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As the mighty economic expansion has barreled along, U.S. cities have attracted extraordinarily high levels of commercial real estate investment.
As the mighty economic expansion has barreled along, U.S. cities have attracted extraordinarily high levels of commercial real estate investment.
By Jinny St. Goar
November 2000
Institutional Investor Magazine
As the mighty economic expansion has barreled along, U.S. cities have attracted extraordinarily high levels of commercial real estate investment. Not surprisingly, the vast majority of the capital has been channeled into privately funded developments in bustling central business districts and wealthy suburban areas. Beleaguered inner-city neighborhoods don't attract much real estate investment in good times or bad.
That's changing. Private real estate investors are joining forces with government agencies and other public entities to form a bevy of new privately funded and publicly aided partnerships that aim to regenerate struggling neighborhoods. So far the sums involved are small -- perhaps $1 billion nationwide -- but investor interest is clearly on the rise. Case in point: New York Citybased Urban America, a socially progressive, privately financed limited partnership, announced last month that it had closed on 14 real estate deals valued at $120 million during its first nine months of activity.
Among the fund's projects are shopping centers in low- and moderate-income neighborhoods in Washington, D.C., and the $29 million College Point Commons park in downtown Detroit. "Institutional investment dollars, combined with solid real estate expertise, will have a dramatic and immediate impact on the quality and value of our properties," says Richmond McCoy, Urban America's CEO.
"Just in the last month, I've been approached twice about setting up an alliance of real estate venture capital funds that would be similar to our alliance of small-business VC funds," reports Kerwin Tesdell, president of the 50-member, New York Citybased Community Development Venture Capital Alliance, a coalition that has total membership assets of $450 million.
These new real estate funds are a natural outgrowth of the Community Reinvestment Act, the 1977 federal law mandating that commercial banks meet the credit needs of the communities in which they are chartered. The Office of the Comptroller of the Currency enforces this imprecise standard, giving banks a satisfactory or unsatisfactory CRA rating for their community efforts. Almost all of these new private funds serve as CRA-eligible vehicles, which means that banks will be interested in participating.
Most funds use the structure of a limited partnership or limited-liability corporation and are established by investors whose interests and concerns are local, although Urban America invests in projects across the country.
Investors come to the table with a variety of motives: social concern, civic pride, calculated self-interest. "Urban America is all about fiscally and socially prudent investing," says Harold Reiff, who manages the fund. "We thought long and hard about which came first, the fiscal or the social, in defining our priorities." Fiscal prudence seems to come first.
Public participation in these funds comes from city and state governments in the form of tax breaks, infrastructure developments and a high-speed permit process. There is no direct public funding; all capital investment is private.
"Municipal politicians and development agency executives have a much greater respect for market forces now than they did ten years ago," says Sunne McPeak, president of the Bay Area Council, a 45-year-old business-sponsored group that focuses on developing infrastructure in the San Francisco area and is launching a private real estate fund.
"Major commercial banks, which in California include BankAmerica, Wells Fargo and Washington Mutual, have been leading us into this marketplace, demanding better mechanisms to address poverty," says Beldon Daniels, president of Economic Innovation, a Boston-based consulting firm. Over the past 25 years, Economic Innovation has helped raise $25 billion in publicly initiated funds, many of which were subsequently turned into real estate investment trusts. "Now we are seeing the emergence of wholesale solutions: funds, such as Genesis LA in Los Angeles and the new ones in San Francisco, Sacramento and San Diego, that will be large enough to have a real impact," says Daniels.
Genesis LA Real Estate Investment Fund closed its first round of fundraising in mid-July with committed capital of $71 million. In early August the fund chose its first site, the $3 million redevelopment of 290,000 square feet of office space in Hollywood. With its second round closing in mid-October, the fund was up to $85 million. "Our inner city is the next frontier for economic development," says Los Angeles Mayor Richard Riordan. "Genesis LA is about the bottom line -- sound, strategic investment that can build a stronger economy."
The fund took as its investment model the redevelopment of a site in the troubled Van Nuys section of Los Angeles, where a General Motors Corp. plant had closed in the wake of the city's 1992 race riots, laying off 3,000 workers. To help attract $75 million in private investment to rebuild the site, the city rebuilt streets and enticed developers with an expedited permit process. The scheme worked: Within six years builders constructed some 150,000 square feet of retail space and more than 100,000 square feet of factories, which together employ 2,500 city residents. "We'll do the same with the Genesis LA sites," says Joanne Halbert, director of the Mayor's Office of Economic Development. "When these projects come to the planning department or to a zoning board, we'll expedite their approvals."
Most public-private funds follow the venture capitalists' model, hiring an outside manager to pull in the money. Shamrock Capital Advisors, the asset management arm of the Disney family, oversees the Genesis LA fund, which is a blind pool offering a limited role for institutional investors, all of which have committed capital to be invested over the next five years. Shamrock's manager, George Buchler, is looking at 21 sites that the city is eager to see developed, though the fund is not obliged to choose any of them. The Community Reinvestment Act requires development of low- and moderate-income areas, but that covers roughly 70 percent of Los Angeles, Buchler says. With the city reporting a commercial vacancy rate of just 5 percent for office space and about 3 percent for industrial space, Buchler feels confident that tenants will be easy to find.
