How can innovative fund models increase generational wealth? In our inaugural episode, learn about how the Dearfield Fund for Black Wealth got its name, how the fund started, and its impact on Black families in Colorado thus far.
The Dearfield Fund for Black Wealth was the 2023 Ivory Prize for Housing Affordability Winner in Finance.
Released in Partnership with the Builder's Daily
TRANSCRIPT
HANNAH: My name is Hannah, and this is the House Party Podcast from Ivory Innovations. We bring you the top entrepreneurs, researchers and practitioners in the industry to shine a light on housing affordability solutions.
Intro Music
HANNAH: On the show today, we have Aisha Weeks and Catherine Toner talking about the Dearfield Fund for Black Wealth and how they grew this from an idea in early 2021 into a $6 million fund with 170 homes closed by black homeowners in Colorado and growing.
The racial wealth gap in this country is staggering and we see this front and center with the homeownership rates between white families and black families. The median homeownership rate for white households is 72% and only 40% for black households. That is why the Dearfield Fund for Black Wealth exists. The fund accelerates home ownership among black families in the Denver metro area through an innovative down payment assistance product structured in the form of shared equity. The fund is incubated within Gary Community Ventures, a Denver based philanthropic organization with decades of experience launching successful ventures. I should also share that Dearfield was our winner in the finance category for the Ivory Prize this last year, so we are really excited to be chatting with them on the podcast today.
We’ll hear from Catherine a bit later on this but Dearfield is especially different from traditional down payment assistance programs out there.
Today we have Aisha Weeks, the Managing Director of the Dearfield Fund and Catherine Toner Managing Director of Impact Investing for Gary Community Ventures.
Thank you both so much for being here.
CATHERINE & AISHA: Thank you for having us.
HANNAH: So I want to get started with how you both got involved in this work, and Dearfield specifically. So, Catherine, I know you’ve been involved since the fund started in 2021 and you really helped shape the finance and operation of Dearfield, so tell us more about how Dearfield started and your role in that.
CATHERINE: Sure! Great to be with you and talking about this great product, so 2021 in the wake of George Floyd our former CEO Mike Johnston and our current CEO and CIO Santhosh Ramdoss explored ideas about ways to bridge the racial wealth gap using housing as the focus and in particular, homeownership. So it was kind of a nebulous idea, as we began, I joined in 2021 kind of when the idea of a fund had come to light but the implementation of what that would actually look like was still TBD. I have a background in investment banking and impact consulting and so was able to dive into the nitty gritty of what kind of a fun concept would look like on the home buyer and investor side of things and so that’s where it kind of started and then got into a lot of detail on the legalese and the fund structure of Dearfield.
HANNAH: So about a year later, Aisha, you joined the fund in June of 2022 and your background is in community development and financial services. I’m curious what drew you to this work. Was there a moment or a story that you feel like really captures why you joined Dearfield?
AISHA: Yes, thank you for that question, so I think to Catherine’s point about just in the wake of the murder of George Floyd. The exposure of racial disparities in our country, I think like a lot of people in organizations, there was a lot of soul searching that was happening I think around the country for how organizations and also individuals could really positively impact an issue that has been long standing for decades and really centuries so for me the work that i was doing in financial services as well as my work in community development really I saw the gaps in access to capital, and kind of the carrot we dangle in terms of you know community reinvestment act for financial institutions to create products or incentivising them to create products that work for lower to moderate income communities or even communities of color uniquely just wasn’t there and in my opinion wasn’t working in the ways that it should’ve. So to know that an organization such as Gary Community Ventures was really thinking this through, not from a public standpoint or a non-profit in terms of charitable contributions but really looking at investment. Which is something that I believe, and the data show that the black community as well as black households have been denied investment, and so I was really drawn to this as a model and understanding that we can prove the point here in Denver and knowing that is an opportunity for it to scale nationally was also exciting as well.
HANNAH: So I want to dig into the story behind the name “Dearfield”. And Aisha, you’ve shared with me a little bit about where the Dearfield Fund got its name and that story being something that really drives the mission behind the fund. So what is Dearfield, where does that come from?
