Addressing The Wealth Gap Through Homeownership And Employee Ownership

With the wealth gap expanding from generation to generation, economic mobility is even less attainable for many people than it was for their parents. The wealthiest 10% of the U.S. population owns around 90% of all assets, while 50% have few to no assets at all. The reality for millions of Americans is that there is nothing to pass down and no financial leg-up toward attaining middle-class markers, such as a college education or homeownership.

“We have profound challenges to address economic inequality, but the corresponding piece of that is opportunities,” shared Lafayette Square Institute Founder and Executive Director Jack Moriarty, who moderated a panel at the 2024 Sorenson Impact Summit.

Moriarty led a conversation with four leaders in homeownership and employee ownership who shared their work and ideas on how to shrink the wealth gap and create opportunities for generational wealth and economic mobility.

The conversation featured:

They discuss how their work has evolved and grown in the panel excerpts below.

Addressing Access Challenges to Homeownership

David: Home prices are pretty high, and they’re going up. Wages have grown at a much slower rate, and as those compound over time, there’s a major gap between what’s fundable from your standard 30-year, fixed-rate mortgage and the purchase price of a home. Homeownership is a key tool that can be used to combat income and economic inequality, and it was actually one of the points of the spear for enforcing things like segregation. It’s one of the legacy sources of that inequality; the problem is much worse for Black and Latino home purchasers.

Low- and moderate-income borrowers have had this dynamic for many decades, but it is now starting to creep up the income scale and become a real crisis for governments, municipalities, and obviously for anyone trying to purchase a home.

Homium is an end-to-end loan origination platform and lender. We offer homeowners a second mortgage, which comes with no interest or monthly payments. Instead, it secures shared appreciation in the home’s value. It’s pretty straightforward: If you borrow 10% of your home’s value, you repay 10% of your home’s value when you choose to refinance or sell. We take that note and we securitize it into a pool, which we offer to foundations, endowments, and other types of catalytic capital here at the beginning, and we will eventually move into institutional investors looking for exposure to home equity as an asset class.

We didn’t invent shared appreciation. The Deerfield Fund that Gary Community Ventures has been successful in using this model with Black homeowners in Denver, and we want to do something similar, paired with on-the-ground CDFIs, MDIs, down payment assistance programs, who want to bring a new capital solution for homeowners so that they can bridge the gap between the cost of that first mortgage and the actual purchase price of their home. We can also use this same instrument to unlock home equity for retirees or folks with fixed or lower incomes so that they can take funds out of their house without having to get additional monthly payments or sell their home and use that for key life expenses like medical bills or college, or just passing wealth to the next generation. This prevents that home from becoming a rental home. It preserves homeownership for that family, and it creates the opportunity for them to use the primary ladder that we have in this country to build family wealth.

The Value Proposition of Employee Ownership

Malini: The Essential Owners Fund was set up to help essential workers share in the value that they create. Covid laid bare an inconvenient truth for us all, which is that the essential workers who power our economy and drive value in the business are also living at a level of economic precarity that is, first and foremost, a moral failing of our society, and second of all, just bad for business. It creates a lot of disruption in our supply chains and in our health services, as we’ve seen. Despite robotics and AI, there are still vast portions of our economy where the frontline workforce drives enterprise value—think produce farming, food manufacturing, and senior care. In these businesses, those essential workers are delivering the value proposition of the company.

We know from years of research that employee ownership is one of the best ways to provide economic stability and engagement at work when it’s well managed. So the Essential Owners Fund was set up to finance employee-owned stakes in essential industry companies. We use debt and equity for non-controlling stakes in companies where frontline workers are deeply and measurably tied to enterprise value. We’ve engaged business owners, typically private, family-run companies that are very profitable and high-performing that are not looking for buyout offers. They’re often looking to handle a little bit of labor disruption and retention, to reward and engage their workforce that has been with them for many years, or look at other strategic options to drive value in their enterprises. They are ready to share ownership.

We are coming in to finance those stakes, and we use impact-informed capital in particular. We use the flexibility to create very competitive terms.

