Dear Landlords 

Any fool knows you can't make money on humane, unsubsidized, low-income housing. But Peter Holsten and Matthew Roddy are no fools.

All of Mary's special possessions are now at the city dump, where they would have been years ago had she not saved them from the trash cans and alleys of Uptown and taken them to her sleeping room in the Norman Hotel. The 80-year-old Mary (which isn't her real name) doesn't talk much about herself, though she once said she'd been a bookkeeper 20 years ago. For years she hauled debris up to her room at the Norman. There was no place for her to lie down, no apparent way for her to get to her bathroom. Pieces of furniture and plastic bags filled with junk rose from floor to ceiling, except along a small passageway from the door to the chair where she slept.

When Peter Holsten and Matthew Roddy--the new owner and new manager of the Norman Hotel, now renamed the Norman Apartments--reached Mary's floor in their rehabbing schedule earlier this year, they gave her a choice: move into a rehabbed room on another floor of the building and leave your possessions behind, or move out. "But what will happen to my things?" she wanted to know. She couldn't walk very well anymore, and she was afraid to go out because she had been mugged a couple of times--so she couldn't get any new things. Roddy promised to store her things and offered not to raise her rent as other tenants' rents had been when they moved. She agreed to move into a new room, a room with a carpet on the floor, miniblinds, a ceiling fan, a bed, wire racks that serve as a dresser, and a tiny kitchenette.

Roddy stored about half her things--selected at random--in an empty apartment and gave Mary a key so that she could go and visit them regularly. Roddy says she would say "I just want to see about my toaster," or some such thing. When he suggested that he could have someone carry something down to her room, she declined his offer. "I just want to make sure it's still there," she said.

When Roddy--who as manager of the building supervises construction and rentals and handles the various problems that come up--was ready to rehab the apartment that held Mary's things, he moved them to the basement, where she could still visit them. "She's paying $160 a month, and she'll go on paying that until she dies," he said last summer (the rent for a sleeping room is normally $240). "I have no interest in raising her rent."

There may have been a note of sadness in Roddy's voice when he reported a few weeks ago that Mary had moved into senior-citizen public housing, which was still cheaper, and that he had disposed of her things. It was as if she was a symbol of the transition of the Norman from its fleabag status to its current life--as if she was a symbol of what Roddy and Holsten are doing in their work as rehabbers of low- and moderate-income housing.

Mary wasn't the only bag person to live at the Norman. One day a man who wore several ancient sweaters, an old wool cap, broken shoes with no laces, and no socks, and who was unshaven and filthy, sat in the new garden patio that Roddy and Holsten built for their tenants on a corner lot adjoining the Norman. The man, who lives in a single-room-occupancy (SRO) unit, quietly contemplated the fountain in the patio as he smoked. "He's not hurting anyone," Roddy said. "I demand three things of tenants when I decide whether they can stay. They must pay their rent, they must observe the building rules, and be clean. On the first two he's perfect. On the last one he's not so good. But we exterminate his room, and he doesn't have much stuff."

The Norman is at 1325 W. Wilson in the heart of the Sheridan Park section of Uptown, which is rapidly being rehabbed with the help of federal tax credits received because the area has been designated a historical district. Last year, when Holsten asked First National Bank to give him a loan to buy and rehab the Norman, the bank turned him down--even though they had lent him money through their Neighborhood Lending program for three other low- and moderate-income projects in neighborhoods that had seen better days. But those projects had been in apartment buildings or low-rise corridor buildings. Sixty-six of the 154 units of the 12-story Norman are SROs, the rest are small studios or small corner one bedrooms. Apparently the banks were not in the business of lending money to rehab SRO hotels, which are reputed to be filled with transients: drug dealers, prostitutes, and other lowlifes--not the creators of stability that a bank looks for when it lends money. Because of that reputation, most SRO hotels are sold for a small down payment and the owners hold the paper for the rest, Holsten says.

There were some low-life characters living at the Norman when Holsten and Roddy took over, but most of the tenants were simply poor people who lived on what they received from welfare, social security, or low-paying jobs. But they paid their rent every week, and the cash flow from the building was better than from many other buildings with fewer units. Many of these tenants had lived at the Norman for years--one man for 43 years, several for 20. Holsten knew he would have to put some of them out. After all, the police were there a couple times a day, he says. But he was also sure that, with proper management, he could turn the Norman into the kind of stable environment that the bank wanted for its lending deals. The bankers weren't convinced.