AISHA: Sure, Dearfield is a town located around 70 miles outside Denver, Colorado. And it was the first black homesteading community in Colorado. It was founded by a business man turned farmer O. T. Jackson, who believed that in order for black people to really have a foothold in the American dream that they needed to own property and own land. So the name Dearfield came from `these fields will be dear to us”, and really embodies the hope that these families had as they came into this unchartered part of the country with the hope of having ownership and agency over their lives. So it's that belief in ownership as the pathway to the American dream and pathway to prosperity is channeling that dream and mission of those early settlers and the homestead in Dearfield.
HANNAH: Gotcha, that’s great. So that was back in 1910. So I want to fast forward back to 2021 and we heard a little bit from Catherine about your role in figuring out the structure for the fund. You have a background in investment banking so you are thinking about the financial model for this. And we understand at a high level that this is a down payment assistance product for black and african american families in Colorado. I want to now dig deeper into the details of how this fund is structured.
CATHERINE: Oh (laughs) Should I just, Should I dive in?
HANNAH: (laughs) Just dive in!
CATHERINE: Just dive on in, so the fund itself is kind of 2 outwardly facing structures. One is on the homebuyer side. It's a shared depreciation product that is in the form of debt as a community second or silent second mortgage alongside their primary mortgage. We provide, the Dearfield Fund, provides up to $40K at the outset and throughout the period of homeownership or up to the point of refi (refinance) the homebuyer pays no principal or interest on that amount. It’s at the point of sale or refi that the homebuyer, or homeowner at that point repays the $40K and just 5% share of the appreciated value of the home. And so it's a way to keep the fund sustainable and in a more traditional private equity product, but it's a silent mortgage, a silent debt product on the back end for them in the homeownership journey. On the investor side it looks a lot like a traditional private equity fund, so there are mission aligned investors with Gary as the general partner of the Fund, Gary Ventures Inc. Our family office entity and we take in investment dollars and use those dollars to allocate those $40K amounts to homebuyers that qualify according to the program criteria and then repayment of the initial investment and a modest anticipated return comes from the principal amount and the shared appreciation.
HANNAH: Gotcha, and for those maybe that aren’t as familiar with how these products function, can you explain what a silent second mortgage is?
AISHA: Sure, so a silent second really means that it just sits behind the first mortgage. It’s silent because there’s no requirement for interest or payment. And so it doesn’t require the borrower to really interact with it at all until the payment is due.
HANNAH: Okay, I see. And so you know there are a lot, maybe not a lot. But there are other down payment assistance programs that exist. We had one actually in our most recent Top 25 cohort for the Ivory Prize, the California Dream for All Shared Appreciation Program. And so, I mentioned in the beginning this is different than traditional down payment assistance programs so can you kind of walk us through what are the specific aspects if you compare Dearfield to a traditional down payment assistance program, like what makes Dearfield distinct?
AISHA: I come from it from a perspective of having been in financial services and having been on the lending side of things and kind of just purely from a down payment assistance standpoint. If a family or a borrower was not 80% AMI or below then you wouldn't qualify for downpayment assistance. There was always a focus really on income and not really on the historic lack of your ability to build generational wealth which is preventing you from having an asset or a downpayment. So it was pretty much an income focus. For the Dearfield Fund we are looking at a max of 140% of area median income (AMI) which includes those who are considered middle class. And I always say that you can be middle class on paper, but it doesn’t mean that you have had the opportunity or your family has had the opportunity to be able to amass savings that allow you to purchase that first asset. So if you don’t have that, how are you then onboarding to the homeownership journey if you don’t have like that grandma or that auntie to be able to cut you a check and so the traditional structure assistance has always been a low to moderate income aspect. And so for me that is one of the main differentiators of the structure of our down payment assistance.
Catherine, would you like to jump in?
CATHERINE: I would say the broad availability of down payment assistance, the quasi state agency level for example is very much a grant or a smaller dollar amount that provides that support and I think because we’re able to structure this down payment as a shared appreciation product as probably the other cohort member has, you're able to provide a larger dollar amount that’s meaningful in the total down payment, dollar amount, closing costs etc. And it’s more scalable because there is a modest return and the program related investment investors expect a lower rate but there is repayment there so as an alternative to a grant there is scalability in the model.