"Our investors expect returns in the mid- to high teens," says Buchler. Though those returns cannot compete with the 20 percent that many private funds produce, investors are not acting as philanthropists. Says Edward Powers, a senior vice president for community development at Bank of America Corp., which has invested $10 million in Genesis LA, "The primary reason for our investment is the return." Los Angeles is, of course, a critical market for the bank, and "the fund's goal -- investing in low- and moderate-income areas -- in and of itself is good for us," says Powers. "Economic development swells the bank's business base." Other Genesis LA investors include charitable foundations looking to obtain respectable returns on their investment while providing benefits to the neighborhood.
Public entities increasingly recognize the need for partnerships with the private sector. Genesis LA has been "a saving grace for the city," says Halbert of the Mayor's Office of Economic Development. "These private sector lenders don't require the extra equity that the banks have asked for." Bank lenders are generally willing to lend on 75 percent of the equity value of a real estate asset in a hard-pressed neighborhood, but they want a first-mortgage position as well. The venture capital funds offer more generous terms to developers. "We generally require at least 10 percent of the project cost to be in the form of developer's equity," explains Shamrock's Buchler. That compares with 25 percent at other lenders.
The creation of John Utendahl, a principal of Wall Street's largest minority-owned investment bank, Utendahl Capital, and veteran M&A lawyer Joseph Flom of Skadden, Arps, Slate, Meagher & Flom, Urban America bought its first property in January. The group committed $5.8 million to develop a neighborhood shopping center in Tampa, Florida. In all its deals, the partnership promises an 8 percent annual return to investors that include Deutsche Bank, Citibank, J.P. Morgan, Prudential Insurance Co. and General Mills.
So far the fund has been meeting that 8 percent hurdle rate, reports Urban America's Reiff. In one of its recent deals, the fund financed a 250,000-square-foot, $19.5 million shopping center in Oxon Hill, Maryland, just outside Washington. It will be anchored by a CVS drugstore, a Footlocker and a police station, which the fund's manager will lease to the county for $1 a year. "This will be the safest place to shop in America," says Reiff.
Until now most large public pension funds have steered clear of these investments, but Community Development's Tesdell thinks that may soon change. In the past few months, he has met with representatives of a large fund who have expressed interest in participating in a public-private real estate partnership investing in real estate. Says Tesdell, "Socially conscious investing can also promote economic development -- and it can be done right in the fund's own backyard."
By Jinny St. Goar
November 2000
Institutional Investor Magazine
As the mighty economic expansion has barreled along, U.S. cities have attracted extraordinarily high levels of commercial real estate investment. Not surprisingly, the vast majority of the capital has been channeled into privately funded developments in bustling central business districts and wealthy suburban areas. Beleaguered inner-city neighborhoods don't attract much real estate investment in good times or bad.
That's changing. Private real estate investors are joining forces with government agencies and other public entities to form a bevy of new privately funded and publicly aided partnerships that aim to regenerate struggling neighborhoods. So far the sums involved are small -- perhaps $1 billion nationwide -- but investor interest is clearly on the rise. Case in point: New York Citybased Urban America, a socially progressive, privately financed limited partnership, announced last month that it had closed on 14 real estate deals valued at $120 million during its first nine months of activity.
Among the fund's projects are shopping centers in low- and moderate-income neighborhoods in Washington, D.C., and the $29 million College Point Commons park in downtown Detroit. "Institutional investment dollars, combined with solid real estate expertise, will have a dramatic and immediate impact on the quality and value of our properties," says Richmond McCoy, Urban America's CEO.
"Just in the last month, I've been approached twice about setting up an alliance of real estate venture capital funds that would be similar to our alliance of small-business VC funds," reports Kerwin Tesdell, president of the 50-member, New York Citybased Community Development Venture Capital Alliance, a coalition that has total membership assets of $450 million.
These new real estate funds are a natural outgrowth of the Community Reinvestment Act, the 1977 federal law mandating that commercial banks meet the credit needs of the communities in which they are chartered. The Office of the Comptroller of the Currency enforces this imprecise standard, giving banks a satisfactory or unsatisfactory CRA rating for their community efforts. Almost all of these new private funds serve as CRA-eligible vehicles, which means that banks will be interested in participating.
Most funds use the structure of a limited partnership or limited-liability corporation and are established by investors whose interests and concerns are local, although Urban America invests in projects across the country.
Investors come to the table with a variety of motives: social concern, civic pride, calculated self-interest. "Urban America is all about fiscally and socially prudent investing," says Harold Reiff, who manages the fund. "We thought long and hard about which came first, the fiscal or the social, in defining our priorities." Fiscal prudence seems to come first.
Public participation in these funds comes from city and state governments in the form of tax breaks, infrastructure developments and a high-speed permit process. There is no direct public funding; all capital investment is private.
