Magic Johnson Finds Hope & Profit in Inner City Development

I know you're wondering what Magic Johnson is doing here talking about real estate development. When I was playing I was successful, of course, on the basketball court and I understood words like "assist," "rebound," "jump shot." And now I have to learn a whole new vocabulary: "build to suit" and "mixed use." And what I've tried to do is take all those words and apply them to urban America.

Every mayor across the country is trying to redevelop their inner cities, or they are trying to re-do their downtowns. A prime example of that is here in downtown Los Angeles. The Staples Center has jump-started all the development that is happening in downtown now. One great project can then make other projects wonderful. Now you have everybody building condominiums downtown, and restaurants are coming downtown. We finally have grocery store chains coming downtown. So the Staples Center really made downtown an attractive place to live and spend time.

We've done the same thing in Harlem. Harlem is back; it's now the place to be in New York. We jump-started that with the Magic Johnson theaters; I put a Starbucks there. And now all the builders are coming in to build condominiums. Five years ago, you could buy a brownstone in Harlem for $150,000. Now, you can't get a brownstone for less than $1 million.

I want to give some insight into working in urban America. The bulk of the development business is probably going to be in urban America, because there are still a lot of cities that are under-developed. But when you go into urban America, there are some key points you need to understand. First of all, 25 percent of the United States is minority, and the minority population is growing much faster than the general population. There is a huge mismatch between supply and demand, between workforce housing and retail to serve the community. And there's huge growth in those communities as well. But less than 2 percent of the private equity capital is targeting these markets.

Now, this is really important, because the skill sets necessary to succeed in urban America are not the same as those you'd use in other communities. You can't underwrite using a computer model when you're thinking about urban America. You need to underwrite a community. You have to be sensitive to merchandising, security, and public issues. To be successful one needs real estate skills . . . and urban skills. That's why we created the Canyon-Johnson fund. I partnered with Canyon because they have great investment skills, and they partnered with me because I've been operating in minority communities for over 15 years.

When you're talking about growing your company, you need urban America, and urban America needs you. If you do it right, there's a high upside for everybody – for the community, for the developer, and for the mayor and city officials. The African-American community represents about $1 trillion; Latinos are $800 billion. When you talk about disposable income, minorities have it. Don't look at it like you did 20 years ago. Things have changed a lot. A lot of you were scared off before, but today it has changed. You will make money in urban America.

But to do that, developers normally need somebody who is a minority to let them know how to play in that landscape, whether that's me or somebody else. When you look at urban America, look at it as a foreign country in a sense, and deal with it like that. But also look to minorities hopefully as your partners because they can help you politically, they can help you with community groups, and you have to make sure that there are minorities on the job site. Every city has an Urban League, and I would tell anybody to go to the Urban League, because they know every minority business. Or there's a minority business association as well, so those are the two sources that can put you together with the right people. And then you can interview three or four of them so that you can find someone who can do what you need to get done.

Audience Question: What do we need to do to encourage other minority icons to get involved in these kinds of projects and get them to give back to the community?

Number one, they have to be committed. I go to every meeting. It doesn't matter who it's with; I'm there. And I'm also there when we have our meetings and are trying to decide on a project and to cast my vote. You have to be serious about whether you want to be a businessman or businesswoman. And you have to be able to say, "I don't know." A lot of time egos get involved. When you've been pampered in sports, sometimes you might think that that's going to carry over to business. All of these ladies and gentlemen in this room don't care about how many baskets I've scored or how many assists I've accrued. All anybody cares about is how I can make them money. That's it. If I can't make them money, they're going to say, "I don't care about no Magic Johnson." So the people you're talking about have to understand that they're going into a different arena. I know that I'm playing in your arena, and I have to know what I'm talking about, and I have to be committed, and I have an understanding that I have to be there in person and not just try to lend my name to something. They have to think seriously about these communities and want to do something and be passionate about it. A lot of minorities are missing in this business, and a young minority can be a great asset. But they have to know their numbers forwards and backwards. I know every minority community in the nation.

And you have to get them to invest some of their own money in the deal. When I found out that I had to pay half, I gave them the check, and then pulled it back. I didn't know then what you guys all know: Use somebody else's money! I had to use my own because there was no track record in urban America. Everybody said, well, if it's so good, why hasn't everybody else done the same thing? So, Magic, you have to bring the money to the table! I believed in it, I had a solid business plan; I knew it would work, so I had to prove it.

Audience Question: What can urban developers do to help solve urban problems, such as education? How can they contribute to the communities in which they're building?

First of all, it's place by place. Every city is so different. At the Magic Johnson Foundation we have 22 technology centers. And we try to allow minorities access to computers, since a lot of them can't afford to have one in their own home. We try to make sure that we go in and give something to the community, as a goodwill gesture. And then what happens? The people embrace our projects now. Minorities say, "you know what? Every project he has, I'm going to support it. I'm going to buy things at the retail outlets that are part of the project." They'll protect it and watch out for break-ins and things like that. I don't have those problems, because I give back to those communities that put money in my pocket.

When we look across this country – and I've met with almost every mayor in almost every city – they're all looking for the same thing: redevelopment in the urban core of their city. No longer can you say that there's no money to be made because there's a lot of money to be made. Why? Because the city will put in money with you. Tax benefits. And on and on. But you just have to make sure you put another extra, in most cases a minority who can help you. So, again, whether it's us, there's other ones, make sure you find the right partner who can help you navigate through the politics and all the other things that happen in urban America.