HANNAH: Mhm, Okay, so it sounds like the income restrictions are not quite as, there’s different types of income requirements for Dearfield then you might see with a traditional program. The actual amount of down payment assistance that you are able to provide is larger than traditional programs and then the scalability, given its a shared appreciation model, is also different. You mentioned Catherine the program related investment piece and know that PRI equity is also something that makes this innovative, so can you talk about kind of what PRI equity is, and kind of how that’s worked into this.
CATHERINE: Sure, so without diving completely into the IRS tax code (laugh) program related investment is an investment that counts for a foundation toward the 5% that foundations are required to distribute in grants and other charitable activity in a given fiscal year and traditionally that’s been on the debt side, it’s very easy to measure what percentage of a coupon or an interest rate is below market relative to where the fed funds rate is etc. Equity PRI’s are also program related investments they contribute to the charitable purpose but because it’s equity, investors are just now getting comfortable with really defining what that charitable purpose is upfront and the ongoing reporting that is required to maintain and kind of connect that charitable purpose to the investment on an ongoing basis. There is increased comfort with that. That is the primary mechanism for investors coming into Dearfield. We also have a structure called PRI debt aggregator fund for those that are not comfortable with that, we’ve partnered with a fiscal sponsor that is the equity member and then they facilitate debt investments on the back end. So we’ve we have kind of a dual mechanism for accepting investment dollars based on where different investment committees or boards are and their comfort levels in doing equity PRIs but our hope is that Dearfield and similar investments become kind of a standard that increases comfort with equity PRI’s because that broadens the asset base that investors can use to advance their charitable purpose.
HANNAH: Gotcha, so it sounds like there are a couple different avenues through which if investors are interested in providing capital to the fund they have different ways of doing so.
CATHERINE: Yep, and it all goes back to establishing upfront and tracking the alignment of the charitable purpose of the organization with the outcomes that Dearfield is using.
AISHA: One thing that I would also like to add as far the differentiator for Dearfield’s down payment assistance in terms as our fund versus others is really our wrap-around services. So on the programmatic side as well, so for my experience you have on the prepurchase side a lot of organization such as HUD certified counseling agencies that are really good with the goal of getting folks into a home, but when it comes to the post purchase side of things in terms of maintaining the home and building it as a generational asset, there's really a gap in the market as it relates to that.
So we are really proud that we are looking at it from a comprehensive wealth building standpoint so looking at homeownership as that asset that you can use to onboard into your wealth journey but also looking at what does a black wealth playbook look like in terms of the pillars that you need to have implemented to ensure that you are holding onto the asset. One of the things that really informs the work that we’re doing around this is that the Federal Reserve Bank of Cleveland has done a lot of research on the racial wealth gap and they have noted that yes, homeownership is a great vehicle to closing that gap, but where black families really fall into an issue is that we’re not able to hold onto that asset long enough to be able to benefit from its appreciation in ownership overtime the same as white families. And so we understand that their might be macroeconomic issues as wells as household level issues that will lend itself to a family losing the home so we are walking side by side with them year over year ensuring that we’re doing everything that we can to help them to retain the home so that they can truly benefit from the ownership.
HANNAH: Wow, so it sounds like there is a lot of innovation happening on the finance piece, there’s also the differentiation around the wrap-around support services that you're providing to ensure that there’s sustainability with that homeownership. I think a third piece that feels really innovative about Dearfield is how Dearfield is centering race in a very upfront way. I’m curious, maybe Aisha since you're involved ,very much so, in the day to day and the fundraising, what’s been the experience in fundraising and having those conversations around race being such a core piece of the mission of this fund.
AISHA: I think it’s been quite interesting going out and raising a fund that centers black wealth and centers black families. We know what the data show but talking to investors about kind of like baking the case or building the case that justice is a historic issue that we are seeking to address, and also I think it’s unique that when you are doing that because not only are we centering black families but we are also raising concessionary capital it becomes like an interesting pool or mix of investors who are impact oriented, who are mission aligned as Catherine had mentioned earlier and those that are saying that “we understand the fund’s goal of dialing down returns to increase impact and that the majority of the upside being with families” because we could have structured it in a very different way where the fund took a larger share of the appreciated value right?
