Can community investment trusts help slow gentrification in Portland?
Every morning, Elizabeth Guerrero starts handing out breakfast burritos and shots of espresso from the window of La Osita. His food cart is at Plaza 122, an unassuming mall in a part of Portland, Oregon, far removed from the quirky boutiques lovingly satirized in Portlandia sketches.
The storefronts and offices in Plaza 122 reflect the surrounding neighborhood: multilingual tax preparers; the Somali American Council of Oregon; a Russian lotion store; a security company; a taxi company; hairdresser.
What does not appear briefly in passing is that Plaza 122 is an experiment that hopes to prevent the existing community from being displaced by gentrification. The businesses operating there are independently owned, but the property is owned by the East Portland Community Investment Trust (CIT). Guerrero, other store owners and more than 100 others are invested in CIT, the first to adopt a program designed to help the asset-poor build equity and a sense of community.
Recent years of rapid growth have pushed many low-income communities away from Portland’s urban core, and now the growth is spreading eastward. A 2018 study by the Bureau of Planning and Sustainability found that East Portland has seen the fastest rising housing costs in the city and more than 14,000 households are cost overburdened, paying more than 30% of their rental income.
Local tenants now have the opportunity to build equity through Plaza 122. The CIT is led by Executive Director John Haines and Chief Operating Officer Sven Gatchev, both employees of the international non-profit organization Mercy Corps. Local affiliate Mercy Corps NW, along with two impact investors and a loan from Beneficial State Bank, purchased the mall for $1.2 million in late 2014. After property improvements and after developing a product investment fund for non-accredited investors, the first shares were sold in November 2017.
Anyone of voting age in the surrounding four zip codes can invest $10, $25, $50 or $100 per month, and today 114 people have invested a total of $50,200. The mailing address limits on investing are designed to ensure that only people in the immediate community are investors, and the $100 cap prevents anyone with sufficient capital from buying all the shares.
CIT is easy to sell to low-income people because there is no risk: an annual return of 2% is guaranteed by a direct letter of credit issued by Northwest Bank. An 8.6% dividend on shares held as of December 21, 2018 was announced, and on the first day of this year, the stock’s initial value of $10 rose to $14.57.
The program attracts its target audience. Sixty-nine percent are first-time investors and 64 percent are tenants; 47% are in the $10,000 to $40,000 income bracket. Investors also reflect East Portland’s diversity and represent 20 countries of origin: 19% are African or African American; 15% Asian or Arab; 12 percent are Latinx; 6% identify as Slavic. The business operating in the mall also reflects this diversity: the taxi company was founded by Somali drivers and the hair salon is owned by Latinas.
La Osita opened its doors at the beginning of the CIT. Guerrero has lived most of her life in East Portland, and with a newly purchased business and home, she was unlikely to be gentrified. She also has a young daughter and got into debt, but had never considered investing before.
“I think it’s a great opportunity for people like me. We don’t know much about this stuff,” she says. “You don’t have to do anything. They give you the information and it’s like, why not do it? It would be stupid not to invest.”
Every potential investor is required to attend what are called Financial Action Classes, offered in five languages. Community leaders, sometimes investors themselves, organize eight hours of goal planning, budgeting and basic investing.
The classes impressed Cheryl Cruz, resident services coordinator for a new nearby affordable housing development called Hazel Heights. Cruz, who also created her own basic budgeting program for those living in the subdivision, convinced some residents to take CIT classes. “They walk away with the knowledge of how to invest, what investing is,” she says. “It’s not that distant concept that’s beyond their reach, it’s something that’s accessible to them.”
A few of those Hazel Heights residents are now investors.
CIT took years to develop, in part because it needed to be safe and legal for asset-poor, low-income investors. Law firm Orrick, Herrington & Sutcliffe found the solution in sections of the Securities Act of 1933 and with the Northwest Bank’s letter of credit.
“There’s something known as a credit-backed bond structure for certain bonds that helps improve its tradability, and they thought, ‘Why can’t we just mimic that?’ Hates.
Although anyone can cash out without penalty at any time, over 95% of investors have kept their money invested since opening the trust. The trust was designed for widespread and sustained impact, with 45,000 shares available to approximately 300-500 people over a period of approximately five years. Once investors redeem subordinated debt from Mercy Corps and impact investors, the community will own Plaza 122 and hopefully help guide its future by serving on its board of directors.
“It’s something I’m hugely excited about because of all the potential that can be in bringing a diverse board, educating them on fiduciary and B-Corps responsibilities, and seeing, once formed, not only what decisions they make for the property but then how these individuals develop as additional leaders in their community and beyond,” says Gatchev.
Plaza 122 is also intended to serve tenants, not just investors, and to benefit the community beyond. When a homeless shelter opened next door, the mall threw a welcome party with music and food. Solar panels will be installed during the summer and it is planned to unlock part of the central car park.
At a recent financial action course, participants worried about gentrification in East Portland even as they wanted improvements. They want grocery stores, better bus service, and safer intersections and parks.
“I think we’re going to see a lot of investment in this area and when that happens you end up with a lot of wealthy people from other parts of Portland coming in and investing,” says Chelsea White-Brainard, who bought a house in East Portland three years ago. “Because they have the capital in mind, they will then benefit from the elevation of this district. I would like to see the inhabitants of the district rising.”
Cindy and Raul Reyes, who just closed their new home, are both East Portland natives. Raul grew up a few blocks from Plaza 122 and over the years has seen his family members pushed further out to the city limits.
“We’re excited to be able to invest in the community we’re moving into,” says Cindy, a first-generation college student studying real estate. She is sold on the CIT model and wants to see more.
Haines and Gatchev also want to see more CIT. They attend conferences and hold webinars meeting with potential financiers and community organizations, hoping to be consultants for locally-led CITs in new cities. They screen prospects by the same standards they used, looking for an engaged ecosystem of frontline organizations, a low-income tenant population in need of community investment, and the missing services that a real estate project could support.
“Some elements of the model should be effective and replicable, but each will be a little different depending on community dynamics,” Haines said. “That will be the fun part, just seeing how this can be turned into the reality that every community needs.”
Along with their expertise and experience, they bring the East Portland CIT bolt nuts. “We give them the tools and we give them the regulations, the education process, and we give them the way to do it – the financial and legal side. And we give them the platform to move the money from back and forth without them having to get their hands on it,” says Gatchev.
While the East Portland CIT has proven viable, its nationwide replicability remains to be seen. The rent pays off Plaza 122’s debt, and after property management fees, appraisal costs, utilities, and other expenses, whatever remains becomes dividends. There’s no money for employees to take on Haines and Gatchev’s work.
Any organization that wants to create a CIT in its own community needs strong partnerships. Mercy Corps and the two impact investors invested $450,000 in addition to Beneficial State Bank’s $900,000 interest-only loan to purchase Plaza 122; investors receive a return of 4%, Mercy Corps 2%. JP Morgan Chase funded the financial action program, which was developed by a former Mercy Corps staffer. Grants pay for solar panels and other non-operational costs.
But no matter how difficult it may be to find the ideal environment for that second CIT, there is no denying the need to provide greater financial opportunities for low-income people. “It’s too necessary given the economic circumstances, the erosion of the middle class and the growing bottom-end bubble,” Haines said. “We need to do a lot more of this, not make it one-off boutique projects in different cities.”