Infill Housing In The Inner City: A New "Emerging Market"

Ray, could you address what inner city investments you & the Millennium Capital Corp. are making, and the promise your work might hold for meeting Southern California's affordable housing shortage?

First, our inner city investment activities are focused on both housing and commercial development. What drives our interest is the extreme shortage of low-income housing in Los Angeles and Southern California. Most current studies show that the number of available low-income units in L.A. County fills less than one-third of the need.

The government provided numerous incentives, such as Section 8 subsidies, several years ago, but most properties are now coming out of those programs. And many of those owners are converting their properties to market rents because Section 8 just doesn't pay anything comparable to what they can get in the market.

We first began investing in inner city real estate slightly less than two years ago. We've discovered that most of the existing properties haven't been well maintained. There's been very little incentive for owners to manage their properties well and keep them rehabbed. But that's allowed us to be successful because we do a 100% renovation before we begin leasing. That's made it extremely easy to get the kind of tenants that we want.

I've discovered that you get a much higher cash-on-cash return in the inner city than on the Westside. Investors pay a significant premium to be on the Westside-as much as 10 to 14 times gross yearly rents. We pay 4 to 5 times yearly rents for the same dollar.

None of the big players are focused on doing business in this region, and that provides a tremendous long-term opportunity for niche players to enter the market.

Let's highlight that. What's your strategy for profiting in this market niche?

First, we've paid substantially below market value for the properties in our portfolio.

Second, we've developed good relationships with brokers, banks and other lenders, as well as several trust/deed sale companies. We prefer to buy properties that have been foreclosed on, where the owner is in financial distress, or directly from banks.

Third, we invest for the long-term. Once we acquire property, we invest in the upgrades needed to make us proud to own it and make it attractive to potential tenants.

Fourth, we've developed very good relationships with property management firms. They not only provide us with quality tenants, but also ensure that tenants' needs are addressed. They also provide us with a level of professionalism that's seldom exhibited in the inner city.

Fifth, all our tenants are either rent-subsidized or extremely well screened.

Ray, as a black Harvard Law & Business School graduate who spent time in Eastern Europe, how did you come to build a premier multifamily development company in Inglewood, Compton and areas of South Central Los Angeles? Why those jurisdictions? And why infill, inner-city housing?

I look at those areas very similarly to the opportunities I pursued in Eastern Europe-they're all emerging markets with enormous untapped potential. The influx of immigrants into Los Angeles as well as the growing Latino and Asian American populations will make these areas some of the fastest-growing in the County. I thought if I got in on the ground floor, I could reap tremendous long-term rewards. Whether others realize it now or later, we'll eventually have to address the need for quality, affordable housing in the inner city.

I also looked at some successful private sector commercial developments. When Magic Johnson started developing movie theaters and Starbucks chains in the inner city, few people thought it would work. Not only is it working, but his theater in South Central and his Starbucks in Inglewood are the two most profitable venues of their kind-his theater earns the most per seat of any theater in the U.S., and his Starbucks is the chain's only non-company owned unit. Those are first-class examples of what can be done. We're trying to replicate that kind of success, which requires a vision and courage that few investors possess.

As a developer now working in the inner city, your view of the proper role of government re affordable housing would enlighten our readers. Is the public sector helping to incentivize what you're doing?

Most new development is in middle- to upper-income areas. Local, State and federal governments need to extend several of the initiatives begun in the ‘70s. Programs like tax incentives for developers who wish to build in the inner city and rent subsidies for tenants need to be expanded. That would be a tremendous step to encourage inner city development.

But even more importantly, we have to look to the local communities. Many of the areas we're involved in have pockets of rampant crime-drug dealing, prostitution, gang activity, etc.-out in the open, day and night. If local law enforcement worked with the community, I believe they could prevent much of this activity, which would give property owners more incentive not only to take care of their properties, but also to take a longer-term approach to investing in these areas.

For instance, while touring several properties we were planning to acquire in South Central, we saw the streets lined with people openly selling drugs. We sat there for several hours, and not one police officer passed by. Even at 1 or 2 a.m. on the Westside, you constantly see police officers. We need more local cooperation between the police and the communities.

There's also a role for local churches because the church is often the most stable institution in these areas. Some, like the Crenshaw Christian Center, are assisting in redevelopment, but much more needs to be done at all levels-government, community, and law enforcement. We are currently developing an organization of inner city apartment owners and brokers to provide a forum for our unique concerns.

There are over 80 cities in L.A. County. Is there a noticeably better climate for your work in different jurisdictions?

The areas in which we've had the most trouble are the ones where the city governments are in disarray.

For instance, we own a number of properties in Compton. Compton's school system has been taken over by the State several times. Several Council members have either resigned or been charged with corruption. And Compton has a per unit tax-so you not only pay tax on land and building, but you also pay an additional tax on each unit within the building. Those types of laws make it very difficult to do business.

However, we've found the city of Inglewood to be very helpful. They realize that the loss of sports at the Forum will impact their tax base, so they're actively looking at ways to encourage investment in the City. With their proximity to both the Airport and to major freeways, some fantastic things will be done there in the next few years-and they've just received several grants to redevelop their downtown.

We'll have the greatest success turning around areas that have long-term geographic importance to the rest of their City.

The housing crisis is nationwide, and of course, we have a sizeable housing shortage here in the metropolitan L.A. area. What policies contribute to this shortage, and what have you learned about how we might, from a public policy point of view, more successfully address the housing challenge?

The primary reason for the housing shortage can be attributed to an overall dynamic in the economy over the last decade-the increasing disparity between rich and poor and the rise of very large immigrant populations. Most new housing is built for upper-income people-in Los Angeles, even many average-income households can't afford to buy a home.

But it's very difficult for developers to build low-income housing from the ground up. It's just not profitable. It's much more effective to buy existing inventory and turn it around.

Lastly, you obviously want to be the region's premier inner city housing developer. What will be the measure of Millennium Capital's success in two or three years' time?

One, I expect us to have at least a $100 million portfolio within three years. We've been growing quickly-six months ago, we owned slightly more than $3 million worth of property; today we own about $10 million.

Two, I hope Millennium's efforts will spur other property owners and investors to take the same pride of ownership that we do in our properties, because that helps the overall neighborhood.

Three, I hope that the suppliers of credit-particularly commercial credit-will begin to realize that the risk premium in the inner city is well worth it. It's often very, very difficult to get acceptable loan-to-value ratios when you're dealing with what are referred to as blighted areas. But in every city, there are certain areas where people want to live, and other areas that are much more crime ridden. These cities should stop blanketing everything with generalized policies and look at things on a much more case-by-case basis.

Four, I hope our actions will encourage community leaders and local law enforcement authorities to work with property owners. Property owners, particularly in the inner city, have become the enemy. There's just a huge amount of red tape to get anything done in the inner city. Reducing that would make the process a lot easier and property owners would be much more willing to share the burden of redevelopment.

Finally, I hope our efforts will encourage commercial developers to take a second look at these forgotten areas. San Francisco, Dallas and New York have turned certain inner city areas into thriving warehouses, loft apartments, and creative spaces for high-tech and Internet companies. We need to do more of that in Los Angeles.