Minority Investment Fund Signs First Deal

An investment fund launched by a Beverly Hills money management firm and Earvin “Magic” Johnson’s development company to channel hundreds of millions of dollars into dense minority neighborhoods has signed its first deal, fund managers will announce today.

The Canyon-Johnson Urban Fund was formed this year by Canyon Capital Realty Advisors and Johnson Development Corp. to invest in real estate developments in urban pockets across the country, where demand for basic services is often unmet.

The deal is a $7-million investment in Milwaukee’s blighted Capitol Court Shopping Mall, which will be razed and rebuilt with a Wal-Mart as an anchor tenant. The project is valued at $53 million.

The mall, built in the 1950s, did not adapt to changes over the years as whites moved to suburbs and African Americans moved into the surrounding neighborhoods, said Canyon Capital managing partner K. Robert Turner.

As a result, the mall was 80% vacant by last year. Still, would-be shoppers abound nearby: The neighborhood’s population grew 15-fold in the last two decades, Turner said, its spending power is more than double the city average and it enjoys only about a third of the retail opportunities of the city overall.

The Canyon-Johnson investment came about after Milwaukee developer Boulder Venture contacted Johnson Development President Kenneth Lombard, seeking a theater and Starbucks for the site.

Johnson Development has built shopping centers in Los Angeles and Las Vegas and has partnerships with Loews Cineplex Entertainment Corp., Starbucks Corp., TGI Friday’s and 24-Hour Fitness. It also led an acquisition last week of Santa Monica-based Fatburger Corp.

Lombard, a co-manager of the Canyon-Johnson fund, recommended investing in the Capitol Court project. Johnson Development and the mall developer are still in negotiations over a theater and Starbucks in the shopping center.

The Canyon-Johnson fund underscores a national trend that has lured big-name retailers and private investors to neglected inner-city neighborhoods from Harlem to South-Central Los Angeles over the last few years.

The fund closed its first investment round last month at $150 million and aims to raise $150 million more in coming months, Turner said.

The precarious economy means fund managers will have to exercise heightened caution, vetting the financial stability of tenants who are suffering as the stock market falters and consumer confidence dips, Turner said.

But he and Lombard said the investment opportunities in low-income minority neighborhoods remain strong, and investors are taking note.

The fund has attracted large public pension funds, insurance companies, banks and Fortune 100 corporations, Turner said. He declined to name them, citing Securities and Exchange Commission restrictions since the fund is still actively raising capital.

“Overall, institutional investment strategies are going to change,” said Turner, whose firm has more than $1 billion in assets under management. “The wonderful returns they’ve earned in the private equity markets over the last few years are not sustained. We’re being much better received than we were six months ago.”

Although dense low-income urban neighborhoods already are seeing unemployment rates spike, Turner said the areas are nevertheless good risks because they are so under-retailed.

“You can have a 40% drop in spending power and they’re still underserved,” he said. “In many communities, 70% of incomes are being spent outside the neighborhood. People have to eat. They still buy shoes, soft goods and basic sundries.”

Added Lombard: “If you have retailers out there looking for quality locations, these are the locations where there will be less competition and more customers.”