The University of Michigan invested big in Detroit. Now come the evictions.

The University of Michigan last year invested $30 million in a private equity firm that buys and renovates homes out of tax foreclosure. One U-M professor fears the arrangement could make the university an “unintentional de facto slumlord.”

The eviction notice arrived last month at William Nunley’s modest two-story house in Detroit’s Fitzgerald neighborhood, one of the hottest real-estate markets in the city. He had lived in the house for three years with his wife and their three children and had hoped to buy it from their landlord.

The construction worker said he was unaware the landlord had fallen about $6,000 behind in taxes and that the house was sold at Wayne County’s tax auction in October for $17,000 to a company funded in part by the University of Michigan.

July 19: Students to University of Michigan: Stop funding Detroit evictions
Opinion: U-M’s investment is helping us improve Detroit, not evict people.

“We didn’t know it was up for auction and we didn’t know somebody else owned it,” said Nunley, who said he kept current on his rent and had a good relationship with his landlord.

“Then we got (termination of tenancy) papers telling us to show up for court. But I had to go to work. You can’t just call in and say, I have to go to court,” he continued, a laugh creeping into his voice. “That is going to give you new problems.”

The home –  located in a neighborhood of northwest Detroit the city is spending millions to revitalize –  is one of 112 bought last fall out of tax foreclosure by a company known as FDR Investments LLC. Property records show the company spent about $2 million at last fall’s auction and was its single largest buyer. A total of 47 of the homes bought by FDR were occupied at the time of foreclosure, and evictions were filed in court on 20 of those homes, according to Wayne County records.

Related: U-M’s Schlissel: ‘Our children will suffer’ because of how we treat higher education today

Nunley said he was shocked to learn his home’s new owner is partially bankrolled by the University of Michigan. Its Board of Regents voted in February 2018 to allocate $30 million from its endowment to a related company: the Detroit Renaissance Real Estate Fund, which is owned by FDR’s two principals.

The investment came after a Detroit Free Press investigation noted that U-M's endowment included few investments in Michigan-based funds.

“My wife and I are trying to get the money together to buy one house. We don’t have millions to buy 113 houses” Nunley asked. “How are we supposed to compete with a university? How is that fair?”

“My wife and I are trying to get the money together to buy one house. We don’t have millions to buy 113 houses. How are we supposed to compete with a university? How is that fair?”

–  William Nunley, a Detroit renter who was evicted by a firm that received funding from the University of Michigan

U-M records show regents invested in a private equity firm known as Fortus Partners, operated by developers Corey Hanker and Jordan Friedman. This April, Fortus Partners registered FDR Investments, LLC as a Delaware-based corporation with the state of Michigan, state records show.

Rick Fitzgerald, U-M’s assistant vice president for public affairs, said university policy bars public discussion of investments. 

In an interview Wednesday, U-M President Mark Schlissel said he didn’t have knowledge of the investment but noted that the university doesn’t “use the endowment as a social tool.”

Mark Schlissel

 University of Michigan President Mark Schlissel said the purpose of the school’s $11.9 billion endowment is to “support the university in an era where public support has really dried up,” rather than as a “social tool.”

“We use it as a way to support the university in an era where public support has really dried up,” Schlissel said, adding that Detroit neighborhoods could benefit from more outside investors. 

“The challenges around housing in Detroit are enormously important,” he said. “The downtown and the Midtown seem to be doing great and the neighborhoods seem to be lagging.”

Hanker, Friedman and attorneys handling the evictions did not respond to numerous messages and attempts to solicit comment. 

U-M regents meeting minutes do not explain why the university, which has a $11.9 billion endowment, invested in Detroit real estate or how the deal came together.

The investment in Fortus was one of three made from U-M’s long-term endowment portfolio in the winter 2018. The other two were in a venture capital fund and a commercial real estate venture in Washington D.C.

A memo to regents from U-M Chief Financial Officer Kevin P. Hegarty explained that “Fortus targets undervalued homes that are typically two to three bedrooms and require varying degrees of renovation. The properties are held for rental income, but Fortus expects to dispose of the assets in bulk through a large portfolio sale.”

Buy low, sell high

That’s a business model familiar to any viewer of HGTV or other real-estate investment shows: Buy low, renovate to increase the rent, and sell high. 