But because we wanted to center wealth creation we were really intentional about structuring it in that way and so that kind of has a funnel there with those that are foundation that have that charitable purpose that are able to use their PRI dollars to invest but I would say what has been the most impactful has been the high net worth individuals who are taking the wealth that they have amassed in this system that has denied others the ability to do so and they are coming to the table saying that “I understand this is how I gained my wealth and I would like to invest to be able to close the racial wealth gap for others.” For me, I feel like foundations are great and we obviously know that they are sitting on very large coffers in terms of their ability to invest, but I think it really resonates when an individual, a person is saying “I’ve sat and I’ve thought about it and I really want to have an impact in this way” to me that’s really be the most impactful experience in terms of working with those investors through their donor advised funds, their DAFs, so that has been encouraging for me in terms of this long haul of fundraising that we still have to go. Our goal is $20M. We've raised $10M so far and deployed around that state(s) so we’re halfway there but that is the piece of it that really is the most encouraging to me.
HANNAH: Im wondering as you’ve gone through the fundraising journey thus far and as you've said you have more of a journey to come, does the story that you’ve told about dearfield shifted at all as you've gotten feedback, questions and concerns from these folks or foundations that your talking about this opportunity, have you had to change about how you talk about the impact or the story or has it kind of remained pretty consistent?
AISHA: I think for us it's been an evolution which is really interesting because we focus obviously on wealth creation but the more that I dove into more of the fauna and all of the ways that we are providing impact, we’re not just helping to build wealth but we are creating household stability as well. When you look at markets such as Denver, and this is not unique to Denver, it's happening around the country as well where you have displacement happening because of the rapid rise in rental cost and you have families that would otherwise be stable but for this occurring and then you look at a state like Colorado that doesn't have any laws against a landlord just being able to increase your rent an exponential amount and how is a family gonna navigate that. So we look at homeownership in terms of a stabilizing vehicle, so that has an economic impact not only for that family but for the city, states and the country as a whole so if we can keep families stable, keep children in a home, keep them in the same school, community and same network we are really providing economic stability for the families as well. So I’ve leaned into that narrative just because it is true right, we’re building wealth but we are also creating stable homes and stable communities in that way. One other thing that I highlight now since we’ve done an analysis of our portfolio and we’ve found that 60% of our portfolio are women, I was really encouraged by that as well to say that we are focused on racial equity but also when you look at it from a gender lens investing perspective, those who may focus more on women that this is also an investment opportunity for them as well if they are focused on gender lens investing so really leaning into those two narratives in addition to the impact we are having on wealth creation.
HANNAH: Wow, yeah that’s fantastic and really interesting also, as you continue to fundraise, be able to incorporate kind of the impact that you're seeing from the people you know you’ve already deployed some of the capital and be able to see what the impact has been and the demographics of what those folks look like and what their experience is, so that’s really cool that the story can evolve as those individual families stories come out.
CATHERINE: I think that’s one reason why we were lucky to be in an institution like Gary that has a family office and private foundation structure, otherwise the headwinds in doing type of fund structure are overwhelming, so the ability to do this and structure this and kind of build the plane while we fly it to get that data, to understand the impact that we’re having and be able to create a positive feedback loop to demonstrate that we think its working (laughs). We think it’s empirically working and there’s a demand for the product. There’s product market fit. We also have investment dollars to kind of kick it off and structure it. I think this might parley into some of the conversation about scalability, but our objective really was to absorb those transaction costs upfront, provide that initial investment capital, bring a couple of anchor investors along like the Robert Wood Johnson Foundation and then be able to demonstrate that impact and build that track record.
HANNAH: Yeah it’s a really powerful and compelling approach for doing something like this and you're right I would really love to talk about scalability. (laughs) I think something that we’ve talked about before is like the vision and idea of how Dearfield can serve as a model for other regions and maybe be replicated elsewhere. So what do you think that should look like? Is this a state level solution that all 50 states adopt? Is this something the Federal Government should be taking on and implementing across the US. What should the future of this look like?
CATHERINE: Aisha, you're in charge of the future.