Holsten and Roddy went to the Organization of the North East (ONE), a community organization in Uptown, for help. After talking the matter over with them and doing some investigation, Jack Crane, who was then on the staff of ONE and is now a private housing consultant in Uptown, went to the bank and convinced the officials to lend Holsten the money. He says he told them of the need for SROs among the stable poor in Uptown and about Holsten's superlative record as a developer, and that if anyone could make the building a stable and profitable one, Holsten and Roddy could. The bank relented and gave Holsten $1.8 million toward the total cost of more than $2.1 million. It was the first time that the bank had given the developer of an SRO conventional lending.

The rehabbing began about a year ago. No gutting was done. It was not to be a yuppie-style rehab like so many in Lincoln Park, Lakeview, and more recently in Uptown, where tenants were displaced and rents were hiked. Only what was needed would be done. New walls, ceilings, and bathrooms were necessary in some units, new kitchens in all the units. The building needed $30,000 worth of heating equipment, $90,000 worth of new wiring, renovated halls and lobby, a canopy over the front door, new signs for the ground-floor stores, storm windows, and $17,000 for the patio. The work is being done floor by floor. Empty apartments were used to house first-floor tenants while that floor was being rehabbed, and then tenants were shifted from old to new units.

The rehabbed portions of the Norman make it look like a pleasant, inexpensive apartment hotel, which it was in 1928 when it was built during Chicago's building boom. The small lobby is cheerful, with mirrors, a chandelier, and, of course, plants. The hallways are pleasant and well lighted, and the apartments, though small, are light and airy because there are no visual obstructions on any side. The rooms on the upper floors have grand views of the city. The filthy, crumbling apartments that have not yet been rehabbed are vivid and painful reminders of what the hotel had become.

In the first couple of days after they took over, Roddy says, he spotted seven or eight people who would have to be evicted. "Drug dealers, prostitutes, pyromaniacs, your basic low-life type," he says. "We ran a 24-hour desk for nearly the first year, so we were able to keep track of activity. It was real easy to spot who was doing what. The first level was to get rid of the hard-core trouble. Then the next level was to get rid of those who didn't pay their rent. There were about a dozen in the first category and 10 to 15 in the other one. Another group we had to evict were tenants who didn't have good habits. Some of them were able to learn to live by building rules--no loud music, keeping the apartment clean, no drunkenness or craziness in the halls, courtesy to the neighbors--but some just couldn't learn. Of those, we had to put out about ten."

Roddy and Holsten helped even the worst tenants move, and when necessary gave them money to move. "It made me feel good when I could say, 'I'll have a place for you to go at two o'clock tomorrow,'" says Roddy. "Even those people have to live someplace." They found them places in SRO hotels where the standards weren't as high, but where Holsten and Roddy knew the managers. "It's difficult to manage a property like that," Roddy says. "Most of the people are what I would call slum landlords." But, Holsten adds, "As bad as some of those slumlords are, they have hard lives. They are the disciplinary authority. Those places are almost like the lowest security prison. No one's keeping the people there, but they're there."

Roddy agrees. "There is a certain service to the community those landlords are performing. They will take the people we kick out--I know where I can send people when I kick them out. Those guys aren't horrible. They try to make things work, but it's tough. They have fires. One place had a baby thrown out of the window. Shootings, burglaries, doors kicked in. It's a hell of a life for those managers. The owners usually don't go near the place. It was like that here. The police were here several times a day. And we still do have problems. The police come on the average of once a week even now."

Of the tenants Holsten and Roddy inherited, nearly 70 percent still live at the Norman. About half of them work; the rest are on some kind of public assistance. They range in age from 20 to 85, though most are between 60 and 70. About half are minority. "When we took over," Holsten says, "we had a high concentration of the mentally ill. But we worked with their social workers to get them better places where there was more care. At this point, we have about ten who can take care of themselves." A few people in wheelchairs also live in the Norman, and there are a couple of unwed mothers on welfare.

"Our biggest problem is the alcoholics," Roddy says. "Some take a bottle to their room and drink--and sleep it off and come out when they're ready. They have a neat appearance and they don't bother anyone. There are others who are constantly having loud company, throwing up in the elevator, urinating in the lobby. They're people I've given chances to, and they've come along just enough that I couldn't justify asking them to leave." Holsten adds, "We give them three chances and then--three strikes and you're out."