While stressing he isn’t aware of the “specifics of the investment,” Schlissel said an argument could be made “that the dislocation of a certain number of people in return for investment in decaying housing stock is part of the pathway to making the city a better place to live.”

“I worry about the University of Michigan investing in this fund because the most likely outcomes of the fund’s purchases in Detroit are counter to the U-M’s mission as a public university with a strong commitment to the city.”

–  Margaret Dewar, a U-M urban planning professor emerita who studies Detroit neighborhoods

Margaret Dewar, a U-M urban planning professor emerita who has studied tax foreclosure and development in Detroit, said she is concerned about Fortus’ impact on neighborhoods.

Once one of the nation’s leaders in black homeownership, Detroit now is a majority-renter city. Last year, bank lenders wrote only 1,000 mortgages in a city of 673,000 residents, and affordable housing is becoming scarce.

I worry about the University of Michigan investing in this fund because the most likely outcomes of the fund’s purchases in Detroit are counter to the U-M’s mission as a public university with a strong commitment to the city,” Dewar said. 

“President Schlissel’s initiatives and the efforts of hundreds of faculty and thousands of students working in partnership with Detroiters need to succeed, not be undermined by this real estate investment.”

Margaret Dewar is a professor emerita of urban planning at the University of Michigan. She said bulk investments in Detroit usually don’t end well for neighborhoods.

Dewar added she fears U-M could become an “unintentional de facto slumlord” if the real-estate market sours and renovations to tax-foreclosed homes don’t materialize.

‘Huge incentive to exit’

Records show FDR and Fortus bought properties in neighborhoods that are rebounding and receiving heavy investment from City Hall, including East English Village, Fitzgerald and the North End.

Among the properties: a two-story, five-bedroom red brick home with a wrap-around porch at 12503 Broadstreet in Russell Woods, traditionally one of Detroit’s finest neighborhoods.

Records show the home, which was occupied at the time of the tax auction, owed $14,000 in back taxes and fees. Fortus bought the home for $66,000 and remodeled it. 

Now, a company owned by Fortus called Hela Management, is listing the home for $2,350 a month in rent

Following conventional wisdom that housing costs should comprise no more than 30 percent of income, tenants would need to make $80,000 per year to rent the home. That’s triple the city’s median income of around $26,000. Fortus also requires tenants to have a 620 credit score and “no prior evictions or legal filings to collect rent.” Nearly two-thirds of Detroiters have credit scores below 600, according to the Urban Institute, a Washington, D.C., think tank.

Russell Woods

Fortus Partners bought this home in Detroit’s Russell Woods neighborhood out of tax foreclosure for $66,000. After remodeling, the rental home is low listed for $2,350 per month. (Courtesy photo)

Fortus’ model of targeting the higher end of the market is unusual among buyers at the county’s tax foreclosure auction, which has sold more than 100,000 homes in the past 10 years. 

A recent study by Joshua Akers, a U-M urban planning professor, found the vast majority of properties bought at the auction were to bulk buyers who made few renovations, kept properties as low-quality investments and allowed unprofitable ones to fall back into tax foreclosure.

He and others contend that cycle of foreclosure has further depressed homeowner rates in Detroit and pushed nearly a third of city properties, 95,000, to the Detroit Land Bank, a city agency that acquires tax-foreclosed land after it fails to sell at auction.

Private equity firms like Fortus rarely appear as direct bulk purchasers in the tax auction, perhaps because the business model of those firms is focused less on renting than on selling.

“With private equity typically there’s a huge incentive to exit, to sell the assets and generate a huge gain on the sale at the back end,” said Aaron Seybert, a social investment officer at the Detroit based Kresge Foundation, a philanthropic investor in Detroit. 

Seybert said private equity investors in other cities generally sell inventories in bulk to other investors. Private equity firms are typically less predatory than other bulk buyers, but also less willing to work with existing tenants to stay in properties, Seybert said.

“It’s professionalized, more standardized, more unyielding because of the scale at which they operate,” he said. “You’re not going to get the human touch. What you’re going to gain in efficiency you lose in flexibility. It’s pick your poison or pick your benefit.”