AISHA: Okay, I am in charge of the future. (laughs) I think we’ve received incredible interest thus far, even prior to my coming onboard and during the time I’ve been the Managing Director for a little over a year now. We’ve had folks in markets such as Seattle, Philadelphia, Minneapolis, folks around the country who are interested in the model. Because the racial wealth gap doesn't just exist in Colorado or Denver Metro (laughs) it's a national issue.
So I think that the fact that we’re reaching out but also that those other entities around the country are saying like “hey we’re interested how can we partner?” So as a part of our goals is really to create a community of practice and also think about identifying other markets and anchor institutions that we could potentially partner with to be able to replicate the model around the country. So replicating the model is one, so that’s obviously super important but we also as I mentioned about the black wealth playbook really we’re wanting to peel back, fly open the curtain in terms of those key pieces that need to be implemented. A lot of times Information is passed from one generation to the other at the dinner table right? Those conversations that just happen organically. There are communities that don’t benefit from the dissemination of that, and so wanting to build that and then share it nationally is also a part of our goals. Not just replicating the fund, but also the models and the pillars for wealth so that it can be deployed across the country and we can see the same type of benefits and impact that we have in Denver Metro, we can see it around the country as well.
HANNAH: Catherine, anything to add on that future vision?
CATHERINE: No, I think the objective of incubating this within Gary is very much not to keep it in Colorado. In the same kind of landscape and headwinds of an individual trying to start this fund, their objective is to have absorbed all of the transaction costs for actually structuring the legal piece, it establishes a special purpose credit program based on the historic and demonstrated, as Aisha mentioned earlier the Cleveland Fed, all of the data we know exists in redlining and barriers that were intentionally put up to prohibit black wealth creation and growth. I think all of those pieces assist in that replication. We know each of the entities that need to be put in place, the fact that there needs to be an anchor institution in those respective geographies to really drive the operations of a given fund and the partnerships that need to be created in order to make that successful and I think Dearfield is still very much a pilot, as I mentioned we’re flying the plane as we’re building it or vice versa (Hannah laughs). But the objective is to kind of have the track record there so that scalability and the acquisition of the model by other folks is realistic.
HANNAH: Gotcha, so for people that are listening to this episode and are excited about the model (from), live in a different state other than Colorado and want to do something similar, what are like the first two things they should do? Is it identify an anchor institution to be the sponsor and sort of run the ops for this, should they reach out to you guys? People that are excited about this and want to bring it to their home market, what does that look like?
CATHERINE: I think having, number one would be having an anchor institution. I think it needs to live somewhere and needs to be driven out of a singular entity or person. And then I think understanding the investable landscape, we did a lot of modeling to understand the appreciation historically in Colorado. What that looks like conservatively to make sure that the model works here in Denver Metro and then the quantum of investment dollars that would be required to show that track record and that product market fit. Having those lending partners. We partnered with First Bank, as our anchor mortgage lending institution and they were critical in being open to an innovative model and structuring something alongside us. We work with Impact Development Fund which is a fiscal sponsor that does a lot of the admin so that the burden is not built out in a full fund structure. It’s creatively dispersed along the entire value chain while also integrating into more traditional mortgage lending practices. And then making sure that there’s investor capital if there’s interest in supporting black wealth and black wealth creation and a buy in to the model which is really building wealth alongside families as Aisha eloquently described like all of the wrap-around services are critical to that wealth creation and so the entire model, there needs to be structure and support for.
But Aisha, interested in what you’d say on there too.
AISHA: You hit on all the points Catherine, that’s excellent. And I want to hone in on one of them which is understanding the housing market in the state. Because I’m originally from New York City, it's a very different market in New York versus where I worked in community development in Cleveland, Ohio in the Midwest, in a rust belt state. And then comparing it to Denver, CO right. And so understanding the model part of that, why it works is the modeling of the appreciation year over year and knowing that you have a strong market based on historics and then also kind of updating that year over year as we move forward, but you have markets where housing is still rebounding from the 2008 foreclosure crisis. And so understanding the strength of those housing markets whether the appreciation that you’re seeing from a historic standpoint and understanding that there may be some tweaks that need to happen what the data is showing you about the historics of your appreciation in your market I think is really important to evaluate as you’re kind of looking at what model would fit in different areas around the country.
