Lessons from Mount Morris
This article was originally published on Jonah Richard’s newsletter, Brick + Mortar. It is shared here (in slightly modified format) with permission. All images for this piece were provided by the author.
The Great Housing Grab
At the turn of the Great Recession, private equity companies struck gold when they entered the single-family housing market en masse. And they haven’t looked back since.
Between 2011 and 2017, some of the world’s largest private equity groups and hedge funds spent $36 billion on over 200,000 homes in ailing markets across the country.
By 2019, they owned over 300,000 single-family homes.
That might only represent 2% of the 15 million single-family rentals on the U.S. market. But institutional investors are just warming up. New single-family rental funds are being spun up left and right: Upward America Venture with $4 billion, Invesco Real Estate with $5 billion… You get the point.
Then, add in the growing iBuyer market from proptech companies like Zillow, Redfin, and Opendoor. In some markets like Raleigh and Charlotte, iBuyers are scooping up 3% of all homes sold.
The public debate over the ethics of government allowing (i.e., facilitating) this and the morality of such blatant Wall Street profiteering is worth following. Even the Atlantic can’t seem to take a consistent stance.
But, regardless of which side you’re on, we can all probably agree on one thing: Institutional investors (or, more specifically, those without any local ownership) will never really care about the communities they operate in. Especially when that’s on the scale of single-family rentals.
Whether that’s because they can’t (spread too thin across many communities) or don’t want to (more concerned with profits than community leadership) is beside the point. The fact is that community development will never be a priority for people with no actual connection to the community.
This has far-reaching implications, albeit dystopian. Who’s going to create spaces that we actually care about? Places that residents are proud of—where they want to hang out, socialize, show off to their friends, and feel at home?
The Hero We Didn’t Know We Needed but Got, Anyway
Enter Greg O’Connell, the uninvited guest to Invitation Homes’ profiteering party (Invitation Homes is Blackstone’s $17-billion single-family home investment vehicle).
Or, more casually: O’Connell is everything Wall Street is not.
O’Connell is a NYC-detective-turned-real-estate-developer admired for his community-first mentality. He not only advocates against gentrification, he is the living antithesis to it. And, fittingly, he is reputed to carry a copy of Jane Jacobs’ The Death and Life of Great American Cities everywhere he goes.
Long before Brooklyn was cool and trendy (that is, full of high rises, Equinox’s, Sweetgreens, and Pressed Juiceries), O’Connell started buying and rehabbing dilapidated properties in Red Hook for use of affordable housing and light manufacturing. You know, the bread and butter of a healthy community.
The results have been a phenomenal success. O’Connell’s efforts can be directly linked to the creation of over 150 businesses and 1,200 jobs in Red Hook.
Fast-forward to 2008 and O’Connell had amassed a portfolio worth hundreds of millions of dollars, partly as a result of other players in the market realizing the value of gentrifying Red Hook. But, despite pressure to sell, O’Connell held out.
Then, he decided to double down on his commitment to promote quality job creation and human-scale neighborhoods.
An alum of SUNY Geneseo in upstate New York, O’Connell turned to Mount Morris—a nearby town with a dwindling population of 2,800. A town that needed a little TLC.
O’Connell in a new Mount Morris acquisition before being restored.
Investing with a Purpose
Around the same time Wall Street started gobbling up single-family homes, O’Connell invested $1 million in buying 19 vacant, rundown buildings in downtown Mount Morris.
Then, he put another $1 million into renovations. In exchange for low rents, commercial tenants agreed to certain stipulations: making sure storefronts stay lit after hours, designating a few days a week to remain open late, etc. Things that would help drive traffic to Main Street and promote healthy commercial activity.
Apartments, too, were discounted. At $500 per month, residents were able to rent a cozy studio apartment at the center of town.
Skeptics wondered how he would ever make his money back. Perhaps there was some element of genuine altruism, or, at the very least, a conscious decision to slow-roll profits over decades.
By 2011, Mount Morris was blossoming. A roomy coffee shop, the Rainy Days Café and Bakery, with gleaming espresso machines, had opened in one of O’Connell’s buildings. So had a barbershop, an antiques store, and a gourmet food store that specializes in products from New York State. A deli opened up. Even arts groups began to set up shop.