Jason Jones

Jason Jones, a principal at Tekton Development in Detroit, said it’s unfair to expect investors to solve the city’s problems with affordable housing.

Jason Jones, a principal of Tekton Development a Detroit-based real estate firm, said it’s unrealistic to expect Fortus or other investors to solve the city’s affordable housing crisis.

“If you’re buying at the auction, your goal is to convert that asset into its highest and best use from Day One,” said Jones, who added that developers should try to work with tenants if they can pay market rate rents.

“There are going to be some houses that are significantly under market value. The value proposition is for renovating and releasing that house to unlock even more value…. It is a really hard truth that everybody can’t live everywhere if we want to have a functioning city.” 

Investing toward future

Speaking at a real estate conference in December 2017, Hanker said recent improvements in Detroit and demographic trends make the city ripe for investment.

“There are more than 100,000 students within 25 miles of Detroit now, and they are bringing in their wealth and skills and staying to build up the local talent pool,” Hanker is quoted in Think Realty. 

Hanker and Friedman are both from Los Angeles but maintain an office in Southfield. Hanker graduated from the University of Michigan in the late 1990s. 

Both have been involved in Detroit real estate for several years but have kept a relatively low profile. Hanker's Linkedin profile claims  "Fortus has purchased, renovated and tenanted more residential real estate in Detroit than any other investment group over the past five years.” 

Corporate paperwork registered to the pair show they’ve been buying properties through the tax auction since 2013. In 2017, they made a deal with Dan Gilbert-owned Bedrock LLC and the City of Detroit to finance the rehab of an affordable housing complex in Midtown.

Less successfully, in 2013, Hanker and Friedman tried to bring their private investment model to a deal with the Detroit Land Bank Authority. Through a Delaware LLC called Fortus Homes, Hanker and Friedman pledged to rehab and sell 24 homes in Detroit’s East English Village neighborhood by leveraging federal money and private equity to restore the homes and then sell them to middle-class families and split the proceeds with the land bank. 

The land bank killed the deal a few months later when, according to meeting minutes, Fortus proposed increasing the number of properties and keeping the homes to rent instead of selling them. 

‘Short term solution’

Two weeks ago, Nunley and his family moved out of their home on Fitzgerald, taking their belongings before the eviction proceeding would have forced out the family.

They are now staying a few miles away with Nunley’s mother-in-law. He’s looking for a better job to make more money to afford a house in Detroit, where property values are rising quickly. He said he’d like to become a homeowner but feels the deck is stacked against families like his. 

“We’re doing fine,” he said. “But this is a short-term situation.”

About the author

Sarah Alvarez is founder of Outlier Media, a journalism service that delivers data reporting and information to low-income news consumers over text messages.

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Comments

Lennie
Fri, 07/12/2019 - 8:49am

What a joke. They've turned the endowment fund into a tax dodge so being a sleazy slumlord like Steve Ross is no surprise.

Arjay
Fri, 07/12/2019 - 9:01am

Ahh yes, The University of Michigan, bastion of liberalism, until it comes to making larger profits. Why not go after the Democratic Attorney General to find some law to sue and prevent people living in a home from being evicted? Nope. It wouldn’t be good to slow down the money falling into U of M’s pockets.

zooman
Fri, 07/12/2019 - 10:12am

The first two comments are really irritating, just knee-jerk reactions based on nothing more than confirmation bias. What this thorough and compelling story has uncovered is shocking. As a U of M alum, I am appalled that there is apparently minimal oversight of how the university's investments are used. This should be of particular concern when the investment at issue is in Michigan and in a challenged city that the university purports to support with innovative programs such as Semester in Detroit.
I don't know what can be done at this stage to protect the homeowners and unsuspecting tenants, but I do hope that this incident serves as a wake-up call to the university's administration and regents to provide a level of oversight of the university's endowment to make sure that its investments are used in ways that are consistent with the university's values, particularly in cases like this where the investment is undermining initiatives that are helping the city's residents.

