Durham has a high number of distressed properties, approximately 548 boarded buildings, that are inefficient and in danger of foreclosure and/or demolishment.  These properties result in massive energy and water waste while offering little community and neighborhood value.  The owners of these distressed properties include banks, rental investors, the local government and financially limited owners, all of whom find themselves in a position that does not result in property improvement or profitable sale. In turn, Durham renters are faced with outrageous utility bills, few affordable, safe and up-to-code living options and low-quality landlords.  Durham SciNergy proposes to solve this problem by providing current distressed owners and rental investors a complete green retrofit to improve energy and waste efficiency as well as implement a landlord entrepreneurial program to strengthen the landlord-tenant relationship.   

    Durham has a massive inventory of distressed houses—below conventional investment grade properties that are in need of significant repair to avoid continued deterioration and eventual condemnation with possible need for environmental remediation—with sub-par living conditions and wasteful energy practices. As of November 2011, there were 548 boarded vacant structures in the Durham city limits. On average, the city of Durham has a 40% higher monthly utility bill compared to the national average.  Many of these properties have holes in the floor, siding, walls, roofs and plumbing creating substantial energy and water waste.

    DS has identified the Durham neighborhoods of  Walltown, Central Park and Southside, as well as the surrounding Warehouse District and Old North Durham as transitional neighborhoods—residential communities where a substantial number of homes are not properly maintained and there are crime and safety concerns for residents. Of the 653 Walltown residential properties, DS identified 89 that can be classified as distressed: 13.63% of the neighborhood. Of the 307 residential properties within the Central Park target area, 36 are in serious need of renovation: making up 11.23% of the neighborhood.  Of the 548 boarded Durham properties, 137 of those properties are located in the Southside neighborhood. Clearly our target neighborhoods have a problem with distressed structures.       

    In addition to a large inventory of distressed properties, the 2008 housing and financial market crisis has put individual property owners in a position where they cannot improve their buildings or sell them. These are “distressed” owners are either: landlords with little incentive to improve their properties, elderly and no longer able to take care of their investment or an individual who inherited the property ill prepared for the financial responsibility.

    This problem will be exacerbated by the City of Durham’s Neighborhood Improvement Services Proactive Rental Improvement Program (PRIP), set to go into effect in 2012.  In this program, NIS will conduct reasonable cause inspections on rental properties in neighborhoods with higher crime rates and code violations. The owners are given a grace period until January, 2013, at which time they will be required to register each rental property in violation.  Owners that fail to either register their properties or eliminate all violations and attend a landlord training course will enter an accelerated incentive program to do so.  The incentive program includes civil penalties ranging from $300-$5000 per month. This program will put distressed property owners in a position where they have to fix their property and attend landlord classes or pay substantial monthly fines effectively diminishing any rental returns.

    Durham SciNergy will help these owners avoid significant fines by providing them with the tools to improve their properties to a standard above code and fulfill the necessary landlord training. The result is a reduction of energy and water waste, higher returns, improved rental living standards, higher quality landlord services, and the overall revitalization of transitional neighborhoods.

In 2010, the Wall Street Journal listed Durham as a leading real estate investment area in the nation. Forbes Magazine just voted Raleigh-Durham to be the #2 “Best Places: Moving on Up” and #2 for “Best Places to Start a Business.” Downtown Durham has seen the vast majority of this growth.

    Distressed owners and rental investors are our primary customers and renters are the end-user customer.  Distressed owners are mainly disabled and/or elderly or an individual that inherited their property and unable to maintain it. After in- depth research, we identified 102 distressed owners in our 3 target neighborhoods.  We also discovered that approximately 40% of Durham’s population rents.  We estimate the total population of our 3 target neighborhoods to be 6,595 residents, bringing us to a rental population of roughly 2,638 individuals.  Our potential renters include singles and families that are upwardly mobile and looking to live within walking distance of downtown Durham.

 Figure C: Target Neighborhood Rental and Distressed Owner Market Sizes

    Yes, distressed owners do not currently have many options for fixing or selling their properties.  Furthermore, the introduction of the PRIP program is going to increase the pressure to do so. For these owners, our services offer a way to upgrade their properties. The corresponding boom in the Durham economy and a strong rental market also makes Durham SciNergy’s model a solution for customers seeking to realize a return on their investment.

