No More Business-As-Usual: Leveraging Private Investment To Recreate Neighborhoods

July 01, 1998

How can communities dispel the stigma of lower-income rental and public housing that has frightened off investors for decades? St. Louis-based McCormack Baron and Associates is a developer that creates economically diverse properties in neglected neighborhoods across the country. The firm is widely recognized for its commitment to the preservation of historic structures as it redevelops neighborhoods into clean, safe and affordable environments that attract private investment.

These developments differ from traditional housing subdivisions because they recreate all aspects of a typical neighborhood within a multiblock area. The recent surge of interest in recreating stable neighborhoods is largely attributable to a handful of private developers using mixed-income housing development. The mixed-income approach has become a popular theme with housing policymakers as one solution to reversing the increased concentration of poor families in public and assisted housing and the associated stigmas. Mixed-income housing includes families with relatively higher incomes, is partly subsidized and partly market-rate or has a predominance of families not dependent on welfare.

At McCormack Baron, Senior Vice President Polly Kinslowe said that it may be helpful to look beyond the objective of avoiding concentrations of the poor to more market-oriented reasons for developing mixed-income housing. "The goal isn't to just create a mix of resident income levels. This is one step along a much broader road to re-establish a socially and economically viable neighborhood," Kinslowe said. In fact, her job is to make sure that the site and apartment designs provide the most efficient space for residents, look great from the outside, and are integrated with the surrounding neighborhood. "Our philosophy is that diversity usually means greater stability and long-term economic growth for the neighborhood."

Mixed-income development also means using public sector housing funds to leverage private investments.

McCormack Baron believes it makes good sense to leverage more funding sources and investments not only to build more units but also to recreate a neighborhood environment that contributes to the economy of the community. Physically, the recreated neighborhood offers housing units that are affordable to lower-income families and that attract moderate- and middle-income residents and buyers. Socially, it works to prevent instability and promotes small business and community development.

McCormack Baron has developed successful mixed-income developments in St. Louis, Kansas City, San Francisco, Louisville, Little Rock, Atlanta, Pittsburgh and Cleveland. In St. Louis, The Residences at Murphy Park, a privately owned development, began as a demonstration project of how public housing funds could be leveraged to recreate an entire neighborhood. Murphy Park is part of an $85 million redevelopment of a 50-acre tract located on the northeast border of the central business district. When completed, the neighborhood will have commercial and residential structures that coexist compatibly.

Challenges of Going Urban

Building in an inner-core neighborhood as opposed to a suburban location of the metropolitan area presents significant and unique challenges. "Older urban areas require far more than the ability to address real estate issues," Kinslowe explains. "Restoring these neighborhoods takes the expertise to coordinate planning, design, construction, and management functions of a development with the interest of the surrounding neighborhoods in mind."

McCormack Baron begins with a complete market analysis to determine the feasibility of building a large multifamily housing development in the inner-core of the city. It does its own research and develops products that are tailored to meet specific market conditions at the neighborhood level. Kinslowe stated that the developer's homework led to the conclusion that it was possible to re-establish a market for housing in the Murphy Park neighborhood.

Next, a network of community members is formed to answer the question, "What is the ultimate vision for this neighborhood?" Kinslowe kicks off a development by establishing solid relationships with future residents and neighborhood members, government officials, businesses, foundations and church leaders to integrate their efforts. This has to be done to attract local, state and federal funding and then leverage these resources to form a development partnership that raises equity and borrows first mortgage funds.

This approach has spurred HUD to direct public housing authorities to collaborate with private developers to meet the local need of housing for low-income people. Public housing authorities are increasingly working with banks, cities, nonprofit groups, and state and local governments to develop affordable housing.

The design phase of the development is thoroughly researched so that the property remains competitive in the local market. Townhomes, garden apartments and detached homes offer porches, patios and individual entries that provide a sense of private space. In Murphy Park, density is light with only 12 units per acre, and the units have all the amenities required to draw middle-class residents. After demolition of the existing public housing buildings occupying the site, construction began in three phases. Phase 1 had development costs of $17.4 million and was completed with 160 units of housing. Demand for the units was high as occupancy hit 100 percent in the first month of operation. The next two phases will add 242 units with development costs of $23.4 million.

Financing is innovative and complex and relies on the leverage of shrinking public housing funds with private investment. Both funding mix and leverage have allowed increased revenue sources for the project, more stable cash flows, and expert management assistance for long-term stability of the development. Investments in the Murphy Park neighborhood currently total more than $20 million (see table). This amount includes only the investments of the original project partners, who are projected to raise an additional $13 million in the next phases of the project.

Common hurdles identified by McCormack Baron include investor uncertainty, misperceptions and lack of understanding of multifamily housing finance and the holistic approach.

Financial institutions play a vital role in restoring confidence in a neighborhood. Kinslowe states: "Our experience in working with banks has been very favorable. However, just like all relationships, they take a lot of hard work. The relationship represents a significant investment of both time and money over a period of many years."

As a for-profit developer, McCormack Baron believes that many urban housing markets have significant unmet demand for rental housing. Nevertheless, investments in developments like Murphy Park bring stability to an area that encourages homebuying, small business starts and an increase in city services. The economic cycle is renewed as greater stability, more jobs and rising disposable income expands. Kinslowe adds, "All the partners come out winners, and the social and economic rewards to the community are tremendous."

For information on McCormack Baron developments in Little Rock or Louisville, contact Kinslowe at (314) 621-3400.

Bridges is a regular review of regional community and economic development issues. Views expressed are not necessarily those of the St. Louis Fed or Federal Reserve System.

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