Today, the town is vibrant and bustling. A destination rather than an afterthought.
On all accounts, what O’Connell initiated in Mount Morris was transformational. The town even has a Greg O’Connell Appreciation Day every year in the spring. It’s a testament to the success of his efforts and the gratitude felt by residents.
Lessons We Can All Learn From
Unfortunately, we can’t all be Greg O’Connells. But at least there are lessons that we can pick up in his wake to help us drive our own revitalization efforts.
Lesson #1: Engage the Community
O’Connell didn’t turn Mount Morris around on his own. Change on that scale takes a village and there were (and still are) many other hands playing key roles along the way:
High school wood shop students built planters around trees. Other students raised and planted flowers and made banners for the streetlights.
Metal shop students built the brackets for hanging baskets and a kiosk for event information. They also created life-size angel sculptures for display at each of 30 businesses during the month of December.
SUNY Geneseo college students developed promotional campaigns for the village and the individual businesses.
SUNY Geneseo students perform plays and musical events in a space on Main Street.
Lesson #2: Focus on Small Business Development
Mount Morris and O’Connell recruited local startups and entrepreneurs instead of big retailers or employers. This strategy was crucial to fostering a vibrant downtown and forming an attractive place to live. Only once they had succeeded there were they able to start recruiting bigger companies. Here are just some of the steps they took:
Design guidelines were developed to address storefront design, signage, lighting, and window displays that ensure a pedestrian-friendly and aesthetically-pleasing environment.
Business guidelines were developed to encourage businesses to change window displays seasonally and to keep display lights on at night. This ensures a more dynamic and active streetscape.
Livingston County provides a highly successful 10-week Business Ownership Training Course for aspiring entrepreneurs. Graduates from the class have opened many of the new businesses in Mount Morris.
Niche businesses have been targeted for the new storefronts. Antique stores, arts-based businesses, and specialty restaurants have been recruited.
O’Connell offers inexpensive rents to minimize risk for startup businesses.
Local banks and the Livingston County Development Corporation have developed special loan products to support new businesses.
Lesson #3: Leverage Municipal, State, and Federal Subsidies
Unfortunately, there were not many subsidy options available to O’Connell at the time. He had to make do with his own private funds.
However, since then, he has become a staunch advocate for government subsidy to promote similar revitalization efforts across other communities. Because, you know, not everyone has a $400-million-plus real estate empire to draw from.
Property Tax Abatements
New York State Legislature passed the Ithaca Law in 2001, which enables cities to pursue their own version of a tax abatement program for new construction and extensive rehabilitation projects.
Most common is a 10-year program. In a nutshell, property tax remains constant for five years after project completion. Then, beginning at year six, the new property tax is introduced in equal increments until full tax liability is reached in year 10.
The power of this cannot be understated. Margins are razor thin for downtown revitalization projects, especially if the developer is looking to make rents affordable for local residents and small businesses. Phasing in any new tax burden over time reduces operating expenses in the initial years and allows savings to be passed off to tenants.
Tax Credit Programs
These act as a direct offset against income taxes and are often used for downtown revitalization projects. So, if a project is awarded $100,000 in tax credits, the owners are able to reduce their tax payments by $100,000.
Alternatively, tax credits can often be sold to a local insurance company or bank for $0.95 on the dollar.
Vermont, for example, has a very robust program. In the fiscal year 2021, the state awarded north of $3 million in tax credits across 29 projects.
The only downside is that credits are only awarded once per year. So, projects need to be planned around that deadline, not vice versa.
You, too, can begin taking real, meaningful steps toward revitalizing your local economy. Learn more about how to encourage and support local businesses over at the Strong Towns Action Lab!
Jonah Richard is a small-scale real estate developer in Vermont. With his company, Village Ventures, he’s currently getting his hands dirty redeveloping mixed-use buildings along Main Street while trying to pick apart and replicate what makes other communities thrive. You can connect with Jonah on Twitter at @jonahrichard.