactly to ask him. Where do you start with a topic so big? How do I make sure to confront the issues without sounding like I am patronizing someone else’s struggle? He must have sensed my trepidation because he said something that set the tone for not only the rest of our conversation but the rest of my research on the topic. 

“I just want to say thanks for asking,” he said. “So many people are afraid that they might offend someone by asking these kinds of questions, but the only way forward is to confront them.” So, I asked him quite plainly, “How has real estate failed black communities, and what can we do to make it right?”

“It is important to remember the negative effects of segregation when it comes to inequality in America,” Jones said. “Having the skills and access to lending to buy real estate is an amazing way to create wealth in this country that many black people in this country have little or no access to. Getting a job in real estate could change the entire direction of someone’s life, so it is important that we open those up to people who might not otherwise be able to find them.”

He was quick to point out that this was very different than asking firms to hire unqualified candidates just because they are black. “We don’t want a handout, we want a chance to compete. Opening up your organization to new types of people, new viewpoints, and ways of thinking is proven to be really beneficial,” he said. Studies have shown that asset managers with diverse teams have proven to perform better versus their less diverse peers. He recommended working with historically black colleges and organizations created for diversity and inclusion to help find black candidates for new hires.

Supporting equality can do a lot more than make the industry more diverse. Supporting black-led organizations fighting for positive change in our communities can also have amazingly positive effects on our neighborhoods. “Violence is not good for business, whether it is coming from the cops or rioters,” Jones said. He told me that the real issue that needed to be addressed was why people were taking to the streets—why there was so much distrust in the system. African-Americans have learned to be fearful of police, let down by the government, and disillusioned with our institutions that have left them behind. “It is not going to happen overnight, but eventually people will see that society values their safety if we make a concerted effort to do so.”

By the 1930’s America was just a shell of its former greatness. Unregulated speculation and unsustainable borrowing had created a bubble in the American economy that eventually burst with such force that it sent millions into the kind of destitute poverty that forces families to sleep on the streets and men to fight in lines for any type of work, no matter how hard or dangerous. Then, as now, there was not a clear consensus on what is the best way to bring an economy back from this deep of a depression. Many thought that the government should step in and give aid directly to the people struggling in the country. Others thought that it was important to adhere to the Keynesian economic principles of increasing consumption as a way to grow the entire economy rather than just stop-gap measures to help the most vulnerable.

One of the strongest proponents of the latter ideology was Marriner Eccles. The son of a well-to-do polygamist Mormon family, Marriner took over his family’s banking business after his father’s early death. He was a millionaire by age 22. As a prominent figure in the financial industry, he became involved in federal politics where he eventually became the chair of the Federal Reserve, a new branch of the government created especially to help pull the country out of the financial hardship that it found itself in. Eccles realized how important homeownership was to a healthy economy, and so he pushed to create the Federal Housing Administration that could help support real estate lending. 

Part of this effort to create a better lending environment meant increasing the length of home loans to 25 years. It also created an agency that would standardize and insure qualified loans, an organization that we now call Fannie Mae. To do this quickly and on a country-wide scale, they created and sold an Underwriting Manual that came with instructions on how to rank the likelihood of a loan getting paid. The document meticulously lays out considerations for the property, the neighborhood, and the buyers and provides tables to help create a scoring system.

The manual advised that certain conditions would lower the strength of the loan and make the mortgage ineligible for the program. One of the conditions was “the presence of any adverse influences which lessen or destroy desirability or utility.” These included a number of things like declining populations, inharmonious uses, and/or “a decline, or danger of decline, of the desirability of the neighborhood through the influx of people of lower living standards.” 

“People of lower living standards” is open to interpretation, but I think we can all recognize that there was a racial component there. If you keep reading, the implicit discrimination turns explicit in a later clause: “The borrower who acquires property for occupancy in a location inhabited by a class or race of people that may impair his interest in the property-and thereby affect his motivation-should be ascribed a lower rating in this feature to reflect the diminishing importance of the property to the borrower.”

The FHA even went as far as to create maps that could be used to easily categorize neighborhoods. I looked up how these maps described a few neighborhoods in my hometown of San Diego. The super affluent enclave of La Jolla was described as such: “Residents embrace nearly all types of professions and are all white. No threat of foreign infiltration. Homes are well maintained.” The predominantly black neighborhood of Logan Heights, on the other hand, was described with a different tone: “Racial concentration of colored fraternity. Homes show only slight degree of pride of ownership and are on the average negligently maintained.” Undesirable neighborhoods were colored in red, the international symbol for danger. Because of this, the process of excluding minority-dominated areas from lending is dubbed “redlining.”