Kristin Faust, Holsten and Roddy's banking officer at First National, says, "They're practically a referral service. They know who to refer people to for certain problems. They know all the agencies. We required that they put in little kitchenettes in the sleeping rooms, and they discovered that certain people on general assistance get meal allowances because they didn't have cooking facilities. They depended on that money. There was a possibility that they would lose their meal allowances when Peter put in those cooking tops. Peter met with their social workers and got it worked out so they wouldn't lose their money. [The two burners and minifridge--no oven or sink--qualified as a "warming center."] There are plenty of landlords out there who could give a hoot whether that happened to their tenants. That's what makes Peter special. He has a comprehensive approach to make the whole thing work decently."

It may sound as if Holsten and Roddy are running their own version of a social-service agency. But the two did buy the Norman cheap--$750,000 for a 12-story, 154-unit building with an excellent cash flow--they did get good terms on their loan, and they will get a $200,000 tax credit for rehabbing in a historical district (because they restored the building without changing its structure, they had little trouble meeting federal requirements that allowed them to qualify for the credit).

"The Norman is excellent now," says Jack Crane. "Matthew has a great deal of experience in rehab. They do a very good job. If they can get a reasonable price to acquire it, they can do a modest rehab and provide a very good product without having to increase rents very much. They've established themselves as successful developers in the low-moderate range. They're not providing housing for the very poor because they don't do subsidized projects.

"I wish there were a hundred more developers like Peter and Matthew. They do excellent development. They're looking to provide housing for people in the neighborhood. They have a vigorous policy of not displacing tenants. If they need to displace them, they will take care of them. They're not going in and kicking out 50 people and then putting in 50 new people. It's just not their style. It's very unusual. They have a strong commitment to good ethics."

Roddy and Holsten have instituted another practice unknown in the fleabag world out of which the Norman has emerged. They give all their tenants one-year leases. "It wasn't always easy to get them to sign," Roddy says. The tenants had been used to paying by the week, and many of them, though they lived in the building for years, still viewed themselves as transients, he says. "In the end most were happy because their rent was guaranteed for a year, not subject to sudden rises as they were under the old system."

There was some heart in the idea of the leases, but there was also some cold business sense. The leases were used to help sell the project to the bank. "They were trying to get any thought of transience I out of the picture," Roddy says.

The rents in the Norman are scaled so that the studios and one bedrooms subsidize the sleeping rooms, Holsten says. The SROs are $240 a month; which is below market price, according to Holsten. The studios are $280 to $320, and the one bedrooms are $400--all market prices. Utilities are included in the rent.

The renovation was scheduled to be complete December 15. As I write this, about 85 percent of the units are renovated; about 70 percent of those have been rented. Roddy carefully screens potential tenants. He gets referrals from social agencies such as Travelers and Immigrants Aid of Chicago, but he is also doing some conventional marketing. His ads have brought a few students and a few moderate-income working people--a hairdresser, a grocery-store manager, a "social-work type." Roddy says elderly people in the neighborhood who have heard what's happening in the Norman come in to say "This is where I want to hang out." In addition some tenants from Holsten's other buildings who have fallen on hard times have taken a sleeping room until they get back on their feet.

The Oakwood Development Co., Peter Holsten's company, now owns or manages 12 buildings with more than 500 units in Albany Park, Edgewater, Rogers Park, and Uptown. In 1975, when he was a graduate student in the School of Business at the University of Chicago, Holsten bought his first building, a 16-unit apartment building in Albany Park. One of his classmates, he says, bragged that he was financing his way through school with a rental building and recommended that Holsten read a book that described how easy it was.

Holsten laughs. It wasn't so easy. Holsten and his wife had their "honeymoon suite" in a basement apartment of his new building. The day after he closed the deal, half the tenants moved out. The owner had stacked the building to make it appear occupied. With the skills he had learned on summer vacations in high school and college, Holsten spent the next three years renovating the building and then renting it. "I had no idea of how much trouble I was buying," he recalls wryly. "I wouldnt recommend this to anyone. But I'm very stubborn." He borrowed money from his father and refinanced the first building to buy a second one and then a third and a fourth. "Meanwhile I'm working a full-time job that has me traveling constantly, and my wife, who is also working full-time, is managing things. All this time, I'm losing money. We lived off my wife's salary and dumped mine into the buildings." One year he faced big gas bills he couldn't pay. "I almost walked away," he says. Instead, he "went crazy with conservation."

His concern with energy costs brought him in touch in 1984 with Matthew Roddy, who, in the course of rehabbing a number of buildings, had become an expert on energy saving. Holsten offered Roddy a job. "I was going crazy," Holsten says, "working at a full-time job in industrial sales and marketing with customers all over the country." By this time, he owned 44 apartments and was having trouble renovating them on nights and weekends and managing them from hotel rooms across the country. He couldn't promise Roddy much money. But Roddy was burned out after working for a big developer.

