This lender helps small developers build houses in Philadelphia

Studying accounting at La Salle University, Latisha Redmond knew she wanted to go into business: “You don’t have to take a state job or do the cookie-cutter deal. You can create whatever you want.” In 2012 she started buying Philly rowhouses (at what now look like bargain prices).

Jesse Fells was a star basketball guard at Kensington High School and Fayetteville State in North Carolina. Back home coaching minor-league ball, he bought a new home in South Philly, but “the roof leaked; every bathroom leaked.” He learned to make repairs himself. “That made me want to get into the business. I figured, if that guy could build a house, I could build a better one.”

Redmond and Fells are among the Philadelphians who got in at the start of a national real estate boom that began after the late-2000s recession as small-scale developers. Rising interest rates have weeded out many of the part-time home-flippers working with their own cash, but these two say they plan to stay in the business, having learned how to raise money from lenders. Both are financed by Spring Garden Capital, a six-year-old institution that has made a new loan every day over the last year, averaging around $300,000 each, to small Philadelphia developers.

Half of Spring Garden’s borrowers, like Redmond and Fells, are people of color or women. Nationwide, around 1,000 of the 112,000 real estate development companies are Black- or Latino-owned, according to a widely quoted estimate by Grove Impact, a Washington bank consultant.

Spring Garden is an unusual institution, staffed largely with former bank lenders but funded by private investors, who aren’t required to have a banking license or follow the bank safety rules (such as independent appraisals) that developers say can slow deals to a crawl. Small banks have blamed regulation for forcing them to merge with larger banks, which don’t find small loans profitable.

The company has paid “double-digit returns” to its investors, said Jay Goldstein, a Philadelphia banker who cofounded Spring Garden six years ago. It typically charges 2% above the prime lending rate — which lately translates to around 10.25%, about a percentage point more than banks — plus 2% at closing, about double what banks charge.

On a recent Friday, developer Fells took delivery of a load of lumber for the first phase of home construction on a vacant Fishtown lot where he’d secured permits and dug the foundation.

He said he’s done seven projects with Spring Garden since the company formed.

It was a big decision in 2015 to borrow, he said. Bank of America and TD Bank branch officers “said they didn’t do investment money on that small a scale.” Dallas Comegys, a Philadelphia native, ex-NBA player, and fellow coach and investor, told him Valley Green Bank, just before its merger, was the city’s leading funder of small developers.

That’s where Fells met Traci Sebastian, who soon after followed Goldstein to Spring Garden, and has been Fells’ loan officer ever since.

“Traci holds my hand,” Fells said with a laugh. “If I have an issue, any time, I call Traci, and things move expeditiously. Traci has been very patient. I’ve been mentored, not just through the finance stuff, but through contracts, architects, engineers, lawyers, anything I need. When I go out to a property and she shows up and brings out the laptop, I know it’s game time.”

Latisha Redmond bought her first house on 64th Street for $15,000 in 2012. She got her general contractor’s license that year. “By now I’ve done eight deals in all — Germantown, Olney, a couple in Montgomery County.”

With the construction slowdown, “skilled people have more availability now. But prices are up since COVID. You have to be generous and fair.” Veteran workers “know all the tricks of the trade, and the juice of it, not just stuff you can read in books or watch on YouTube. It’s magical when you watch them.”

Redmond credits Spring Garden lender Renae Stennett with speeding deals. “Renae made it easy to understand. ... I didn’t like long processes and wait times. I didn’t want to risk losing the deal to someone quicker. Renae understood. She said, ‘Let’s make it happen.’”

Spring Garden’s lenders “fly under the radar,” said Charles B. Crawford Jr., chair and chief executive of Hyperion Bank, based in the city’s Northern Liberties section. “Because they are not regulated like a bank, they are able to move quicker and can provide more flexibility,” funding neighborhood developers “while charging rates and fees modestly higher than a bank.”

“Typically, small developers are buying houses one at a time, but they also want to keep an active pipeline of projects ready, so they can keep one or more construction crews busy,” said Ken Weinstein, a Northwest Philadelphia-based developer.

To fund the work between sales, “it used to be you needed to have a rich uncle,” but local lenders like Spring Garden can fill that role, if carefully run. Weinstein set up the Jumpstart program, funded recently by Raymond James & Co.’s Pittsburgh-based TriState Capital Bank, to teach first-time developers business and finance skills. Weinstein said Jumpstart graduates are among the clients Spring Garden finances.

Spring Garden’s CEO, Goldstein, and president, Andy Rachlin, come out of two different strands in the network of Philadelphia finance. Goldstein was the founder and head of the former Valley Green Bank, whose focus included small developer loans before its sale to Souderton-based Univest Corp. in 2015. Rachlin was managing director at the Reinvestment Fund, the Philadelphia-based nonprofit lender.

“The disappearance of most of the community banks means there is this entire class of entrepreneurs that finds access to capital increasingly difficult,” Rachlin said. “That’s our market opportunity,” serving “small real estate entrepreneurs, including women and minorities, who had limited access to capital.”

Spring Garden raised an initial $20 million from 100 local investors about six years ago. The partners also organized a group of local banks to finance additional loans, and OceanFirst Bank is now the company’s lead bank lender. Spring Garden has also raised millions from nonprofit “social-impact” investors, including groups like the Reinvestment Fund.

“These are not charitable investments,” Rachlin said. “They are earning a risk-adjusted return.”

The company has expanded to Baltimore, Washington, and Pittsburgh. It has faced some competition from nonbank financial technology lenders, but one-at-a-time real estate construction lending “is a difficult thing to do,” Rachlin said. “They can only do cookie-cutter deals of low complexity,” which are scarce in Philadelphia.

He noted the home sales data giant Zillow set up a loan division, Offers, to try to enter the business on the shoulders of its free home-description and price-estimate service, but found the business unprofitable and shut it in 2021.

“Everyone was trying to do this, when interest rates were so low,” Redmond said. “Now properties aren’t selling as fast. So people are turning them into rentals. I already had a property-management company,” so it has been natural to add upgraded Spring Garden-financed properties.

Even before high interest rates, COVID-19 was a challenge, especially the eviction moratorium the city imposed. “People got comfortable with not paying rent,” Redmond said. “You have to focus on tenant selection.”

“People think it’s so intimidating! Anyone can do this,” Redmond said. “You have to be patient. You have to stick to it.”