Investment Funding for New Urbanists

Exerpts From New Urban News

Since the late 1990s, a number of people have tried to form investment pools that would provide money for new urbanist developments. It has not been easy going.

The Traditional Neighborhood Development Fund, started in 1997 by new urbanist developers Robert Chapman, Rob Dickson, and Lloyd Zuckerberg, obtained backing from the multi-billion-dollar Hillman Company and from a major shareholder in Goldman Sachs, but was never able to place any significant capital.

The Fund for New Urbanism, started in 2002 with Andres Duany, Sam Young, and businessman Wayne Huizenga as partners, hoped to finance several projects but is now limiting itself to just one — a 930-acre development near Edenton, North Carolina. Another pool, the Green Living Fund, which Kacey Fitzpatrick in the San Francisco Bay Area expected to have in operation by late 2006, has delayed its startup by at least several months.

Yet while some investment pools are being postponed or pared down, others are springing into existence. In January, the Denver-based Revival Fund Management of Dennis Fleming and Charlie Randall started its Urban Green Fund, which will invest in walkable, mixed-use developments within a half-mile of mass transit. Also importantly, philanthropies are coming forward. The New York-based FB Heron Foundation, for example, is investing in New Urbanism through funds such as the Bay Area Smart Growth Fund and the California Smart Growth Fund.

What seems to be under way is a sorting out of investment concepts and participants. In some instances, new urbanists tried to start funds before conditions were ripe. “We were way premature nine or 10 years ago,” says Chapman, who leads an established new urbanist development company, the North Carolina-based Traditional Neighborhood Development Partners. “I think the time is absolutely right now. We’ll make an announcement in midsummer about a new fund that will have a sustainability and green building aspect.”

Some funds have run into difficulty because they employed methods that diverged too much from the real estate field’s usual ways of doing business. DPZ’s Fund for New Urbanism, whose research and organizing were carried out primarily by Young and Demetri Baches, had what seemed an ingenious idea: The Fund would identify eight sites “ideally located for smart growth,” design plans and codes for them, secure entitlements so that construction could occur as-of-right, and transfer the approved plans to developers prepared to follow the plans.

There turned out to be at least two flaws in the Fund’s premise, according to sources consulted by New Urban News. First, developers resisted paying to obtain planned, entitled projects. “A developer doesn’t want to pay retail,” Chapman says. “He wants to pay wholesale.” Second, the Fund suffered from being seen as more a planning operation than a development organization. Baches acknowledges that DPZ did not want to devote time and energy to becoming a full-fledged developer itself. With a busy international planning practice, DPZ would have had a hard time managing several development projects. Thus the Fund settled upon carrying out the one project it had pushed the furthest — Sandy Point.


THE NEED FOR PATIENT CAPITAL
Analysts agree that there is clearly a need for pools of “patient capital.” Mainstream real estate financiers mostly have “a time horizon that is so compressed that you have to make [undesirable] compromises,” Chapman observes. A new urbanist development will surpass a conventional subdivision in value in the long run, he says, but first a great deal of money and time must be invested. It’s not uncommon for 15 years to be needed.

“We need to understand real estate as a 40-year asset class again,” says Fleming. Fleming expects to put money into a project for eight to nine years and to have a provision allowing the investment to be renewed twice. By comparison, conventional real estate funds usually “have a time horizon of five [years] plus two [extensions] or seven [years] plus two [extensions].”

Revival Fund Management expects its Urban Green Fund to amass $250 million and will invest it in approximately 20 to 30 projects in “progressive real estate markets” such as Denver, Seattle, Dallas-Fort Worth, Boston, Washington, and the Bay Area (except the purportedly overpriced city of San Francisco). Each project will get $7 million to $12 million from the Fund, says Fleming, the managing director. Properties will typically be “within a half-mile radius of frequent transit service” and will feature energy-efficient technologies, a fund statement says.

Once the first Urban Green Fund is established, a second fund would be started, and so on. Eventually Revival would like to establish a real estate investment trust (REIT) for properties that are new urbanist and “green.”

Criteria similar to Revival’s are already being used by the $100 million Rose Smart Growth Fund, which developer Jonathan Rose established about a year ago. After buying two buildings in downtown Seattle for $23 million last April, the Rose fund announced its second investment in November: half of the $38 million needed to convert the historic Clipper Mill buildings in northern Baltimore to 51,000 sq. ft. of arts and crafts studios, 62,000 sq. ft. of offices, 36 loft apartments, and other uses. The Rose Fund became a 50-50 partner with Struever Bros. Eccles & Rouse, which is developing the project, with Cho Benn Holback + Associates as architects. The property adjoins a light-rail stop in Jones Falls Valley.

A new urbanist investment of more limited duration is “mezzanine capital,” which Philip Blumberg’s American Ventures Realty in Coral Gables, Florida, supplied to projects such as market-based, moderate-income housing in the Little Havana section of Miami and the luxury-class Gold Avenue Lofts in downtown Albuquerque. Mezzanine financing — so called because it occupies a level between loans and long-term equity— generally is paid off after about 18 months. Blumberg says the investments made through his company’s South Florida Urban Initiatives Fund and New Mexico Urban Initiatives Fund, both of which are near being closed out, have performed well, delivering operating returns of 15 percent or better.

Blumberg says plans for a third urban initiatives fund, in New Jersey, fell through when Governor Jim McGreevey, with whom the fund organizers were working, unexpectedly resigned in November 2004 (after the governor admitted having an extramarital affair with a male state employee). “Given the current down cycle in residential real estate, we’re evaluating what would be the next form for a fund,” Blumberg says, noting that he remains “bullish” on this kind of investment.Chapman views better financial structures as a key to improving the quality of community development in America. When he rolls out a new fund later this year, many of his investors are expected to be “foundations, endowments, and other socially conscious organizations” comfortable with a long timeline.

A growing number of foundations are putting money from their endowments into environmentally and socially responsible real estate development. The Heron Foundation has placed $11 million (3.5 percent of its endowment) into the Bay Area and California Smart Growth Funds and the Canyon-Johnson Urban Fund, Genesis Workforce Housing Fund, and UrbanAmerica funds.

California has become a hotbed for smart growth funds, which often favor energy-efficient buildings along with urban locations near mass transit. The California Public Employees’ Retirement System (CalPERS) has invested in funds such as the Green Development Fund — which was begun with the Houston-based real estate firm Hines, for construction of LEED pre-certified office buildings — and the $676 million CIM Urban Real Estate Fund. Two of the fund management companies most active in California are Pacific Coast Capital Partners and Pacific Realty Group. Among the sponsors of such funds is the Bay Area Council, which in 2002 started the $66 million Bay Area Smart Growth Fund I for projects in or near neighborhoods of below-median income and which has since launched a second fund.

Baches is now managing partner of DPZ Pacific, a firm licensed by DPZ to produce plans, designs, and codes in Australia, New Zealand, China, and other parts of East Asia. “ He expects to start funds in that part of the world, where he thinks the prospects for New Urbanism are bright.