U B Judge
Fri, 07/12/2019 - 5:06pm

Zooman - you sound knowledgeable, skilled at crafting comments, and articulate quite well, but . . . who are you to put down the 1st 2 comments from readers because you don't like their 'knee jerk' commentary? Their words are every bit as valid as yours. Had you never written your 1st sentence you would have had higher reader respect. To put down others was not necessary and is rather revealing as to your own insecure issues. Maybe those 2 writers were not as irritated as you? Sorry you are so appalled and must use the confirmation bias label. Not too impressive; their expressions every bit as valid as yours. The bias we have may not be bias at all. Maybe it is perceived superiority that makes us think like that.

zooman
Sun, 07/14/2019 - 9:58am

U B Judge. I didn't say that the comments were appalling. I found them irritating. Big difference. This is the kind of story that makes Bridge so valuable. It deserves thoughtful consideration and comments that deal with the substance of the story. Comments such as these, regardless of which part of the political spectrum they come from, add very little value to discussing or addressing the public policy challenges this story raises.

Marlene
Fri, 07/12/2019 - 11:25am

There is no mention in this article concerning the landlord's or the city's lack of communication with its tenants about the foreclosure. The major problem here is the tenants were not informed nor given the chance to pay the mortgage for the home they were renting – which the new buyer of the home has nothing to do with. Need to shine a light onto the foreclosure process. Using U of M's name for click bait won't solve this problem.

James F Bish
Fri, 07/12/2019 - 11:46am

Thanks for the article.
Certainly puts what l see daily in NW Det. In context. We receive 2 or more offers weekly to buy our home .
It has become quite clear, those not in the $46 K or more yearly income level are being driven out of the city.

Todd
Fri, 07/12/2019 - 2:27pm

I'd never invest in that toilet.

WRTolkas
Sat, 07/13/2019 - 2:59pm

Agreed, I'll never return.

Marlino
Fri, 07/12/2019 - 4:21pm

This appears a long, detailed, documented article. All I know is it appears William Nunley got the boot. Attorney's and finance people all involved in these kinds of deals, and the tenant gets the boot. Shame on these supposed do gooder folks & investment tycoons who are involved, forgetting the little guys who are already in place being tossed out like an old piece of luggage. Whomever it is at the top of this wondrous chain should have an attorney in place - the sole purpose to help protect some of these citizens fighting daily for survival, who get kicked in the teeth by the money grab folks. Since U of M is involved in helping, then hold their feet to the fire. It is very bothering. Folks want a city life, stay there years working extremely hard, and overnight comes the knock on the door. Get outta dodge. It's shere bullshit! Turns my stomach.

John Q. Public
Fri, 07/12/2019 - 6:11pm

If you want to follow how developer money plus connections to government agents screws the little guy every single time, just look for the word "authority" in the agency name: Downtown Development Authority, Brownfield Redevelopment Authority, Land Bank Authority, Michigan State Housing Development Authority. Every one of them authorizes non-elected government employees with intentionally inherent conflicts of interest to write their own rules over governing the spending of tens--even hundreds--of millions of dollars in tax revenue.

TrueBlue
Sat, 07/13/2019 - 2:59pm

I want to provide a viewpoint as a (small) real estate investor.

We take our hard-earned money and plow it into a project, hoping to improve the neighborhood and make some money for ourselves while we do it. We take a risk. On some projects we've made very good money, and on others we've lost our shirt. But, even when we lose, we are proud that we helped take a dilapidated property and made it much nicer.

The hard part is it doesn't take much to turn a winner into a loser. When an area is gentrifying, it is often impossible to rehab a house to make it nice AND provide affordable housing. That is, unless there are lots of government incentives.

To me the one failure point here is the city could have and should have offered the tenant the opportunity to buy the house at the price that Fortus paid. I have friends that have tried to buy property in Detroit and have been given the bureaucratic run-around only to find some large group was able to acquire it in a back-room deal.

Aside from that, no laws were broken. Fortus is acting in its own best interest and massively improving the property as well as the city's tax base. We can see just from this article that Fortus paid off a massive tax lien and the property tax on that house will jump significantly after Fortus sells. These sorts of activities should generate massive new resources the city can use to address low income housing issues, whether they manage it themselves or provide incentives to hard-working entrepreneurs to include it in their business plan.

Montayj
Sat, 07/13/2019 - 10:51pm

Because the masses in America dont understand the connection between racism and classism and that the rich is against us all but we continue to fight each other while they do this type of stuff. Yep, keep being racist and keep losing your house.