Looking for a company that can handle a tough job? The John Stewart Co. never turns down a challenge. In August 2005, the affordable housing firm signed on to redevelop a dilapidated San Francisco public housing project despite a major roadblock: a missing check from the federal government in the amount of approximately $30 million.
The San Francisco Housing Authority had tried unsuccessfully to secure HOPE VI funding for Hunters View three years in a row. The John Stewart Co. continued to believe that the project could still happen, even without millions of dollars in federal funding. The answer: HOPE, specifically HOPE San Francisco. The company is working with the housing authority and its development partners to replace the 267 public housing units through the new city initiative, which aims to revitalize distressed, low-density public housing in the absence of HOPE VI dollars through mixed-income development. The program relies on grants and funding from the private sector to fill in a portion of the financial gaps.
“I know how difficult it is to finance affordable housing of any kind,” says G. Allan Kingston, president and CEO of Culver City, Calif.-based Century Housing, one of California's largest affordable housing lenders. “To their credit, The John Stewart Co. is going out and saying, ‘We are not going to wait for some government program. We are going to do something that helps make the difference.'”
The John Stewart Co. (called JSCo for short) is the first to admit that Hunters View is a risky undertaking, but that only fuels the firm's interest in the project. “This is a very interesting, convoluted, brain-damaged deal in an unsafe neighborhood, which is what we like,” says company founder and chairman John Stewart. “These types of projects are just perfect for us.”
The company has garnered quite a reputation throughout the Golden State for its ability to manage and develop projects that others wouldn't dare touch, thanks to its proactive, no-nonsense approach. “They are able to roll with very difficult situations and very difficult property conditions,” says Carol Galante, president of BRIDGE Housing Corp., a San Francisco-based nonprofit developer. “I don't think there is anybody better to take over a HUD distressed property. There may be companies that are parallel in everyday development, but when you are really dealing with this messy stuff, they have a technical understanding as well as the fortitude to stick with these developments.”
PERFECT MATRIX The firm has certainly seen its fair share of brain-damaged projects, as Stewart likes to say, since the company was launched in 1978 with just three employees. “We are keen here on doing interesting one-off deals that most people won't do,” says Stewart, who founded the firm nearly three decades ago and is known throughout the multifamily industry for his commitment to affordable housing. “Although there is a higher level of anxiety and frustration, there's a lot of satisfaction to it, and the ‘ennui' factor is mitigated.”
Today, the 1,200-person company is California's largest manager of affordable housing, with two-thirds of its 28,000-unit portfolio consisting of apartments that lease for below–market–rate rents. JSCo has grown dramatically in the last several years under the leadership of Jack Gardner, who has increased the firm's management portfolio by about two-thirds since he took over Stewart's role as president in 2001 and CEO a year later. (For more information on the transition, see “Smooth Transitions” on page 31.)
Gardner's extensive resume includes leadership roles at both for-profits and nonprofits throughout California, including the Low Income Investment Fund and the Hollywood Community Housing Corp., and even a brief stint as a singing waiter (Gardner's been known to break into song and dance at a moment's notice). “I chose Jack because he has a renaissance background and disposition,” says Stewart. “Jack has both the development and the management experience, which I think is very important.”
Gardner and Stewart do complement each other nicely, says Keeley Kirkendall, executive vice president of ARCS Commercial Mortgage Co., who worked with both executives when JSCo was briefly owned by Southern California Edison from 1997 to 2001. “John is the big-picture dreamer, and Jack is smart enough to figure out what John is dreaming about and figure out how to make it work or talk John out of it.”
The two executives also share many traits, including a good sense of humor and, of course, a passion for the affordable cause. And Gardner welcomes new challenges as much as his predecessor—if not more. Every year, he and a friend climb a new mountain in the Pacific Northwest; they've already reached the peaks of Mt. Shasta, Mt. Hood, and Mount St. Helens. Gardner compares this annual pilgrimage to his work at JSCo. “The commitment and the mental toughness that it takes to keep putting one foot above the other to get to the top of the mountain is similar to how I see our business,” says Gardner. “It's all about the tools, the technique, and the teamwork.”
Gardner, 47, has spent the last several years focused on the tools and techniques the company needs to move forward. He's building up the company's back-office operations which, as often happens in entrepreneurial companies, had been overlooked as the company grew over nearly 30 years. To help support JSCo's substantial growth, Gardner established a human resources department when he came on board and is expanding the company's back-office IT operations.
