The Innovators: 548 Capital
In this series, Bisnow highlights people and companies pushing the commercial real estate industry forward in myriad ways. Click here to read Q&As with all the innovators Bisnow has interviewed so far.
Renewable energy and sustainability came into vogue in the past few years. The owners of Class-A trophy office and multifamily buildings have competed with one another over who could trumpet more pro-environmental features, qualities increasingly prized by tenants. Affluent homeowners are also likely to dabble with solar panels, LED lights and advanced appliances that cut energy use. Low-income communities tend to get left out of these innovations, but a Chicago-based investor and developer is changing that, one building at a time.
After a career as an analyst for Duke Realty Corp. and HSBC, and more than six years as vice president of business development for Equities First, A.J. Patton founded 548 Capital in 2016, naming the new firm after the unit number of the Section 8 apartment where he grew up in Terre Haute, Indiana. It was there he learned harsh lessons about the high cost of energy.
“In 1999, my mother received a $400 gas bill, and my mother was making $10 an hour, and so, subsequently our gas was shut off,” he said. “That experience has stuck with me forever.”
Patton resolved to bring on board investors that wanted to not only see solid returns but to help modernize buildings in historically disadvantaged communities on Chicago’s South Side and West Side. By 2019, 548 Capital raised enough money to buy a vacant six-flat in North Lawndale on the West Side from nonprofit lender Community Investment Corp. And last year, it expanded to the South Side by buying a 33-unit building at 1372 West 79th St. in Auburn Gresham, which it is outfitting with solar panels, and then a vacant six-flat nearby at 7701 South Carpenter St.
548 Capital is redeveloping the properties, adding a host of energy-efficient features that will cut energy use and operating costs, allowing the company to keep rents affordable for families making between 60% and 80% of area median income, Patton said. Another touchstone for 548 Capital is hiring local contractors and workers, ensuring the money spent stays in these communities, he added.
This should be a year of big announcements from 548 Capital. Patton said the firm is readying a 90K SF project in South Shore, as well as several others on both the South and West Sides, and will soon have about $20M to $25M of projects underway.
For its efforts in bringing renewable energy to low- and moderate-income communities, 548 Capital is a Bisnow Innovator.
This interview has been edited and condensed for clarity.
Bisnow: What was wrong with the way renewable energy technologies and energy-efficiency programs were being promoted?
Patton: I kept posing the question to anybody that would listen, are low-income families able to access it? Almost to a person they all were like, “well not yet, and here's the reasons why not yet.” Listening to other institutional investors claim that they could not find ways to utilize energy-efficient and sustainable technology in low- and moderate-income communities led me to believe that I could do it.
Eventually, I just quit my job and said, “it's time for somebody to shift the market.” These communities are worthy of these investments.
Bisnow: Why do families in these communities need solar power or other renewable energy sources?
Patton: Low-income families pay a disproportionate amount of their income toward energy, so they would benefit the most from the energy-efficient technology upgrades. Also, these families, especially children, disproportionately suffer from asthma, partly due to the exposure to gas from gas stoves. So, electrifying these buildings with renewable technologies, as well as lowering the cost of utilities, impacts these communities the most, and adds the most value to those marketplaces.
Bisnow: How do you convince investors that this is something worth doing?
Patton: All of our investors are attracted to the net returns. That has to matter. Even if you don’t care about keeping housing affordable or lowering utility bills, you can still get a very competitive investment return by investing in renewable energy and solar infrastructure exclusively targeted to low- and moderate-income families.
But some people care more about the social impact. We've got both types of investors, and by merit we've earned their attention.
Bisnow: Who has decided to invest in the work of 548 Capital?
Patton: Aurelien Capital Partners is a wealth management firm that oversees and manages money for pro athletes and other high net worth clients, and they have advised their clients to invest with us. That's been the core of our major investments.
Bisnow: Is there more to 548 Capital’s mission than redeveloping individual properties?
Patton: Our aim is to redevelop communities and to serve as a platform so communities can redevelop themselves. We care a lot about job creation, and we care a lot about who gets those jobs. So, I would say our long-term plan is to keep finding communities that are primed for investment and have the local contractors and community leaders that want to oversee that kind of reinvestment.
Bisnow: How do these projects create jobs in the neighborhoods where 548 Capital works?
Patton: Some of the things we ask are, who is installing the solar, the LED lighting, the new insulation and the new windows? That matters. We put a lot of thought into that and believe it should be the people in the community. That’s the kicker right there, that’s the biggest piece.
Bisnow: How do the communities respond to powering units with solar energy?
Patton: With open arms. Local contractors, local community leaders and local advocates are our champions. And being able to lower utility bills for families is an absolute blessing, and the community gets it. By lowering their utility bills you're solving one of their core problems and making them more economically independent. You’re bringing a value proposition to the people. Every time we've gone to a community with that, it's been welcomed and celebrated.
Bisnow: How much savings do your residents see?
Patton: It's just not the solar, it’s the solar, plus the energy-efficient improvements from better HVAC, better windows, better insulation and more efficient appliances. At a minimum, the utilities are a third lower, and in most cases, we overwhelmingly outperform that.
Our strategy is, if we can lower the utility bill and the operating expenses in the building, we can keep the building affordable, and that protects the community from displacement and gentrification.
Bisnow: Is there a right way and a wrong way to invest in historically disadvantaged communities?
Patton: The right way is to include the community in the development. They should get first rights to bid on any work. They should be first in participating in any workforce training and development programs, and first in those conversations. Where you see people go wrong is, they parachute in with their own ideas, and don't include any of the people who've been there. They don't think about who gets those contracts. Or, is the design of these developments respectful to the history of this community?
It’s both an art and a science. You've got to be transparent about your interests. You've got to figure out who's been doing work there already, and who's been advocating and doing the ground game before you. Then you ask them, and ask yourself, how do your interests align with the people who've been doing that work and advocating in those neighborhoods for decades? I have ideas about [what] I think is good for the community, but if the community doesn't at least remotely buy into that, then I have two questions: Do I have the right idea? Am I taking the right approach?
This is transforming communities one block at a time.