Holsten gradually bought several more buildings, all of them like the first--low- and moderate-income buildings in neighborhoods on the edge. He hadn't bought his first building or even his fifth because he was interested in providing housing for this market. He simply bought the largest buildings he could find for the money--the "biggest bang for the buck"--and a run-down neighborhood offered the best bargains. "I didn't want a neighborhood that was bombed out," he says. "That had no promise. But it had to be low-income enough for me to afford it. I wasn't going out to find some poor people to house them, but as the company evolved, I've learned that, while our best economic return is in marginal neighborhoods, I'm driven by more than that. Matthew certainly is. We have the least competition in these neighborhoods because there are very few people who can handle these projects. But I do feel very good about housing people who need it badly and can't afford much. That's why I want to stay in this market. It wasn't why I got into it, but now that I'm here I feel good about it."

It helps that doing such housing makes economic sense. Holsten and his wife were able to quit their regular jobs in 1986 to work on their buildings full-time. After the bills are paid, they take home a comfortable if modest income, and 20 years from now, when their mortgages are paid off, they will have a tidy retirement fund. Roddy is on Holsten's payroll, but he is also a partner in the buildings and will therefore benefit in the long run. "We need to make an economic return because we need to earn a living," Holsten says, "but none of us have excessive needs. We don't need to get rich. We have a mission to serve a low-income population which we feel is being ill-served both by the private and public sectors. There's a real gap there--a real market niche that very few people will bother with because it's so management intensive. We can basically renovate all the buildings we can lay our hands on. The only thing that's holding us back is getting the money to do it."

Holsten's mission to shelter the ill-housed is in no small part attributable to the influence of Roddy. "Matthew is a role model for me," Holsten says. "I admire him tremendously."

Roddy is one of those people who are inspired to do good because of their religious beliefs. "I have a particular interest in reaching this market and not such a strong interest in economic goals," he says. "I would like to provide housing for low-income people with the same or superior levels that not-for-profits and church groups do, and yet make a profit doing it. If I had been able to make it work in the not-for-profit sector in terms of supporting my family, that's where I would be. But the fact is, the compensation you get in such jobs doesn't support a family. Also the bureaucracy and the strings attached in not-for-profits are too great. Getting together with Peter was more feasible. If you apply the right integrity and the right mix of rehab and management, you can pull this off." Roddy has three children; a fourth is due in February.

Roddy's inspiration comes from the Mennonite Church, specifically the Reba Place Church in Evanston, where his family are longtime members. "It is a church that has very strong roots in social service and concern for the poor," he explains. "What I find interesting is that the values I hold and bring to the company and share with Peter actually help us in what were trying to do. Because I find over and over again that people respond to being treated with respect and concern and honest interest in them and their well-being. We have all kinds of examples of how that has paid off." He then tells a story about a drug dealer who gave up dealing to stay in the Norman.

Roddy, who is 36, also says that he's a product of the 60s, when he was involved in demonstrations at the University of Illinois at Chicago. "But my values are not rooted in that experience," he says. "I already had my values. I run into a lot of 60s radicals who are now pursuing the American dream of megabucks."

Holsten, who is 39, was no campus radical. He was, he says, "crossing picket lines to go to class in engineering school at the University of Wisconsin. I must have been some nerd." He says he has learned a great deal from Roddy. "It's been through Matthew's concern--his expertise and hard work--that we've been able to grow like this."

Kristin Faust of First National describes some of what makes it possible for the pair to renovate without displacing tenants or raising their rents beyond their capacity to pay. "They do their own management and they have their own construction crews. They don't have to pay separate companies to do these deals. This lowers their overall costs. In addition, they get what amounts to sweat equity because, typically, a developer takes his fees and the contractor takes his fees. That's how real estate developers make money. What happens in Peter's contracts is that he lowers his fee or doesn't take any. And that money he has earned, he puts back into the project."

It also helps that Holsten is borrowing money on better-than-usual terms. And local community organizations have helped him qualify for First National's Neighborhood Lending program, which is designed to put money on good terms into targeted areas around the city to build or renovate property for low- and moderate-income people. The money is lent to home owners and developers at low interest rates, sometimes with 30 years instead of 20 to pay it back. So far, First National has financed about 200 such projects and has lent about $56 million. Under this program, no project is accepted without community sponsorship, Faust says. The bank tries, she says, "to do a careful job of investigation of both the project and the organizations." The neighborhoods must have an average income that is no more than 80 percent of the average income of metropolitan Chicago; that includes about half the city. Most of First National's money has gone into large apartment buildings, but it has also lent to singlefamily home owners, developers of commercial strips, and renovators of mixed-use buildings such as the Norman, which has two stores on its ground floor.