Living in a red neighborhood, let’s say one that had a “concentration of colored fraternity,” could cost a buyer their loan. The repercussions of this kind of exclusion are obvious. Today African-Americans make up less than one percent of the population of La Jolla. The average house price is $1.7 million, four times the average in Logan Heights and twenty times the average for Euclid, Ohio.

Even before I set out to write this article, I had a call scheduled with Scott Rechler, Chairman and CEO of RxR Realty. I wanted to talk to him because I had seen him post on social media about a program his company was developing that would connect small businesses with local professionals to lend them their valuable expertise. The volunteer organization was started in the dark days after the first shutdowns in New York. Its purpose was to help business owners understand and apply for government relief. But since then it has grown to a marketplace for white-collar volunteers. I saw this as a great example of a property company being actively involved in community development, exactly the kind of example of socially responsible business that I like to call attention to. RxR’s motto is “doing good and doing well means doing better,” so I knew Scott and I were aligned with philosophy. 

Between the time that I booked the interview and when I finally got him on the phone, the protests and riots had entered their most destructive days. I didn’t want to bring them up right away, after all this was an open wound and a sensitive topic, so I went through my questions about his volunteer initiative. He was very energetic and on point throughout our chat. I could see why he is a regular on those finance shows that play in the background of airport lounges. Finally, I asked him if he wanted to comment on the events of the past few nights. He gave a heavy sigh, he sounded tired. Some of his properties had been damaged in the riots, he has been up late talking with property managers about what they should do, whether or not they should board up their windows the next day. 

But, even in his weariness, he didn’t display even an ounce of anger. He supported the cause of the protests. He only lamented that “I am disappointed that the righteous cause that these brave protestors are fighting for has been drowned out by the looters. I am disappointed in our leadership as well for not getting ahead of this thing.”

Here was someone who had actually been negatively impacted by the riots, and he was less upset than half of the people on my Facebook feed, who had no other skin in the game besides their notions about right and wrong. He knew that the damage coming from this unrest was nothing compared to the damage that had been done to cause it. Movies like to portray developers and landlords as the evil antagonists in a story. They come to town in a caravan of limos, buy up the land and threaten the local way of life. I am not going to say that this doesn’t happen, but my experience is that many landlords and developers are like Scott, caring and supportive of the community around their properties. There is an old saying in real estate, “people don’t move to buildings, they move to neighborhoods.” Smart landlords realize that one of the best investments they can make for their property is actually an investment in the neighborhoods where those properties are located. 

After my conversation with Scott, he wrote a public statement about the protests. I was moved by it so I will put a  piece of it here as a further example of how Scott, and hopefully others that want to follow in his footsteps, are breaking the mold of the stereotypical corporate overlord.

I recognize that we cannot change the country on our own, but I do believe that we can serve as a model on how the country can change. Let us all pray for those who have peacefully taken to the streets to make their voices heard and for those who have been charged with keeping our communities safe. And to George Floyd, Ahmaud Arbery, Breonna Taylor, and far too many others, may they rest in peace and in their honor, let us seize this moment to create a better and more equitable world for everyone, starting right here, right now.

Scott Rechler, Chairman and CEO of RxR Realty

In 2007, Beth Jacobson was having the kind of year that loan officers dream about. She was top producer for Wells Fargo’s emerging market mortgage unit. Her success came from originating mortgages for clients in the poorest areas of downtown Baltimore, just a short thirty-minute drive on the interstate from the sleepy suburbs where she grew up. Business was booming. One year she reportedly made around $700,000, the kind of salary that even CEOs of big companies would get scrutinized for. Her team was flown around to company retreats and touted to other loan officers as an example of how their hard work and ingenuity would pay off. She liked to joke around and say things like “I’ll pay for your kids to go to private school if you give me clients.”

But, Beth wasn’t able to enjoy the fruits of her success. She couldn’t get over her guilt for the way that her and her colleagues qualified people for loans. Everyday she felt like she “rode the stagecoach from hell.” She had witnessed, first hand, how her employer, Wells Fargo, incentivized her to sell subprime loans to her clients, mostly urban minorities. These loans are reserved for high risk borrowers and come with a hefty increase in interest rate—and of course a hefty commission to go with it. 

Eventually, the guilt overcame the earnings. She became a key witness in a federal lawsuit brought against Wells Fargo by the city of Baltimore. The tactic of targeting certain groups for predatory lending is called “reverse redlining” and is by no means limited to Wells Fargo. Some powerful data has come out about the extent that the practice has adversely affected people of color. Loans in a predominantly minority neighborhood are 4.7 times more likely to result in foreclosure than is a loan in a predominantly hite neighborhood. African-Americans with FICO scores greater than 660 were 2.5 times more likely to receive a high-cost or high-risk loan than a white borrower with the same risk factors.

