Partners (Spring 2001)

Urban America Sees Opportunity With Inner-City Commercial Real Estate
by Ana Cruz-Taura
Urban America's
Richmond McCoy
If you ask community development practitioners what is the biggest hurdle in spurring effective urban revitalization, most will note a frequent disconnect between capital and commitment to the community — between money and socially-conscious development.

UrbanAmerica, L.P., is committed to creating a model for fiscally and socially prudent investment in inner-city commercial real estate by acting as a catalyst for economic development and private sector investment in low- and moderate-income communities.

Formed in 1998, UrbanAmerica raised an initial $60 million in capital from a list of well-recognized and respected investors committed to the company’s mission. The company ended 2000 with $165 million in assets in selected markets throughout the nation including Detroit, Las Vegas, Washington D.C., Atlanta, and several Florida cities. Drawing from the expertise of its management and board of directors, UrbanAmerica seeks specific investments that would allow for targeted returns of approximately 20%.

Investment Profile

In September 2000, UrbanAmerica purchased Lakes Mall in Lauderdale Lakes, Florida. The 255,773 square-foot shopping center is anchored by several national tenants — Sports Authority (including the Sports Authority corporate headquarters), Big Lots, Office Depot, and Smart & Final — and is located in a moderate-income census tract.

UrbanAmerica was able to attract Starbucks into a custom-built out-parcel and is constructing a second build-to-suit out-parcel for an Island Grill restaurant. With a chain of five successful restaurants in Jamaica, Island Grill’s first U.S. location is expected to do well in a community that has attracted a significant West Indies migration in the past few years. Financing the leasehold improvements or build-out for the small business owner is a valuable ingredient to the success of UrbanAmerica investments.

The Lakes Mall acquisition represented a $6.25 million investment by UrbanAmerica and has created approximately $196,000 per annum in vendor contracts for local companies. The mall brought 36 new full-time jobs for local residents through the vendor contracts and has generated approximately $665,350 in annual household income for local residents — resulting in approximately $98,000 in annual disposable income.

To better understand UrbanAmerica’s methods and successes to date, one need only visit a few properties with Chairman and Chief Executive Officer Richmond McCoy. McCoy will point out how UrbanAmerica looks for credit-anchored retail, office, and special purpose commercial projects with existing, stable cash flow. The company then enhances the investments by improving the properties structurally and aesthetically, increasing and solidifying occupancy, and strengthening each property’s standing in the community by attracting consumer traffic and offering employment opportunities to local residents.

Low- and moderate-income neighborhoods, including Federal Empowerment Zones, Enterprise Communities, and State Economic Development Zones, are seen as offering the greatest opportunity for both effecting socioeconomic change and maximizing investment return. In addition to the attraction for banks to lend in these areas under Community Reinvestment Act considerations, such locations typically offer tax credits and other economic development incentives to facilitate financing. “Incentives are a valuable aspect toward investment strategy,” notes McCoy. “They are most applicable to properties that need rehab or for new development of real estate because incentives stabilize the investment.”

The initial round of investment in 2000 resulted in approximately 700 properties submitted by national real estate brokers, community development corporations and referrals from the National Congress for Community and Economic Development. Of these, 400 properties were determined to be “CRA qualified.” Twenty-five percent of that group was assessed as economically qualified. Of these, UrbanAmerica made bids on 40 selected properties, which resulted in 16 acquisitions during the year.

Acquisitions are fundamentally based on credit and location. Credit considerations weigh in because the properties are often leveraged with 75% debt. Location is considered not only in terms of the actual property site, but also in terms of the community that surrounds the property.

Several indicators have been identified as key market attributes to guide investments. “We look at economic engines that contribute to the long range stability of the investment,” says McCoy. Many of these indicators zero-in on those factors that have been proven to fuel successful economic revitalization throughout the country.

Real Estate Investment Trusts

A REIT is a company that invests its assets in real estate holdings. The REIT purchases, develops, manages and sells real estate assets with its investors sharing in the usual benefits of a landlord, such as earnings and depreciation, on a high volume scale and without the obligation of day-to-day management of properties.

REIT investments, while containing risks, can be advantageous because they offer liquidity to an investment portfolio and are believed by many to be one of the strongest vehicles to hedge inflation.

For example, the cities where investments are made must have local government officials who are dedicated to revitalization of distressed areas. In addition, an established vision, and ample available resources for development and growth must already exist in the communities. In essence, UrbanAmerica is not only leveraging capital, but is also leveraging the existing redevelopment trend in target communities.

In following its mission, McCoy points out that UrbanAmerica has positioned itself as a sound and profitable community development investment opportunity for financial institutions. Not only are the properties acquired in predominantly low-and moderate-income areas, but the investment and redevelopment process is conducted to stimulate the local job market for residents — including local contractors and vendors — to increase the residual effect of the economic injection to each community.

Growth plans for the company include raising an additional $100 million in capital in 2001. The existing fund will be capped at $110 million to support roughly $400 million in assets and a $400 million pipeline. Then a second fund will be started following the same investment principles. UrbanAmerica’s primary exit strategy is to launch an IPO and become a Real Estate Investment Trust (REIT), but the company is also interested in the eventual sale of properties from its portfolio.

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