Gardner also is working to diversify the company's services and revenue streams to maximize JSCo's profits. Property management, once 99 percent of the firm's operations in terms of gross revenue, is now only about 85 percent of the overall mix. The firm also is expanding into the development arena for both new construction and rehabs ( JSCo has developed about 2,700 multifamily units since its inception).
Such diversification helps the company manage one of its greatest challenges: Balancing its social mission with the need to make money and the desire to prosper as a business. “We are not so profit-driven,” says Gardner. “We like doing things that have great community impact and help people. I don't want to be some bleeding heart, but we feel good about what we do and make money.” (Ironically, Gardner's office offers a sweeping view of the city's financial district.)
The company tackles many projects with the goal of just breaking even. A good example is San Francisco's North Beach Place, a $100 million HOPE VI redevelopment of a dilapidated public housing complex into a 341-unit vibrant mixed-use community. The company split the development fees with two other partners and ended up making only about $1 million (but is now earning money through the management of the property and retail stores and net cash flow from those operations). The John Stewart Co. is also the largest private manager of supportive and special needs housing in California, programs which certainly are not big moneymakers. JSCo manages SRO units for a wide range of target populations, including the formerly homeless, physically disabled, and those with HIV/AIDS.
“Some projects we do well on, others we lose money on,” says Stewart. “You are not going to make money on the projects for the developmentally disabled or HOPWA housing for people with AIDS. Those are small, inefficient, and labor-intensive, and in order to survive in the business you have to offset them with larger projects.”
The company does just that, offsetting its affordable initiatives with the development and management of market-rate and luxury product. Its two largest market-rate clients: The Presidio Residences, a former military post in San Francisco and now a national park with a wide-range of housing (monthly rents go as high as $10,000), and The Villages at Treasure Island, nearly 625 units (renovated by JSCo) on a former U.S. Navy housing site. In addition to its management services, the company reaps revenue through its third-party development, construction, and financial and syndication services.
MANAGEMENT EXPERTS JSCo is well-diversified in its offerings, but the company's core backbone is management. It comes as no surprise that the company is focused on one of the most challenging components of affordable housing. “What they do is the toughest part of our industry; they are right there in the operational mix,” says Kingston of Century Housing. “It's one thing to get a place built. To ensure that it operates in an economically feasible way and at the same time for the benefits of whomever is living there, that's an ongoing issue and takes the patience of a saint.”
Over the years, the company has developed the endurance and fortitude to tackle properties ridden with crime and gangs. JSCo recently signed on to manage a heavily distressed 90-unit property in Stockton, Calif., for BRIDGE Housing Corp. “It's the worst multifamily property in Stockton from the perspective of police calls,” says Galante of BRIDGE. “The John Stewart Co. rolled up their sleeves and jumped right in.” And that's exactly what the company also did during the redevelopment of Pullman Point Apartments in Richmond, Calif., outside of San Francisco. Gangs traded gunshots as Gardner and his team cut down the landscaping that had been serving as snipers' nests.
Not surprisingly, it can be extremely difficult for a company to hire and keep property management staff at such locations. “One account I manage myself because there is nobody else on staff who would even consider it,” says Loren Sanborn, a senior vice president and partner at JSCo who heads up the company's property management work. The company has had success hiring on-site staff from the resident base. “You are getting battle-hardened, realistic people who know what's going on out there,” says Gardner. And the company is a big proponent of promoting from within, so many of these employees have risen up the ranks to positions as high as regional managers.
HOPE FOR THE FUTURE But even the most skilled affordable housing firm can't escape the truth: federal funding for projects is becoming scarce.
In February, the Bush administration released its fiscal year 2008 budget proposal, which slashed the HOPE VI program and, overall, reduced HUD funding for affordable programs by eight percent. But instead of just lamenting on the loss, the forward-thinking JSCo is taking action and preparing itself for a future without (or with limited) funds from programs like HOPE VI. It's helping the city of San Francisco spearhead a new program (aptly named HOPE San Francisco) to revitalize distressed, low-density public housing in the absence of federal dollars through mixed-income development and grants and loans from the public and private sector.
The poster child for the project is Hunters View, a dilapidated 267-unit public housing complex in Southeast San Francisco. The San Francisco Housing Authority selected The John Stewart Co., along with partners Ridgepoint Non-Profit Housing Corp. and Devine & Gong, to undertake the massive redevelopment without any hope for federal funding in sight. (The city believes it was denied funding because it received five previous HOPE VI grants combined with the reduction/proposed elimination of the program.) The plan is to turn the property into a vibrant mixed-income community with one-for-one replacement of the affordable units and the development of approximately 400 additional affordable, market-rate, and for-sale units. The net proceeds from the sale of the market-rate units will serve as the financial engine of the project by cross-subsidizing the development costs of the public housing replacement units.