The inability to qualify for home loans have left many African-Americas without any sense of ownership in their neighborhoods. African-American homeownership hovers around 40 percent while white ownership is at 70. Since homeownership is the main way that Americans create and save wealth, this has undoubtedly been a major reason for the shocking wealth gap. As of February this year, an average white American has ten times the net worth of an average African-American. 

Ultimately, Wells Fargo settled with the city of Baltimore for $175 million. They made statements that “the value of settling to us is to get this behind us.” While the money that Wells Fargo returned of course helped those damaged by their lending practices, I am sure for most African-Americans living in blighted neighborhoods with no avenue for property ownership, this issue feels far from settled. In fact, one of the buildings burned in the recent riots was a Wells Fargo branch office.

It would have been easy to stop here. To leave the reader in a dark place, one that matches my mood. It is certainly easier to cultivate dread for a problem than it is to find solutions to it. But doing what is easier is never the thing that makes a better story. I wanted this drama to have a third act, one that has at least a semblance of a happy ending. So, I asked around to find someone that was helping to bridge the gap between African-Americans and the real estate industry. Surely, part of the reason that people of color have been negatively impacted, inadvertently or not, by issues involving property is because they have very little representation in the industry that controls it.

That is how I was introduced to Cedric Bobo. Right of the bat, he explained that he was lucky, his mom taught him early on the value of ownership. “My grandparents were the original entrepreneurs. They were farmers.” He is from Mississippi, where his family has been for generations. Land ownership has been baked into his family ever since his grandfather stipulated in his will that his farmland was for the family and could not be sold under any circumstance. Cedric excelled in school, got an MBA at Harvard, and went on to a career in private equity. 

Cedric has an infectious optimism about him. He gets excited when he explains how his time working at the highest levels of finance made him realize what was missing for many African-Americans. “Most kids growing up don’t learn the language of ownership. Communities can’t change unless you train kids how to think like owners just like you would a sport.” He uses a lot of sports analogies, he has a friend that works for the NBA that he will often consult with to help him understand the best recruitment strategies. “The NBA is one of the best organizations in the world at finding and developing talent from every corner of the globe,” he said.

After a number of years working for The Carlyle Group, he decided to follow his passion and co-founded Project Destined, a social impact investment and education platform. He has classes going all over the country that give hands-on commercial real estate investment training to urban youth and military veterans. He does this by making each class compete in vetting, analyzing, and underwriting an actual live deal that he puts together.  While he started out small, has scaled his program incredibly well. After starting in Detroit, he was brought into Miami with help from A-rod and J. Lo (he seems to know everyone). He works with the Real Estate Board of New York for his training program there. 

“The problem with the current environment is that people are upset because they don’t own anything, they don’t have anything to lose,” he said. Cedric likes to pick buildings for his course that are similar to what many of the kids in it might live in. “We are all consumers of real estate, so I want to give kids a way to understand the development in their areas and know that they could be a part of it.”

Having a better representation of the population in the areas that a real estate company operates can help make sure that development doesn’t leave the most marginalized behind. It can also open organizations up to possibly high achieving candidates that wouldn’t have otherwise have been considered. “You have to reach as many people as possible and give them a clear definition of how to succeed. When you sign a contract in basketball, you know that it doesn’t matter if you are friends with the owner or the coach, you know that you just need to win championships. This game is hard enough, there is no reason to hide the ball,” he told me.

Cedric was heartened by how many people are now giving to social causes, but more than anything he wants to keep the conversation going. “It is great if you give money, but that isn’t going to be enough. We all have to go back and think about how we can translate these feelings into action. Even if we all just do a little, it can snowball and add up to major change.”

This essay is an attempt to do just that, to keep the conversation going in the property industry that I write for and about. But to do this, I can’t write myself out of this story, no matter how convenient it might be. I am not a racist, but that is no longer sufficient. For the world to change, I have to change. I have to educate myself about the inherent racism in our systems, even if I had no part in creating them. I have to admit that I live in a bubble, that I come from a place of privilege, that I have been given opportunities that others haven’t for no reason except who I was born to. I have to realize that my ignorance and my silence are part of the problem. I have to find ways to change this situation in our country because it is too important to ignore. I am America. I am crying. And I can’t breathe.

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By Franco Faraudo Propmodo Editor & Co-Founder
Franco Faraudo has an MBA in entrepreneurship and has worked with a wide spectrum of technology and real estate organizations on their branding and content strategy. He has worked in real estate as an agent, manager, and investor. He writes about the intersection between the physical and digital world and is Co-founder and Editor of Propmodo.