Real estate as a Jewish impact investment

Ideas on how real estate could unlock massive amounts of untapped philanthropy for the betterment of our Jewish communities

Sep 24, 2023

Welcome to The Business of Jewish, an insider/outsider's perspective on the management of professional Jewish organizations. If you’d like to sign up to receive a bi-weekly email, you can do so here.

Note: I’ve never worked as a real estate investor and know very little about how foundations and federations think about managing their corpus capital. Some of these ideas may be impractical but hopefully they are directionally thought provoking.

In no small way vibrant Jewish life exists because of philanthropy. Most of the businesses of Jewish life don’t generate enough revenue to breakeven let alone fuel their evolution. As a result, the organizations we are part of conduct campaigns of different varieties to bridge the annual profit gap and periodically conduct capital campaigns to fuel the future. These two philanthropy strategies have positively impacted thousands of Jewish organizations across the country and created invaluable opportunities for Jewish engagement of different sorts.

The challenge of the current model is that it is hard to grow our sources of capital. Every year our organizations go back to a similar group of people. Some of those people decide to generously donate again, while others fall off. To compensate for those that fall off we build new donor relationship and increase our asks from existing donors. For the organizations I’ve been involved with as a lay leader this has resulted in modest campaign growth on a year to year basis. If you were to combine the philanthropic dollars raised on an annual basis for an entire community the trends are likely similar - flat to modest annual growth.

If you believe that innovation and new thinking has stalled in many of our communal institutions, flat sources of capital are a problem. While financial capital is not the only solution to reinvigorating Jewish life and there are shifts we can make in how we use existing capital, financial capital often provides the fuel for experimentation. In addition to enabling the future, philanthropy ensures that Jewish professionals (“JPros”) are fairly compensated for the sacrifices they make by entering into the field.

Fortunately massive coffers of additional capital do exist, but they are designed to stay where they are in order to fuel annual donations. For every dollar they spend in philanthropy, individuals (sometimes via Donor Advised Funds or “DAFs”) and foundations store orders of magnitude more in investments. They have a certain expectation on the return they will get from these investments, which is predictable enough to convince them to give away a certain amount of funds on an annual basis in the form of philanthropy. Foundations often call this coffer money their “corpus”, while individuals might simply call this “savings”.

What if there was a way to tap into this savings for the sake of impacting our institutions in a way that accomplished the goal of predictable capital growth?

There is already a precedent for this in the form of “Impact Investing”. Impact investing is an investment approach that seeks to generate positive, measurable social and environmental impact alongside financial returns. Impact investors consider the potential impact of their investments on a company's employees, customers, communities, and the environment when making investment decisions. Because investors couple together all of these constraints, impact investing might not fully maximize financial return, but it does optimize outcomes across other definitions that investors care about. An impact investment of sorts the Jewish community is familiar with is Israel Bonds. They are a vehicle for investors to make a less than optimal return, but also one that optimizes for other benefits, namely supporting the State of Israel. The question becomes how we interpret impact investing in other ways for the Jewish world when most of our business models are not optimized toward any form of financial return.

The answer may lie in real estate, an asset that has shown itself over a medium term arch to have a positive return. If we think of real estate broadly we can begin to get a picture of the impact magnitude of this asset. The more obvious form of impact this asset provides is in the buildings our institutions own and have owned for many years, but if we broaden its definition we might consider the personal real estate assets our JPros have as part of planting their flag in our respective communities.

Framework for Evaluating Impact

Before jumping into different examples of how we can solicit corpus funds for real estate, I wanted to propose a framework to evaluate each of these investment types. I believe that any viable impact investment vehicle needs to fit at least these 4 criteria:

Predictable return - Any investor who considers the vehicle will want to compare it against other viable alternatives for corpus capital and as a result will want to understand the likelihood of a financial return.
Scale of Impact - As an impact investment an investor will want to understand the magnitude of impact they can make with their capital.
Reasonably termed liquidity - Investors will look to assess how long their capital is ‘locked up’ in this vehicle as one of the factors gating their decision. Investors want access to their capital (or “liquidity”) and if it is effectively frozen in a particular investment vehicle for too long they will view that negatively.
Ease of management - Each model we’ll evaluate carries varying operating burdens. The harder the model is to operate the harder it will be to get it off the ground and make sure it’s successful.

