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Real Estate Private Equity Funds Financing Alternative Development Through Double Bottom Line Private Equity Funds & A Real Estate Social Investment Framework By Jeffrey Elliot Levy B.A., Economics U.C. Berkeley, 1997 Submitted to the Department of Urban Studies and Planning and the Center for Real Estate in Partial Fulfillment of the Requirements for the Degrees of Master in City Planning and Master of Science in Real Estate Development MASSACHUSETTS INS fTE at the OF TECHNOLOGY MASSACHUSETTS INSTITUTE OF TECHNOLOGY JUN 28 2005 June 2005 LIBRARIES C 2005 Jeffrey Elliot Levy. All rights reserved. The author hereby grants to MIT permission to reproduce and to distribute publicly paper and electronic copies of this thesis document in whole or in part. Signature of Author: (fenter'for Real Estate and'Department of Urban Studies and Planning 14 May 19, 2005 Certified by: Karl Seidman Senior Lecturer, Department of Urban Studies and Planning Thesis Supervisor Accepted by: -David Geltner Chairman, "trdepamental Degree Program in Real Estate Development Accepted by: LDennis Frenchman Chairman, Master in City Planning Program Department of Urban Studies and Planning ROTCH Financing Alternative Development Through Double Bottom Line Private Equity Funds & A Real Estate Social Investment Framework By Jeffrey Elliot Levy Submitted to the Department of Urban Studies and Planning and the Center for Real Estate On May 19, 2005 in Partial Fulfillment of the Requirements for the Degrees of Master in City Planning and Master of Science in Real Estate Development ABSTRACT The post-WWII period has seen a radical change in the growth patterns and composition of American cities, as a decentralized form of real estate development, conventional development, has become the dominant real estate development paradigm. As conventional development has become pervasive it has contributed to a host of negative economic, social, and environmental impacts. Growing dissatisfaction and concern over these negative impacts has given rise to development models that seek to accommodate the demand for new built space through alternative spatial forms, development locations, development practices, and development products. Collectively called "alterative development", these development models seek to minimize or eliminate potential negative social and environmental externalities caused by real estate development. While alternative development has gained some traction in the real estate development industry, it still faces significant barriers. Chief among these barriers is the lack of access to reasonably priced debt and equity capital. As the availability of financial capital is one of the key factors determining what gets built, when, and where, the lack of access to capital for alternative development has profound effects on the economic, social, and environmental health of our communities. This thesis argues that one solution to overcoming the financing barrier, and expanding access to capital for alternative development projects, is through the development of a "real estate social investment" framework and the use of this framework to guide the investment decisions of capital delivery vehicles that can deliver reasonably priced capital to alternative development projects that produce financial returns plus social and environmental returns (the double bottom line). This thesis offers suggestions on what a real estate social investment framework might entail and how the financial, social, and environmental return components could be measured and evaluated. This framework is then used as a lens through which to examine the existing practice of double bottom line (DBL) real estate private equity investment funds. Through analyze of existing theory and practice surrounding social investing and double bottom line real estate private equity funds, recommendations are proposed to advance both the practice of DBL real estate private equity funds and the development and maturation of a real estate social investment industry. Thesis Supervisor: Karl Seidman Title: Senior Lecturer, Department of Urban Studies & Planning Thesis Reader: Lynn M. Fisher, PhD Title: Assistant Professor of Real Estate ACKNOWLEDGEMENTS First, I want to say what a joy and relief it is to be at this moment. It has been a long, arduous road but the end has finally arrived and I'm better off for having made the journey. This thesis would not have been possible without the invaluable guidance and support of many individuals. I would like to thank everyone who contributed their time and ideas to this project. To all those who gave generously of their time for interviews, thank you. Special thanks goes out to my family, I would not be where I am today without their unconditional love and support. I want to extend extra special thanks to my mom and sister, who were always there when I needed someone to talk to. I would also like to thank my academic and thesis advisor, Karl Seidman, who gave generously of his time and energy, and provided invaluable encouragement, guidance, ideas, and support over the last two years. I feel fortunate to have had the privilege of learning from, and working with, you. Many thanks also go to my friends and colleagues at the Massachusetts Housing Investment Corporation who have been kind enough to employ me during this process. To all the great friends I have made during my time here, thanks for the good times and all you have bestowed upon me. Finally, but most importantly, a special "toda roba" goes out to Kimberly Bardy. No one deserves more credit for helping me reach the finish line than you. Thank you for standing by my side and being my friend over the last eight months, I know it hasn't been easy for you and for us. I sincerely appreciate all the support you have given me and the many good times we have had together. I am eternally grateful that you came into my life and I look forward to a thesis-free future with you. TABLE OF CONTENTS Chapter 1 - Introduction............................................................. 9 Chapter 2 - Conventional Development ........................................... 17 What is Conventional Development?............... ........... ......... ..... .... ..... .... ..... .... 17 History of Decentralization and the Forces That Caused It........................................18 The Costs of Conventional Development................................................................ 23 C onclusion ............................................................................................. .. 26 Chapter 3 - Alternative Development............... .............................. 29 Demand for Alternative Development Products and Locations.................................... 31 Barriers to Alternative Development. ................................................................. 36 The Financing Barrier to Alternative Development.................................................... 38 Conclusion.......................................................................... ..........--- - - 44 Chapter 4 - Real Estate Private Equity Funds and A Real Estate Social Investment Framework...............................................................47 Real Estate Private Equity Funds 101................................................................50 A Real Estate Social Investment Framework.........................................................58 C on clu sion .................................................................................................... 80 Chapter 5 - Double Bottom Line Real Estate Private Equity Funds - A Survey of Existing Practice............................................................83 C ase Studies............................................................................................ 85 Fund M anager M odel....................................................................... .... 85 Contract Model......................................................................... 91 Ownership Model...................................................................... ... 104 Conclusion: A Summary of Key Findings.............................................................113 Chapter 6 - Recommendations........................................................117 Advancing the Practice of DBL Real Estate Private Equity Funds.................................117 Advancing Real Estate Social Investing................................................................130 Chapter 7 - Conclusion.................................................................135 Appendix A - LEED Green Building Checklist......................................139 Appendix B - LISC Social Objective Criteria.........................................141 Appendix C - Bay Area Smart Growth Fund Investments To Date.................143 Appendix D - Sacramento Valley Fund Smart Growth Fund Investments to D ate ......................................................................... ................ 14 4 Appendix E - Genesis L.A. Real Estate Fund Investments to Date................145 Appendix F - Green Communities Initiative Underwriting Criteria................146 B ibliography ................................................................................ 149 CHAPTER 1: INTRODUCTION The post-WWII period has seen a radical change in the growth patterns and composition of American cities as a decentralized form of real estate development, conventional development, has taken hold and become the dominant real estate development paradigm in the United States. Influenced by a number of forces
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