Plus, the development team is obtaining much of the missing funds through grants and low-interest loans from both local and national foundations. To date, the team has pieced together about $3 million, including a $2 million PRI (program-related investment) and $200,000 grant from the Ford Foundation, a $50,000 recoverable grant from the Local Initiatives Support Corp., a $50,000 grant from the Fannie Mae Foundation, a $25,000 grant from the San Francisco Foundation, and a $600,000 predevelopment loan from the Mayor's Office of Housing.
“Localities are going to have to do things like this,” says Gardner. “HUD is not going to do it. They are cutting the operating subsidies for public housing nationwide to below what the buildings even need to operate. So now it's the business sector, the local government, and the philanthropic sector all working together [to make these projects happen].”
JSCo's support is instrumental in the program's success, says Doug Shoemaker, deputy director for the Mayor's Office of Housing in San Francisco. “They really have been responsible for the two most successful HOPE VI projects [North Beach Place and Valencia Gardens] that have happened in San Francisco,” he says. “They have really demonstrated to people what the potential out there is [for public housing redevelopments].”
Still, the Hunters View project represents a substantial financial risk for both the development team and the city. “We think we can pull Hunters View off, but it's pretty out there,” admits Gardner. The company must have faith in its work. It already plans to apply this financial model to a project called Sierra Vista in Stockton, Calif. For this one, however, JSCo plans to sell lots to home builders (versus developing the for-sale units itself) which firm leaders say will allow the company to capture more profit. “It's a lot of market risk, and it may not end up looking exactly as we planned, but hey, like John [Stewart] says, you just scale it up. We're doing a 340-unit project, so why not a 660-unit rental, for-sale, mixed-income, mixed-generational revitalization?” says Gardner.
Sounds like a challenge the company just can't pass up.
SMOOTH TRANSITIONS John Stewart knows how to make a succession plan succeed.
Anyone who works at The John Stewart Co. has inevitably heard this line: “You work with Jon Stewart? I love ‘The Daily Show!'” Uh, no, it's actually the other John Stewart, the affordable housing legend.
But this Stewart does have his own share of one-liners. When asked why he hasn't retired, he says, “The idea of staying home and watching ‘As the World Turns' doesn't do it for me.”
Still, Stewart, now 72, knows he can't lead his company forever. After heading up the firm for nearly three decades, Stewart in 2001 entrusted the president role to Jack Gardner, with whom Stewart had worked briefly in the past. (Gardner later added the CEO title.)
It has proven to be the right choice for the firm. The succession plan, with Stewart staying on board as chairman, has gone smoothly, Stewart says, thanks to the following strategies
- Train your successor for several months to a year. While Stewart was still running the company, he and Gardner worked side-by-side in adjoining offices for a year. This gave Stewart a chance to teach Gardner everything the apprentice needed to know.
- Involve the management team in your decision. Stewart selected a relatively new hire to take over the company; a decision which could have easily created animosity among the company's long-time employees. But Stewart avoided such a situation by involving them in the decision and asking them to “interview” Gardner individually and as a group.
- Know your boundaries. The executives carefully divvied up their responsibilities, making sure Stewart does not get involved in projects where he'll step on Gardner's territory.
- Keep up your connections. Stewart, who has strong name recognition in the affordable housing and multifamily worlds, maintains relationships with the financial community, city agencies, and other powerful groups.
- Founded: 1978
- Headquarters: San Francisco
- Employees: 1,202
- 2006 Revenue: $30.2 million
- Units owned in 2006: 1,376
- Units managed in 2006: 28,841
- Units in the pipeline: 448 under construction/rehab, 1,427 in various stages of development
- Geographic coverage: California
LEADERSHIP LESSONS
- Name: Jack Gardner
- Title: President and CEO, The John Stewart Co.
- Age: 47
- First job: Residential construction
- Favorite quote: “You must be the change you want to see in the world.” —Mahatma Gandhi
- Favorite recently read book:No Shortcuts to the Top by Ed Viesturs (the first American to scale all 14 of the world's 26,000-foot peaks)
- Best business decision: “Hiring great people and then trusting them to do their jobs better than I could.”
- Greatest challenge: Generating a reasonable profit while achieving public benefits (the “double bottom line”).
- Best advice someone gave you: The perfect is the enemy of the good.