I’ll break down real estate opportunities into two categories - Commercial and Residential.

Residential

Residential or personal real estate for the sake of Jewish impact investing involves finding housing for JPros as a means of encouraging them to enter the field and then keeping them in the field once they enter it. These are people who have in many cases dedicated their lives to solving Jewish challenges, but whose compensation often makes it challenging to live inside of the communities they support. As a result they are often forced to make concessions, by living on the outskirts of Jewish population centers. This might mean living in less vibrant Jewish communities and also may mean longer commute times, which at minimum doesn’t optimize their time for our community and also likely leads to additional work stress. These may also be factors that make talented individuals not want to enter the field altogether. There is a longer debate to be had around the merits of building Jewish hubs on the outskirts of town, but for the sake of this analysis let’s assume there is worthy demand to be fulfilled moving JPros into cities and towns that are hard for them to afford today.

Idea 1: Buy and rent

The simplest method of fulfilling the housing need for JPros is buying housing that we rent back at a discount to market rents. This is not a novel idea for Jewish organizations. For many years, notably synagogues but also other institutions, have been purchasing homes for leadership in order to allow them to live close to the organization they lead. I have heard of a number of Rabbis and school heads that were offered this perk. There is even an Orthodox day school here in Boston who purchased multiple properties in order to house teachers who would have otherwise moved out of town because they couldn’t afford to live within the community within walking distance to a synagogue.

There are pros and cons to this approach. The upside of real estate deals like this is that the organization owns an asset that they can flexibly rent out and manage. If for some reason the renter wants to leave the community they can rent them to another JPro or even a non JPro. The organization also has the ability to renovate the asset and make decisions that optimize its future value. The challenge is that these are individually financed deals that are often a stretch for the organization that initiates them. It’s hard to mobilize communal appetite to spend such a large portion of the balance sheet for the sake of a limited number of individuals.

The impact investing opportunity associated with buy and rent is to create a centrally managed fund whose purpose is to buy and rent properties to JPros. If we’re able to tap into corpus funds we can scale the solution that is individually happening inside of our communities already. There may even be the opportunity to support these properties with centralized property management services. I suspect there are purpose minded Jewish property management company owners who would be interested in helping with an initiative like this.

Let’s evaluate Buy and Rent across the criteria we defined:

Predictable return - If you believe due to supply/demand real estate will continue to appreciate over a long arch this is a worthy investment, not much different than investing in other residential real estate opportunities. This of course is not an ironclad rule, but any fund that is selectively deploying capital could pinpoint key geographies of Jewish life they believe to be good medium/long term investments and invest selectively.
Scale of impact - Housing is expensive which means a large amount of capital would only impact a small amount of individuals. The fund might need to spend hundreds of thousands of dollars to help a single JPro. This contrasts with other philanthropic pursuits that impact individuals at a broader scale. That said, if you consider the impact JPros can have on a wider range of individuals in their communities there’s a way to think of this investment in multiplicative terms. The advantage of a rental model is that it creates the flexibility for the organization to keep the Jewish professional in town and then have them ‘graduate’ to homeownership over time. The organization can then move on to the next individual they want to help.
Reasonably termed liquidity - Liquidity is a challenge with real estate investments. In particular in investments that likely don’t return cash flow from rents in excess of monthly costs (mortgage, property tax, etc), it may be 10+ years from the time a property is purchased to the time it's sold. This means that investor money is effectively stuck in the investment which will make it less liquid. This is why for all of these models there is a massive advantage to scale. If a single fund owns properties all over the country it is more likely that pockets of liquidity will open up more regularly and opportunities will exist to get out of the investment if the investors decides to do so. The other advantage of buy and rent is that rental properties are typically a bit more transient in that renters often want to graduate to homeownership. Because there will be more instances of property transition it will become easier for the ownership group to selectively decide to sell them.
Ease of management - This criteria is a disadvantage of buy and rent. Scaling property management is hard and costly, but that just means the fund would need to rely on a capable purpose minded property management firm that can help scale this capability for the community.