The Neighborhood Lending program started in 1984 because community groups threatened to challenge a First National buy out of American National Bank. Under federal law--the Community Reinvestment Act, which was passed in 1978--community groups are empowered to challenge bank buy outs if they can show that the purchasing bank is not investing enough of its community deposits in the neighborhood. Chicago Reinvestment Alliance, an umbrella group of community organizations led by longtime community activist Gale Cincotta, had evidence that First National and other banks were redlining Chicago's low-income neighborhoods. First National's chairman agreed to set aside $100 million to be targeted at community reinvestment in low-income neighborhoods. Harris Bank, Northern Trust Bank, and Continental Bank soon followed First National's example, though with much smaller amounts.

Of the 200 loans made by First National in this program, only one is heading for foreclosure. "Neighborhood-lending portfolios are usually the strongest of any real estate portfolios of any bank," Faust says. "The whole perception of this program was 'Oh my God, this is going to be awful. They're all going to be very risky.' There were people inside and outside the bank who had this perception. But we are not lending to uncreditworthy people. We are lending to people who either own a building or are developers like Peter, who has an interest in that neighborhood, or to people who just want to make an investment in their neighborhood.

"Most of our investor-customers will probably never leave their jobs as Peter did. They buy one, maybe two buildings, but don't get into the business." What Holsten and Roddy have done, Faust says, is "part of what we're trying to do in this program. They are really sensitive to the tenants, and I think that is really important."

There are problems with rehabbing in low-income neighborhoods that are not generally recognized by public-service advocates, Holsten says. "The problem is that typically a building in very poor condition has very low rents, which means very low cash flow, which in turn means no ability to service any sizable debt. So what do you do? You have to jack up the rents to get the cash flow to service the debt that you incurred to renovate. It's a tough deal. Housing activists such as Helen Shiller [alderman of the 46th Ward, which includes Uptown] want the rehabbing done without the rents going up much. There are ways to do that, but they often have problems attached to them, which make them neither attractive nor necessarily so successful. While federal money is as low as 3 percent money--which makes your debt service go way down, and you can get lots of money to rehab with--it also brings the requirement that you use union-scale labor, which brings the costs way up. Then you have the delays with the bureaucracy. I'm frankly scared of all that. I have a good relationship with the [city] Department of Housing, and they keep saying, 'When are you going to become a customer of ours?' I keep saying, 'When you lower your wage demands.'

"The low-income market is real tough. It's a nationwide problem. I'd love to do a project where we could get down to the people who are on the street--the $150-a-month stuff--but we couldn't do it without deep subsidies, which scare me."

Talking specifically about rehabbing SROs, Holsten says, "The way to make them work is to combine them with larger units so the rents on the larger units compensate for the low rents on the sleeping rooms. What that means is that you have to buy cheap if you want to do a decent job. But since they have a very good cash flow because they have so many units per space, the owners are reluctant to sell cheap because they're making so much money. Our cash flow is not so hot because we have slapped a big debt on the building in the rehab, but it's still adequate for our goals."

In fact, the cash flow at the Norman is better than in Holsten's other buildings. "This was a case of taking over a building where the cash flow was underutilized. It wasn't being put back into the building. The guy was sticking it all in his pocket. So we were able to come in and, taking basically the same cash flow, throw a lot of debt on it--because the money was there to do it without raising the rents much, which is not what typically happens in these buildings. I have a feeling that as we show that, these buildings can work with debt on them for renovation, the buildings will become more acceptable to banks for loans, and people will begin to do more. Unfortunately with that happening, you'll get price increases."

Meanwhile Holsten and Roddy have negotiated a deal with Travelers and Immigrants Aid to renovate a building like the Norman on the south side that will serve the truly poor by using grants and low-interest money to keep the rents in half of the building at $100 for an SRO, $150 to $200 for a studio, and $250 for a one bedroom. "We would do the construction," Roddy says, "and Travelers Aid would do the fund-raising. That's one of the possible solutions: a public-private partnership where the private sector provides the expertise and the public sector gets the money to subsidize it."

Art accompanying story in printed newspaper (not available in this archive): photos/John Sundlof.

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