"Municipal politicians and development agency executives have a much greater respect for market forces now than they did ten years ago," says Sunne McPeak, president of the Bay Area Council, a 45-year-old business-sponsored group that focuses on developing infrastructure in the San Francisco area and is launching a private real estate fund.
"Major commercial banks, which in California include BankAmerica, Wells Fargo and Washington Mutual, have been leading us into this marketplace, demanding better mechanisms to address poverty," says Beldon Daniels, president of Economic Innovation, a Boston-based consulting firm. Over the past 25 years, Economic Innovation has helped raise $25 billion in publicly initiated funds, many of which were subsequently turned into real estate investment trusts. "Now we are seeing the emergence of wholesale solutions: funds, such as Genesis LA in Los Angeles and the new ones in San Francisco, Sacramento and San Diego, that will be large enough to have a real impact," says Daniels.
Genesis LA Real Estate Investment Fund closed its first round of fundraising in mid-July with committed capital of $71 million. In early August the fund chose its first site, the $3 million redevelopment of 290,000 square feet of office space in Hollywood. With its second round closing in mid-October, the fund was up to $85 million. "Our inner city is the next frontier for economic development," says Los Angeles Mayor Richard Riordan. "Genesis LA is about the bottom line -- sound, strategic investment that can build a stronger economy."
The fund took as its investment model the redevelopment of a site in the troubled Van Nuys section of Los Angeles, where a General Motors Corp. plant had closed in the wake of the city's 1992 race riots, laying off 3,000 workers. To help attract $75 million in private investment to rebuild the site, the city rebuilt streets and enticed developers with an expedited permit process. The scheme worked: Within six years builders constructed some 150,000 square feet of retail space and more than 100,000 square feet of factories, which together employ 2,500 city residents. "We'll do the same with the Genesis LA sites," says Joanne Halbert, director of the Mayor's Office of Economic Development. "When these projects come to the planning department or to a zoning board, we'll expedite their approvals."
Most public-private funds follow the venture capitalists' model, hiring an outside manager to pull in the money. Shamrock Capital Advisors, the asset management arm of the Disney family, oversees the Genesis LA fund, which is a blind pool offering a limited role for institutional investors, all of which have committed capital to be invested over the next five years. Shamrock's manager, George Buchler, is looking at 21 sites that the city is eager to see developed, though the fund is not obliged to choose any of them. The Community Reinvestment Act requires development of low- and moderate-income areas, but that covers roughly 70 percent of Los Angeles, Buchler says. With the city reporting a commercial vacancy rate of just 5 percent for office space and about 3 percent for industrial space, Buchler feels confident that tenants will be easy to find.
"Our investors expect returns in the mid- to high teens," says Buchler. Though those returns cannot compete with the 20 percent that many private funds produce, investors are not acting as philanthropists. Says Edward Powers, a senior vice president for community development at Bank of America Corp., which has invested $10 million in Genesis LA, "The primary reason for our investment is the return." Los Angeles is, of course, a critical market for the bank, and "the fund's goal -- investing in low- and moderate-income areas -- in and of itself is good for us," says Powers. "Economic development swells the bank's business base." Other Genesis LA investors include charitable foundations looking to obtain respectable returns on their investment while providing benefits to the neighborhood.
Public entities increasingly recognize the need for partnerships with the private sector. Genesis LA has been "a saving grace for the city," says Halbert of the Mayor's Office of Economic Development. "These private sector lenders don't require the extra equity that the banks have asked for." Bank lenders are generally willing to lend on 75 percent of the equity value of a real estate asset in a hard-pressed neighborhood, but they want a first-mortgage position as well. The venture capital funds offer more generous terms to developers. "We generally require at least 10 percent of the project cost to be in the form of developer's equity," explains Shamrock's Buchler. That compares with 25 percent at other lenders.
The creation of John Utendahl, a principal of Wall Street's largest minority-owned investment bank, Utendahl Capital, and veteran M&A lawyer Joseph Flom of Skadden, Arps, Slate, Meagher & Flom, Urban America bought its first property in January. The group committed $5.8 million to develop a neighborhood shopping center in Tampa, Florida. In all its deals, the partnership promises an 8 percent annual return to investors that include Deutsche Bank, Citibank, J.P. Morgan, Prudential Insurance Co. and General Mills.
So far the fund has been meeting that 8 percent hurdle rate, reports Urban America's Reiff. In one of its recent deals, the fund financed a 250,000-square-foot, $19.5 million shopping center in Oxon Hill, Maryland, just outside Washington. It will be anchored by a CVS drugstore, a Footlocker and a police station, which the fund's manager will lease to the county for $1 a year. "This will be the safest place to shop in America," says Reiff.
Until now most large public pension funds have steered clear of these investments, but Community Development's Tesdell thinks that may soon change. In the past few months, he has met with representatives of a large fund who have expressed interest in participating in a public-private real estate partnership investing in real estate. Says Tesdell, "Socially conscious investing can also promote economic development -- and it can be done right in the fund's own backyard."