HANNAH: So, it sounds like sort of 3 things.
1. Identifying where this will live, ideally some kind of anchor institution for that to be the home.
2. Learning about the landscape both the housing market and also the investor landscape. What is the interest from the investor community in this kind of product
3. Finally identifying the right lending and fiscal partners to really kick start this thing and get it moving.
CATHERINE: Yeah you got it.
HANNAH: Sounds easy!
AISHA: You're right, just do all that, just do all that.
(All laugh)
HANNAH: And then you're good to go.
So I want to, for my last question here, is zoom out a little bit and talk about what else you both think needs to be happening to address the racial wealth gap. Dearfield, the model is just one piece of the puzzle. So I would love to hear from both of you what else is missing in the ecosystem? What are the opportunities? What else needs to be done?
AISHA: I think for me, like you said. This is an entire ecosystem. When you think about all of the elements that are really driving the racial wealth gap, you can look at income and income disparities in terms of one of the main drivers, access to capital which is where dearfield is fitting into but we are on the down payment assistance side.
There is a reckoning that needs to happen with the mortgage system in general. Some of the things that we’ve uncovered are issues with the way in which student loans are still preventing low to moderate income households from being able to qualify for a first mortgage. For very arbitrary treatment of what that payment needs to look like and it's really causing disparities in terms of access.
Then, you know if someone gets into a home and then on the back end we have discrimination happening (on), in the appraisal system there needs to be a reevaluation and an overhaul and I know that the federal government, the president is looking at what needs to change, he has a whole PACE initiative looking at that as well. In terms of how do we create access for more african americans, black individuals as well as just people of color more broadly to become an appraiser. Its very much an apprentice type of structure and then it becomes this generational access even into that industry and it does have ramifications. Even looking at the audit system and the tax system realizing, and it recently being released, that black families are disproportionately called for an audit and what it means in terms of fees and penalties and all of that.
And thinking about what kind of needs to change in these systems where you have a lot of things that are codified and haven't really been brought out to light. So when you look at all of the things that impact someone’s finances: the family economic structure as well as access to capital, the tax system, policy. It’s like we have to operate simultaneously in all of these different areas, otherwise gains in one such as access to capital could be eroded if we’re not working on all the other components (that) flow into that as well.
CATHERINE: Can I just say from the broader Gary Community Ventures perspective and I oversee our family economic mobility investments on the endowment side and funky financial structures like Dearfield but we’re thinking about this in other spaces and our lens is very much “how do we increase families income, decrease expenses and increase assets?” And Dearfield fits squarely in the ownership side of things but we’re trying to figure out ways in reducing the racial wealth gap of employee ownership, which disproportionately in manufacturing companies employ people of color how do you elevate folks into positions of management so that equity creation is a part of the everyday activity of going to work?
How do you create and support investment portfolios and grow alongside the stock market if homeownership isn't the right choice for that family? And then we’re also piloting in Colorado the concept of tenant equity so how can you, your normal rental cash flows every month contribute to an equity appreciation or an equity stake that provides at least emergency savings for families that we know is essential and then how does that grow overtime when you as the renter are contributing to the property value of the property that you’re renting in? So trying to think through different ways where the traditional financial structures as Aisha described earlier that have created these disparities, how do you integrate families at the center of those structures to bridge those gaps that we’ve created over time.
HANNAH: Great, wow I love both of your responses because I think Aisha you highlighted so much of the work that still needs to be done given a lot of the inequities that are baked in not only into real estate and homeownership but also the tax system and all of these other elements that we need to be thinking about as we’re focusing on solving inequities in one area and then Catherine you touched on sort of the work that Gary is doing right now to address some of those things. So very exciting and inspiring to hear that. I think we’ll end there. Thank you both so much for joining us today. It was awesome to learn more about Dearfield and the impact that Dearfield is having, we’re excited to see how this continues to grow!
AISHA & CATHERINE: Thanks for having us (Hannah)
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Tune in next week to hear from 2 brothers that are bringing together technology, predictive analytics, and financial modeling to help real estate professionals source and evaluate deals faster, ultimately driving down development costs and improving affordability. That’s all for today. Thanks for listening to House Party with Ivory Innovations.
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