Idea 2: Co-invest

In this model the Jewish community would invest side-by-side with JPros to purchase homes. The net benefit of this model is that we cater to the desire of JPros to be home owners and we help them build wealth. It stands to reason that a viable method of keeping JPros in the field would be to boost their balance sheet and help them maintain faith that they can continue to work in the community while retiring in a way that meets their expectation.

There is a company called “Landed” that has partially institutionalized this kind of model. They’ve created a way for investors to pool capital in “Landed Funds'' focused on individual communities. These funds solicit applications from a targeted group of people (JPros in our case) and extend co-investment in the form of down payments. The Zuckerberg-Chan Foundation used Landed to invest in homes for dozens of teachers in the Bay Area. The net benefit of these investments for JPros is: a) It makes purchasing a property possible for JPros who would otherwise not be able to pull together the down payment, and b) Even for those who could afford a 10-20% down payment, it helps defray the monthly cost of a mortgage, which at 6%+ interest rates is significant. This means that there is a recurring philanthropic benefit to the JPro in the form of a reduced monthly payment.

In return for co-investing the fund decides what portion of the equity upside they will keep. If they want to richen the economics for investors they will give them their full share of the equity upside. For instance, if a property costs $500K, the fund helps with $100K of the down payment, and the property then sells for $1m, the fund would keep $100K of the upside or 20% of the $500K gain in property value. There is also a model where they keep a smaller % of the upside. In this example they might put in 20% worth of equity, but say they will only keep 50% of the upside and return the rest to the JPro. This would tilt the impact investment to the side of the JPro and detract from the financial return. These are the types of tradeoff decisions to be made in impact investments like this one.

Criteria evaluation:

Predictable return - Similar to the previous buy and rent model, the success of this model is predicated upon positive real estate returns. The difference is that in this model both the investor and the JPro are making a bet on the appreciation of real estate.
Scale of impact - Also similar to buy and rent scale this model is inherently limited by the expense of buying real estate. The argument for this model is the theoretical wealth it creates for JPros. If you believe JPro tenure can be fueled by the perception of a comfortable retirement, then opening up the opportunity of home ownership could more easily lock JPros into the field.
Reasonably termed liquidity - This model shares in the liquidity challenges of rent and buy, but those challenges are exacerbated by the fact that there is far more friction associated with buying and selling a home (rather than renting) which means that JPros will be less likely to move in/out of the home as frequently. As a result there may be less logical opportunities for selling the asset. This is counteracted, however, by the possibility that the JPro could refinance the mortgage and “buy out” the investors. In this scenario, the property goes up in value enough that the homeowner can take the necessary cash out of the home to buy out investors. According to Landed, with the declining interest rate, growing home value environment of 2016-2021, the average Landed home was refinanced in under 5 years. If you believe interest rates will go down in the next 10-20 years and property values will continue to increase, liquidity may be less of a challenge.
Ease of management - There is a valid argument that the co-invest model creates less management burden for investors because the home is owned by the individual JPro and it’s in their best incentive to keep it up and invest in it appropriately. This would reduce the reliance on property management, although it could create the challenge of gaining investor approval when the homeowner wants to do a renovation. The beauty of working with a partner like Landed is that they could manage all of these management burdens in return for a modest fee.

Commercial real estate

Residential real estate’s opportunity mainly lies in the form of houses to be bought in the future. Opportunities exist to leverage untapped capital to help JPros make choices that are right for their families and provide a net benefit to our Jewish communities. The commercial real estate opportunity for impact is more focused on buildings we already own.

