Illinois Business Journal - Builder makes home ownership reality

EAST ST. LOUIS - "Location, location, location," is the well-known answer to the question: "What are the three most important things to know about real estate?"

We have all heard of contrarian investors in the stock market. Don Johnson is a living, breathing example of a homebuilder contrarian who restricts himself to building single family homes in perhaps the toughest location in the region: the cities of Centreville, East St. Louis and Washington Park. All three communities have seen severe population declines over the past 40 years.

How in the world did Johnson find his way to East St. Louis? A native of the northern suburbs of Chicago, the 36-year-old, single Johnson was born in Evanston, lived in Zion and graduated from North Chicago Community High School. After high school Johnson ventured downstate, where in 1990 he graduated from Southern Illinois University Carbondale with a bachelor's degree in architecture.

In post-graduate studies, Johnson stayed downstate, earning his MBA and a master's degree in architecture from at Champaign-Urbana. It was as a graduate student that Johnson discovered East St. Louis. For two years, he worked on a research project funded through a grant from the state of Illinois.

In 1993, after graduating from the University of Illinois, Johnson again worked in East St. Louis with a government program, this time with the University of Illinois Extension Service. In 1995, Johnson became grant administrator of a U.S. Department of Agriculture grant for the East St. Louis area.

"By 1996, I had gained a lot of experience with various governmental grants and programs and began to see the need to build houses in the East St. Louis area," Johnson said. "I approached local banks for construction loans, but with no success. After I built and sold four homes, I began to win the respect of the banks and local politicians. I completed 10 homes in 1996, 24 in 1997, more than 30 in 1998 and this year we will complete about 50 homes. All my homes are pre-sold before we begin construction."

How in the world does Johnson build and sell homes in areas where many people are afraid to drive their cars?

"First of all, I can deliver a new home at a fraction of the cost of what that same home would cost if it were located in, say, O'Fallon," he said.

Johnson reduces his costs by offering a combination of cheap land and government programs and incentives.

"Whereas a typical residential lot in O'Fallon costs $30,000 to $35,000," Johnson said, "I buy my lots from the city of East St. Louis for $1,000 to $4,000. I now have an agreement to buy them for $20 per front foot."

Johnson is also able to reduce property taxes for his customers.

"I think the annual budget of East St. Louis is about $14 million," he said, "and $8-10 million comes from the Casino Queen. Because East St. Louis doesn't have much of a tax base, the real estate tax rate is high. For example, a home valued at $80,000 creates property taxes of about $4,000 per year."

The Southwestern Illinois residential builder's use of tax increment financing is unique. Using the example of an $80,000 new home, the homeowner gets a 50 percent or $2,000 property tax abatement for 23 years, Johnson said, which can be extended up to 35 years.

"And I use 60 percent or $1,200 of what the homeowner pays to improve the local infrastructure, with the remaining $800 paid to the tax authorities. The tax authorities are happy, because that's $800 more than they were receiving before the home was built."

Johnson takes advantage of government programs that let him avoid common costs such as building permit and inspection fees. He also pays no sales tax on construction materials. In order to avoid theft of building materials on the job site, he buys pre-assembled panels that are trucked to the job site and assembled within a few days.

Continuing with his $80,000 home example, Johnson said his customers have no difficulty getting a home loan in the amount of $50,000. The balance of $30,000 is available from government programs and foundation grants.

"One program forgives the $30,000 over 10 years," he said. "Another is a 10-year balloon (note), and it is forgiven at the end of 10 years if the financial situation of the homebuyer has not changed."

What's Johnson's motivation? His answer is rooted in practicality.

"Realistically, I am under no illusion about the 50 new homes that we build a year," he said. "It is just a Band-Aid on a gaping wound, in view of the population decline in the cities where I build. But I suppose the biggest reward for me is to deliver house keys to a family who could not otherwise afford to own their home."