When innovation is a risk for small businesses

Saturday, February 5, 2011; 9:18 PM

The big idea: A small Chicago South Side business gambles that "green" will mean gold.

The scenario: Lisa and Clarence Hall, an African American couple living on Chicago's South Side, are seasoned real estate developers in urban Chicago. After years of developing multifamily residential and mixed-use properties, they are interested in developing a commercial property: a derelict and vacant building owned by the city of Chicago. What's more, they want to transform it from an eyesore into a glimmering, sustainable retail and office space featuring the latest in environmentally sustainable design. They envision bringing the first Leadership in Energy and Environmental Design (LEED)-certified commercial building to a busy thoroughfare on the South Side.

The couple makes up the leadership of CHL Properties, which specializes in acquiring dilapidated properties, rehabilitating them and converting them into attractive, affordable multifamily units. The firm manages a sizable portfolio of residential properties.

The Halls have experience in identifying suitable tenants and ensuring steady payment terms. And they've developed this intelligence in neighborhoods that are "resource-constrained." As classic first-mover strategists, the Halls see the returns commensurate with entering markets others would deem too risky.

A ledger of pros and cons accounts for the basic challenges of the project. Although the building was on the segregated South Side, the blocks surrounding it have been transitioning in recent years, to include national retail chains. Transforming the aged building would require structural improvements and might require removal of hazardous elements such as asbestos. Acquiring the property might involve a lengthy Request for Proposal process as opposed to a traditional private sale. They would need to secure a construction loan. None of the risks seemed insurmountable.

There were challenges they hadn't faced before: The tenants would be retail and office clients. The LEED certification would require at least a 20 percent construction cost premium and an involved inspection and review leading to certification. They wondered whether the commercial transition on the block would be sustainable.

The resolution: After a Kafkaesque process to secure the property, the Halls faced challenges in construction. The building had asbestos that required removal. There was theft, including of copper pipes, after which they contracted for guard dogs. The couple was required to use local subcontractors, and had to ensure that a sizable portion were minority- and female-owned. Overcoming the odds, the 12,000-square-foot, LEED-certified building even includes a verdant "living roof." However, the building is without tenants. Recessionary pressures have slowed the neighborhood's upturn, and interested tenants have not been of the professional ilk the Halls had envisioned.

The lesson: We live in a time when the phrase "green building" doesn't indicate paint color. Our president has encouraged green jobs and clean energy, and CEOs pose for glamour shots in architecturally designed, sustainable buildings.

There are subtle and direct pressures on entrepreneurs to adopt the latest innovations, especially when we as a society find them normatively desirable. The pace of change creates a corollary ambiguity about which innovations to adopt, and how to determine whether the investments will result in expected growth. The best advice is to cut through the hype and carefully consider the environments in which firms operate - socially, culturally and economically.

- Gregory Fairchild

Fairchild is executive director of the Tayloe Murphy Center and associate professor of business administration at the University of Virginia's Darden School of Business. He teaches strategic management, entrepreneurship and ethics.

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