    For rental real estate investors, our services offer a way to enter the market with a premium property for a less than premium price. Yes, the typical model for real estate investors is to buy a cheap property, spend as little as possible and then rent it.  But, in our model, the investor purchases a retrofitted property at the cost of a distressed property.  This, in turn, allows the investor to charge a higher rent, which remains aligned with the market and within the affordability index, due to utility savings and improved amenities.  The higher rent will offset the rent sharing loss and the energy retrofit will potentially qualify them for tax credits. Additionally, the economic boom and strong rental market makes this an ideal time to invest in Durham.

    For renters, the demand for quality, affordable housing in Durham has outpaced the supply, evincing a local economic boom in Durham.  As Durham’s downtown undergoes continuing revitalization, there is a growing trend toward live/work/play urban living options.  For various reasons, such as preference for mobility, short-term relocation to the area or an inability to qualify for a mortgage in today’s difficult lending environment, the residential rental market in Durham remains strong. The demand is furthered by a lack of quality rental housing for low-income to middle-income renters.  Currently, the options consist of luxury apartments with high rents or lower-end properties with varying levels of quality, efficiency and safety. Figure D below shows the projected additional rental demand and occupancy rates through 2013.

Figure D: Projected Additional Rental Demand 2010-2013

    Durham SciNergy acts as a retrofit project manager for real estate investors and distressed property owners.  First, DS leverages valuable partnerships to provide energy retrofits on distressed properties at a lower than market rate price. Depending on the property, green retrofits can include technologies such as air and vapor ceiling insulation, backyard gardens, energy efficient appliances and systems, porous pavement, remediation (ridding property of lead and asbestos), solar hot water, and xeriscaping, among others. The old, expensive, and inefficient utility systems in these properties can be replaced with sustainable green systems which decrease environmental impact and energy costs.

    Once the retrofit is complete, DS aids in the rental process while recouping costs via a rent sharing agreement.  For the duration of the rent sharing agreement, there are certain guidelines which include education regarding landlord-tenant practices and requirements as well as requiring affordable rents and high level tenant services. To accomplish this, they can either enter a program to learn how to be a proper landlord or opt to have their investment managed by a property management firm.  Rental rates will increase but be in line with comparable prices and still fall within the HUD affordability index. We anticipate the average rent-sharing agreement to last 3-5 years. When the rent-share deal is finished, the owner holds the property free and clear.

    The Benefits: Our work will reduce utility costs by an average of 35-40%, help distressed property owners improve their properties and realize a return, increase profits for rental investors while raising the bar for landlord services, increase the inventory of safe, affordable quality rental options while preserving neighborhood integrity and increasing tax revenues for the City.

    We have filed our 501 c3 and Charitable Solicitation License. Until we receive our non-profit status, we are a provisional non-profit.  This can be challenging when attempting to form strategic partnerships. Once we receive our official status, partners and investors will have less liability and be more forthcoming with donations and investments. In the meantime, we are still progressing with the Durham SciNergy business plan and are in the process of developing a fundraising initiative.

    Zoning will also be a regulatory issue.  Zoning is infamously difficult and painful.  Since we are focusing on single-family units, du, tri and quad-plexes, we do not anticipate a high level of zoning headache.  However, in an effort to combat this hurdle, we plan to build and maintain valuable relationships with city and county officials who have the power of influence zoning decisions.

    Social issues are also a hurdle that we expect to face.  While our project promotes building, neighborhood and community improvement, concerned citizens may interpret our efforts as a gentrification movement, aimed at displacing low-income minorities.  To overcome this hurdle, we plan to target vacant buildings in the beginning. If and when we get to a scale at which we target several properties, in a single neighborhood, at once, we will give the pre-retrofit tenant the first opportunity to rent the property after it is renovated.  We will also plan to be heavily involved in neighborhood meetings and events.  Our goal is to preserve neighborhood integrity while correcting the deteriorating housing stock.

