REAL ESTATE PRIVATE EQUITY - GENTRIFICATION GENERATOR

When discussing gentrification, the conversation often veers off course. Frequently, the focus shifts to various actors who are merely participants in the gentrification process. As a result, we overlook the capitalist forces and profit-driven schemes that operate behind the scenes, which are the true root causes that need to be understood. One prevalent profit-making scheme that directly fuels gentrification is Real Estate Private Equity. In this article, we will quickly break down the dynamics of real estate private equity and highlight five key moments where gentrification is perpetuated due to profit-making schemes.

Before proceeding, it is important to briefly explain the concept of real estate private equity. Generally, private equity resembles a partnership between two main partners: the general partner (GP) and the limited partner (LP). The general partner is the entity that manages the entire business, acquires the land, oversees development, and coordinates the investment. The limited partner primarily funds the operation from various sources. The objective of these partners is to raise funds and, through expertise and influence, develop land for quick profit returns. Here are the five key moments illustrating how real estate private equity drives gentrification:

1. The general partner oversees the entire process and charges an acquisition fee to the limited partner. For instance, when land is purchased using the limited partner's funds, the general partner takes a percentage as a service fee. This incentivizes the general partner to acquire land or properties in bulk, as it allows them to charge higher fees. This is the first trigger for gentrification because it prevents smaller organizations or individuals from competing and developing small neighborhood initiatives or affordable housing.

2. The general and limited partners estimate and negotiate expected profits. If the general partner exceeds the initial profit expectations the general partner receives bonuses. In this way GP are incentivized to implement cookie-cutter solutions to cut costs or invest in more expensive materials to attract high-income consumers. This is the second trigger for gentrification.

3. Real estate private equity aims to exit investments quickly and profitably. They prefer to develop land rapidly using standardized solutions and reused tendering files to complete development swiftly, then speculate until market prices peak before selling the property. This is the third trigger for gentrification, as participatory design concepts are incompatible with fast-track processes.

4. The limited partner can fund investments from various sources, including pension funds, sovereign university funds, or insurance companies. This aspect of private equity directly fosters gentrification by using public money to fund private investments, promising returns. While initially appealing, this approach victimizes the public domain, making it a hostage to success. The government is pressured to support development to avoid potential social destabilization, which could undermine authority, erode social trust, and affect market prices, creating a vicious cycle of failure. Consequently, no one wants to hinder development, even if it negatively impacts the city's social fabric and its citizens.

5. In some scenarios, if a private equity firm receives substantial public and logistical support from the government, it may eliminate competition and establish a market monopoly for greater profits. This is particularly problematic for low-income families who may lose their properties or struggle to cope with sharp inflation.