Todd: Apis & Heritage Capital Partners is an impact-focused, market-facing, mission-driven investment firm that’s taking capital from a very prestigious group of impact investors. With that capital, we do on the front end what looks very similar to private, 100% equity buyouts of small and medium-sized businesses across the U.S. But instead of that equity in that company going into our fund or to our investors’ hands, 100% of that equity goes into the hands of workers through what’s called an employee stock ownership plan, or an ESOP.

For us, the mission and vision is to address the racial wealth gap in the U.S. in a scalable, market-facing way. We get at the racial wealth gap component by focusing on investing in companies with diverse workforces. We’re happy to say that with the four companies we’ve invested in to date, north of 85% of the 400-plus workers are workers of color, so we are definitely exceeding that threshold. ESOP was created with the same tax legislation that created the 401(k).

What’s really important is the cultural change. How do you shift the mindset of your workforce from a relationship of “I’m a worker in somebody else’s company” to “I am now a worker-owner in my own company?” The research shows, as do anecdotal stories from our portfolio, that when you do that, you actually start to see real business and financial value created at these companies. Statistically, only employee-owned firms that institute those cultural changes see higher growth. They’re more resilient, less likely to shut down during a downturn or a recession. They have better margins, and they’re overall better companies. For us and our investors, they’re better, safer investments.

So, how do we go about making that mindset shift from worker to worker-owner? First, we don’t do it alone. We have a partner organization called the Democracy at Work Institute. Our firm was actually incubated and birthed out of this national nonprofit to figure out how to scale this model for workers and workers-owners of color.

We have three primary ways: culturally competent and linguistically competent training and education, governance, and actual ownership. Culturally competent education that teaches them what it means to be a worker-owner, in whatever language the workforce speaks. Secondly is governance. Going in, we give a seat on the board of directors to a worker-owner, and as we exit the company, over the course of five years, we will replace our board seats with worker-owners. When we leave, workers will actually have governance control of the firm. The third piece is actual ownership. A lot of companies do engagement, a lot of companies do education, but there’s no replacement for real financial ownership of a company. And through the ESOP, that’s how we do it. That’s how you shift that mindset.

Approaching the Ownership Lens from an Underwriting Perspective

Santhosh: I’m an asset allocator. I work for a family office and a private foundation. We’ve kind of taken an obsession towards the ownership lens in the last few years. It came from two points of clarity. One: We are deeply invested in economic mobility, and we started realizing that the pathway toward wealth for most Americans is not going to come from income. We’re not going to earn our way into wealth-building in this country. It’s going to come from assets and their balance sheet appreciating in value.

We also realized that we ourselves are a significant asset holder–half a billion dollar endowment when we started–and we’ve been asset holders that have been appreciating dramatically. We did the math to determine where across that capital value chain we have been sharing that wealth. There are wealth creators and value creators, whether it’s employees in a company, workers in an enterprise, or potentially renters in a multifamily unit. We have all those assets in our balance sheet. Then there are owner-operators, then fund managers, and then there’s us. In the last 10 years, we’ve shared about $100 million of wealth with fund managers. But we have shared zero wealth with value creators who are workers in these companies when it’s a private-equity owned transaction or it’s a multi-family affordable housing deal. That was shocking, because we’re place-based and our bias here is to build wealth in our communities. How do we change that?

That to us is the obsession with ownership lens. The starting place was easy. It’s these amazing folks here. The second part of ownership lens for us is that every manager we meet across any asset class, we ask them about ownership, we ask them about who’s creating value and how they are sharing that value with people across the value chain. The more we ask that question, the more we think that we exert power as LPs into the institutions that haven’t thought about it. I think the more they hear that conversation, the more we’re going to see specs with an ownership focus.

I want to say something slightly controversial. Extractive ownership is the cardinal sin of American capitalism. We all built this, and it’s based on owning bodies and owning land—we took the land and put fences around it. That’s the root of our capitalism. And that’s not the controversial thing, by the way. The controversial thing is impact investing was built out of it. We as a community have built climate lens models, education, FinTech, gender lens, all of these funds. We invested in all of them. But not one single instance did we ever say that wealth needs to be distributed and equitably shared. It’s just a tiny sliver. I think it’s an opportunity where there’s a small but really critical group of investors, Sorensen being a significant part of it, that are all starting to see the world.