Milestones: Achieved

• Co-founders recruited
•  Organization incorporated
• Fundraiser recruited
• Developed a business and fundraising plan
• Reserved URL, set up corporate email
•  Begun to secure strategic partnerships
• Filed 501(c)3 and Charitable Solicitations License
• Established financial operations
• Visual brand created
• Internship program launched

Milestones: Current Partners

•  Kompleks Creative – Provide graphic design and web development
• Bull City Mobile – Will provide OpenRemote, a home automation platform
•  North Carolina A&T’s Center for Energy Research and Training (CERT) – Will perform energy audits, students will perform green tech installations
• Yard Sprout – Will install edible gardens and assist with finding volunteer and at-cost providers for xeriscaping, rain gardens
• City of Durham - Neighborhood Improvement Services, Community Development – Entering into an MOU as the preferred partner for investor-owners affected by the Proactive Rental Inspection Program
• Preservation Durham – Will participate in project planning to drive preservation-oriented renovations and retrofits
• Durham Technical Community College – Students will construct solar-powered video surveillance and security lighting systems, students will participate in energy audits, project planning, and green tech installations

Milestones: Upcoming

• First Quarter
• Seed funding
• Strategic partnerships
• Launch website
• Target property pipeline development
• Second Quarter
• First property project initiated
• Implement fundraising plan
• Financial & accounting structure finalized
• Third Quarter
• First project completed
• Establish office space
• Fourth Quarter
• Follow-on funding
• Proof of concept established
• Second property project outlined

    As a non-profit, exit/harvest is a non-issue. We estimate needing $1,250,000 in cash flows to become self-sufficient within three years.  As a non-profit, we will continuously be raising funds. Our pilot project is budgeted to cost a low of $30,000 and a high of $50,000.  The expected timeframe for renovation completion is six months with an average low-high rent-sharing agreement of 3-5 years.  The pilot project will serve as a proof-of-concept and used to attract donations and investments, allowing a transition to a larger scale operation. To make that transition, we plan to form an alliance with organizations like Self-Help, Builders of Hope and Habitat for Humanity which allow us to work on a neighborhood scale. Our goal is to have 5-7 properties in each of our target neighborhoods by the end of 2017. By operating on a neighborhood scale, we expect a 5-10% decrease in cost due to economies of scale. Once we are able to gain a substantial presence in Durham, we will consider expanding to other cities with similar needs.  At the top of that list is Danville, VA.  We have a close relationship with the Danville Director of Economic Affairs who is very interested in duplicating our concept. 

-Patrick Mills ’12 – V.P. of Business Development and General Counsel. I am a licensed attorney in Illinois, studying at Duke Law in the Law and Entrepreneurship LLM program

-Laura Faulconer – Executive Director and President. I hold a PhD in Biomedical Engineering and a BS in Forensic Science. Before co-founding Durham SciNergy, I helped launch the Center of Innovation for Nanobiotechnology, a nonprofit working at the intersection of advanced materials and life sciences to accelerate commercialization. I also own two rental properties in Durham that I rehabbed myself.

-Leslie Talbott- VP of Operations and Treasurer. I hold a BSBA in Business Administration from The Kenan-Flagler Business School.  I have over five years of local real estate experience and have helped start four businesses.

-Daniel Reiff-Intern. I am an undergraduate student at the Pratt School of Engineering, Class of 2015. I am working on a Mechanical Engineering and Economics double major.

-Danya Liu-Intern. I am a junior studying environmental science at Duke’s Trinity School, Class of 2013.

-Anna Schroeder- Intern. I am a junior majoring in Literature and Sustainability at UNC-Chapel Hill.  My expected graduation date is May, 2013

    We will use the $50,000 prize to fund a pilot project and establish proof of concept.  This project will be a Walltown quad-plex with four- two bedroom two bathroom apartments.  We have an interested rental investor that will purchase this property. We will use these funds to purchase any equipment that we are unable to have donated as well as pay a general contractor and service providers to perform and manage the retrofit. These funds will get us through our third quarter.  At that time, we will have implemented our fundraising plan and formed an alliance with similar organizations to move to a neighborhood scale.  We anticipate being self-sufficient within three years.