A California developer is trying to raise $1 billion to invest in Black and Latino communities. If successful, it would be one of the largest commercial real-estate funds ever to focus on minority neighborhoods.
Martin Muoto, chief executive of the real-estate firm SoLa Impact LLC, already runs three funds totaling $180 million. They focus on affordable housing and some commercial real estate in minority neighborhoods around South Los Angeles. The funds, which raised money from individual partners in large investors like the private-equity firm General Atlantic, have recorded double-digit average annual returns since the first fund launched in 2014.
Now, Mr. Muoto is trying to use a similar approach in cities across the U.S. that suffer from a shortage of affordable housing and from what he said are regulatory barriers that make it tougher to build. His new Black Impact Fund is focusing on large metropolises like Philadelphia and Atlanta, as well as midsize cities like Fresno, Calif.
SoLa has been investing in opportunity zones, a program created by the 2017 federal tax overhaul that allows investors to defer and reduce taxes if they reinvest capital gains in designated low-income communities.
Critics of the program say it sometimes misses the mark, like when states earmark neighborhoods where development is already taking place. That could give investors a significant tax break without creating many new jobs or more affordable housing in poorer neighborhoods.
President-elect Joe Biden has suggested overhauls, including requiring more detailed reporting on job growth and poverty reduction. Mr. Muoto said he has raised questions about opportunity-zone investments that haven’t delivered benefits to distressed local communities.
Mr. Muoto’s Black Impact Fund consists of two separate funds—one targeting $500 million in opportunity-zone investments and another one with a $500 million goal for making investments near designated opportunity zones. He said areas near these zones can benefit from spillover effects such as asset appreciation. By offering a non-opportunity-zone fund, he can also raise money from pension funds and endowments that are interested in social-impact investing but already benefit from other tax incentives.
Mr. Muoto, who left Nigeria after receiving a scholarship from the Wharton School of the University of Pennsylvania, said there is a stigma that these neighborhoods are unsafe or unruly.
“The perception that these are going to be hard places to operate in, it’s not altogether untrue,” he said.
But he said he has found a process that can work. The first step he takes is building affordable housing, and then, offering access to education. SoLa Impact has a foundation that offers scholarships and financial-education programs such as mock stock challenges.
To ensure the communities benefit from the Black Impact Fund, 13% of fees and asset appreciation will go to a nonprofit entity that will perform social-impact work and build housing for purchase at cost in areas where the new fund invests. It will be modeled after SoLa’s nonprofit, which provides students in the Watts neighborhood of Los Angeles with scholarships to colleges and vocational schools. Recipients learn skills that could help them make a living, Mr. Muoto said. The community and educational programs also earn the trust of residents who, in turn, make the effort to take care of the area and pay rents on time, he added.
“When you really align with the community, it does not dilute your returns. They solidify your returns,” Mr. Muoto said.
During the coronavirus pandemic, housing for lower-income communities has outperformed market-rate housing in coastal areas as the shortage of such affordable homes resulted in lower churn rates and better returns.
Developing projects in minority neighborhoods can be a good deal, especially if land is cheaper and there are tax and infrastructure incentives. With a comprehensive plan, “you make your returns on the buy, on the way in,” said William W. Towns, adjunct professor of social impact at Kellogg School of Management at Northwestern University.