May 18. 2016; Pittsburgh Post-Gazette
Joe Calloway, CEO of RE360, has been buying up houses in rundown neighborhoods in Pittsburgh. That’s not too unusual, but Joe’s business model may be off the beaten path. Rather than finding a wealthy investor or seeking a government subsidy, Joe’s business model relies on a private foundation. Finding capital for risky projects? That’s a win.
A Pittsburgh Post-Gazette story, “Buying up abandoned homes in Allentown, Beltzhoover helps investors, communities,” profiles the work of Joe Calloway with the health-based Birmingham Foundation in rehabbing affordable houses in neglected Pittsburgh neighborhoods. According to the article, here’s how the deal works:
RE360 buys abandoned houses, fixes them up and either rents or sells them to owner-occupants. The Birmingham Foundation provides capital for those real estate projects and receives a nine percent return on the money. It then puts the nine percent back into those same communities to assist youth programs, senior citizens and other projects.
Earning a competitive return on investment? That’s a win, too.
Housing isn’t the only visible improvement. The Post-Gazette story also notes that the overall economic health of one of the neighborhoods seems to have been stimulated by the investment in housing. “The business district, which was blighted and vacant in 2012, is filling up with new tenants, including Work Hard PGH, a tech business incubator; Pittsburgh Coding Academy, an organization that teaches high-level computer language; Spool, a sewing and fabric shop that offers classes and custom garments; and Black Forge Coffee, which is often mentioned as one of the best coffeehouses in the city.” Stimulating secondary investment? That’s a win-win-win for this project.
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The Birmingham Foundation is one of those foundations created when a local nonprofit hospital is bought out by a mega-hospital—in this case, UPMC, also known as the University of Pittsburgh Medical Center. Like many health-based foundations, Birmingham was endowed with the nonprofit assets of the South Side Hospital. Its purpose is to serve residents in the same service area as the former hospital.
Mark Bibro, executive director of the Foundation, likens the Foundation’s support of this private enterprise to investing the Foundation’s assets in the stock markets. “Instead of investing all in stocks and bonds, we took a small part—$450,000—and invested in the housing stock of the Hilltop area with Joe Calloway’s help.” Using RE360 as an investment vehicle, Mr. Bibro explains, the Foundation gets more than a nice cash return, it gets improved housing and economic development in the community it is committed by mission to serve.
An overview of so-called “conversion” foundations shows two themes. These foundations created with the assets of health care providers are strongly geographical and often concerned with health issues. Birmingham Foundation certainly meets the former description, not so much the latter. “Addressing basic health care needs” and “increasing access to health care services in high-risk communities” are just two of the nine program areas of the Foundation.
NPQ’s Rick Cohen surveyed the field of “program related investments” in his 2013 article, “Put Your Money Where Your Mission Is: Mission-Related Investments and You.” In that article, Cohen noted, “The PRI concept is that foundations issue debt or equity investments to nonprofit or for-profit entities with a charitable purpose and they do so without the expectation that the investment will earn a market-rate return.”
For Birmingham, the return on investment seems to be comparable to the return on a commercial investment. That makes sense when the investment goes into a for-profit venture. The “mission” aspect of the activity is not just the location of the investment, but also the potential risk of investing in a small sole proprietorship rather than a Fortune 500 company. After all, Joe Calloway turned to Birmingham when private capital dried up.
Recent IRS regulations of PRIs make clear that there are special due diligence requirements for Foundations seeking to invest in for profit social ventures. In an NPQ feature from earlier this month, Gene Takagi reports, “Private foundations must exercise expenditure responsibility, a set of due diligence procedures codified in the Treasury Regulations, when making PRIs (or grants) to for-profit social enterprises.” These procedures include monitoring to assure that the grant is spent solely for the purpose for which it was made, conducting a pre-grant inquiry concerning potential grantees, and obtaining full and complete reports from the grantee on how the funds are spent, which will be shared with the IRS.—Spencer Wells