If we just use synagogues as a proxy for property values, there are 3,700 synagogues in the country. Let’s say 3,000 of them are owned outright (Could be wrong - I know very little about alternatives to synagogue ownership). If the average building and the land it sits on is worth $3m that is $9B of real estate value. That is also $9B of value that is just sitting there accumulating value without a near term impact opportunity.

If the goal of synagogues is to instill Jewish outcomes and maximize the opportunities for Jewish spirituality in our communities, we might ask ourselves whether $9B of accumulating assets best serves that purpose. What if there were a way to extract some of that equity now and repurpose it for the greater benefit of the community?

One alternative is for synagogues to do what homeowners do when they want to extract cash out of their home, which is to get a mortgage (referred to as a “cash out refinance”) and take out debt on the asset they own. The issue with this is synagogue board rightful aversions to debt. I’m also not certain whether there are banks who would be willing to finance that debt if it wasn’t used to make the asset (the synagogue) more valuable.

Another perhaps more viable alternative is to sell some of the equity in their properties to purpose minded investors (i.e. impact investors). The idea would be to create a fund that buys pieces of synagogues and injects capital into those synagogues, with a stated purpose for that capital. The fund could create criteria for viable uses of capital and have a committee that evaluates proposals. These proposals could be focused on re-envisioning the synagogue or more likely injecting funds into the surrounding community.

Evaluating across criteria

Predictable return - In theory the institution’s building as an asset should follow a similar trend for other local real estate. I’m less familiar with the history of returns on commercial properties, but presumably at minimum the land they sit on will continue to appreciate.
Scale of impact - The allure of this investment type is the magnitude of capital that exists in real estate value and the opportunity to use millions of dollars wisely. Unlike a residential fund that is focused on a limited number of individuals, albeit individuals that have a multiplicative effect on the community, this capital could be used to help a greater number of people. The nature of the impact is something that would be governed by the fund itself and defined by its principles. There could be a setup where there are actually multiple Jewish building equity funds focused on different purposes. We could have a families with young children fund, an antisemitism fund, or perhaps a fund focused on Israel, in addition to others. This would solve for the fact that investors may have a preference for where their money goes.
Reasonably termed liquidity - This is the trickiest component of this commercial idea. The fact is that very few Jewish institutions have liquidity events where the building actually sells and the capital goes back to the institution to be split with an investor group. We had one synagogue I can think of here in Boston who sold its property for ~$20m to downsize. While it injected some of that capital into the synagogue it partnered with, $10m+ remained on its balance sheet and is still just sitting there, which so far doesn’t seem like an optimal communal outcome.

There are two ways of thinking about solving for this:

A. Create a liquidity timeline for buildings we invest in - If we’re investing in buildings like synagogues we might partner with institutions with aging populations and stipulate some form of sale in ~10 years (for example). This would create an assurance that investors will get their money back (hopefully with a return) in a defined time period.

B. Create a large liquid market - The other alternative is to do this at a large enough scale that investors can buy out one another’s stakes. The challenge with this, beyond the scale required to do so, would be the fact that we’d need to have an every ~1 year process to value the buildings. The other benefit of scale is if this fund makes enough investments, it can diversify itself with buildings that have different likely ownership timelines. There might be some buildings in the portfolio that have a ~30 lifecycle while others have a ~10 year lifecycle.

Ease of management - As discussed above this idea would require a bunch of management: An investment committee that establishes uses of capital, a process for monitoring those uses, and a commitment to regularly value our buildings.

Next steps

I haven’t dug in far enough to understand which of the above options is the most viable. I don’t have enough expertise in capital markets, foundation/federation corpus philosophies, or real estate to best assess these options. Because these ideas are hard to evaluate and the solutions are likely common across regions and would benefit from massive scale it stands to reason that a national foundation or JFNA would be in the best position to do the diligence and potentially to create the fund(s). I do believe, however, that in comparison to other sources of capital in our community, the asset of real estate is one that is worth evaluation. If we can figure out how to devote this capital to a more impactful use it might unlock a massive amount of capital that could move us out of our incremental fundraising cycle.

The Business of Jewish