The Guru Is In
Family Storefront Housing
By David A. Smith
5 min read
Across America, the anti-exclusionary zoning rebellion is in full swing, and like many localized revolutions, it takes revolutionary thinking – like rediscovering the asset class that built 19th-century urban America, which over the last 50 years has become a capital backwater: the family storefront dwelling.
Two- and three-story dwellings with retail/commercial on the ground floor, rental on the second floor and the owners’ extended household living on the third floor enabled large busy families to work where they lived and sell where they worked. Ground-floor open-by-day retail frontages, lived-by-night homes above provided round-the-clock investment, activity, socialization and neighborhood watch. The family storefront dwelling was user-friendly, immigrant-friendly and entrepreneur-friendly.
It was denser than what it supplanted; better built (often using brick instead of wood); improvable and constructed incrementally. Three-generation families pooled their labor, their limited command of English, their pre-immigration expertise and their powerful desire to succeed, aspire and assimilate, into a complex integrated family enterprise where everyone from urchins to grandparents pitched in.
From its emergence in the Gilded Age, the family storefront dwelling was a category-killer that made America’s industrializing urban economies boom and streets and neighborhoods blossom. Neighborhood after neighborhood sprouted homes, jobs, lively urban activity, first-generation Americans and hyphenated ethnic identity. The newcomers-become-neighbors proudly announced their lineage in their stores’ names, which is why a century and a half later an owner’s name (“and Sons”) atop the marquee proudly signals local roots, local services, local authenticity and local customer service.
From Reconstruction up through the Depression—an age before urban planning, before zoning, before building codes, before reinforced concrete—the family storefront dwelling went viral. Sepia photographs of Baltimore, Brooklyn, Chicago, Cleveland, Detroit, New York, Philadelphia or St. Louis show block after block of storefront streets that are hives of activity. Many flourished smack in the middle of neighborhoods where the newly codified all-American game of baseball (organized into a National League in 1876) took root and gave all these immigrating urbanists recreation, identity and pride.
Yet, starting after World War II, these commercial corridors slowly died, killed by three postwar initiatives that, in framing the future, starved the past: zoning, underwriting and liquidity.
Zoning, which though invented in 1916 proliferated only with the rise of the automobile, led to the postwar suburbanization of America. Postwar zoning was two-dimensional and mono-use, with single-family and multifamily being separately classified. Storefront dwellings were generally lumped in with Business Districts, devaluing their utility for family businesses whose owners and workers lived upstairs. Moreover, because most of these properties had been repeatedly modified over the decades, they were often non-conforming: grandfathered in as legal only if kept as they were. With no new ones being built, the typology dwindled.
Underwriting. With the rise of the Federal Housing Administration (FHA) as the postwar source of long-term financing, new national underwriting classifications excluded the storefront dwelling. Single-family housing meant one to four units, owner occupied, complying with all applicable zoning ordinances (uh-oh), and with “areas designed or used for non-residential purposes” limited to 25 percent of the total floor area.
Further, single-family home buyers are underwritten predominantly on the borrower’s personal income, which has come to mean formal income (salaried or investment). These standards exclude extended-family income, fluctuating income, small-landlord income or self-employment income – the income sources that storefront dwellings allow families to maximize.
Liquidity. Beyond underwriting, deciding whether and on what terms to extend credit in the form of a loan lies the need for liquidity – expandable sources of cash to fund that newly created loan. Until the mid-1980s, liquidity was local because Savings and Loan (S&L) institutions tapped local deposits and held their loans on their balance sheets.
For its small loan size, a family storefront dwelling is a complex asset: breadwinner income, side-hustle income, landlord income and sweat-equity capital improvements are all integral elements in the lending proposition. When the local banker was a Rotarian alongside all the other local businesses, social credit was earned and refreshed once a week, and the banker could verbally underwrite a family storefront dwelling in five minutes over iced tea and cobb salad.
All that social capital was vaporized by the collapse of the S&L from the one-two punch of the Keating Five scandals and the Tax Reform Act of 1986. The resulting, now defunct, Resolution Trust Corporation-compelled consolidation more than halved the number of S&Ls, and the vacancy thus created was rapidly filled by Fannie Mae and Freddie Mac. Touch gave way to scale, and while that spread capital efficiency, it also bred unconscious capital exclusion.
Thus, many urban neighborhoods are dying today. Their family storefronts can’t be renovated because they can’t be underwritten with local touch, and they can’t be funded with local liquidity.
The solution lies with CDFIs – and HFAs. Though never framed in these terms, Community Development Finance Institutions (CDFIs) (created by statute in 1994) to lend locally to communities to fund things that national lenders can’t or don’t choose to reach, have evolved into surrogate S&Ls, with one critical difference: they are prohibited from taking deposits. This starves them of liquidity, leaving them dependent on the capital markets, they approve only of what they can swiftly fund off-balance-sheet.
Instead of catch-as-catch-can liquidity that keeps CDFIs undercapitalized and financially apprehensive, they should be funded by housing finance agencies (HFAs) on a seller-servicer or risk-sharing basis. HFAs have plenty of capital and surging ratings; they have a state-level hard-boundary geographic focus that overlays nicely onto CDFIs’ metropolitan focus; they have legislative legitimacy and governance; and they have or should have a policy imperative.
HFAs have scale. CDFIs have touch. Family storefront housing needs them to combine.
