Sacramento Business Journal

Nehemiah has $40M for 'infill'

February 1, 2002 - A fund that plans to invest up to $40 million building "infill" real estate development projects in the Sacramento region has been formed by Nehemiah Corportaion of California.

The Nehemiah Sacramento Valley Fund LLC should kick into gear by late summer.

It will target low- and moderate-income areas. The fund will use money from investors, including Wells Fargo Bank , as equity capital in partnerships formed with infill developers- those who build in existing, often older urban areas.

"It's another potential resource for developing innovative projects in areas that have not been targeted by capital," said Scott Syphax, Sacramento-based Nehemiah's president and chief executive officer.

Equity money - the money developers bring to a real estate project in order to satisfy lenders - is in woefully short supply for urban-core redevelopment locally. That's been a major hindrance here, even while infill development has become a hot trend in larger urban areas around the country, including Los Angeles and the Bay Area.

"This fund is wonderful news," said Beverly Fretz-Brown, director of housing development for the Sacramento Housing and Redevelopment Agency. "One of the more difficult things for infill developers to obtain is equity. It could help immeasurably with our downtown housing program."

Developers, however, are waiting to see whether the fund's terms for helping to capitalize projects will be acceptable.

"Every time there is more capital, it helps," said Sotiris Kolokotronis, one of downtown Sacramento's most active infill builders. "But if they want to be in and out in a couple or three years and want an extremely high return, it won't be easy for them to find projects."

Returns in the high teens: The fund has been in the works for the past 18 months. It is one of a small wave of socially conscious equity development funds formed in recent years to deal with the growing need to redevelop older urban areas.

The idea behind the Nehemiah fund is based on the $85 million Genesis LA fund, formed at the behest of the city of Los Angeles to promote infill development, said Al Esquivel, project coordinator with Nehemiah.

Nehemiah has so far lined up some $20 million in capital, including $5 million from Wells Fargo, $3 million from Nehemiah itself and $2 million from Pacific Coast Capital Partners LLC.

The fund will start getting involved in projects when it hits the $25 million mark, probably by autumn, Esquivel said.

San Francisco-based Pacific Coast Capital was picked to manage the fund. The company will search out likely infill developments and strike partnership deals with developers. On average, the fund will invest $1 million to $2 million per project, Esquivel estimated.

He estimated that the fund's target capitalization of $40 million could be leveraged into projects costing $200 million or more to develop. The fund's money would typically not be loaned, but would be part of the equity - the cash put into a project by a developer from his own pocket.

The fund will likely expect a return on investment in the "high-teens," and the average length of the investment would be three to five years, said Adam Zoger, a principal in Pacific Coast Capital.

That's where the rub may be for developers like Kolokotronis. "Three to five years will be hard," he said. "We need more patient money - 10-year terms. And I don't think they can substantiate more than the mid-teens for the return."

Esquivel explained that the terms can be adjusted somewhat if the need be. The fund, however, is out to make a market-rate profit and is looking for large projects costing $10 million or more, he added.

One reason equity capital for infill projects has avoided Sacramento is that the projects here and small and few compared to bigger metropolitan areas, said Bill Heartman, vice president of operations for Regis Homes of Northern California, another active infill builder. Investors in the big metro areas look for $25 million projects rather than the $10 million the Sacramento Valley Fund is seeking, he said, and that could fill the bill locally.

Looking for smart growth: The fund's cash will be used for residential and commercial development in low- and moderate- income census tracts. The commercial projects will be judged partly on their ability to bring jobs to an area, Esquivel said.

One thing that makes the fund unusual in the development world is that its criteria include "smart growth" standards.

Smart growth is the term being used to describe projects that do not promote suburban sprawl and traffic congestion. Typically, such projects use infill land and mix housing, retail and offices together to promote walking and use of transit.

The Sacramento Valley Fund will specifically require that its projects:

• Are mixed-use infill projects close to public transit.
  
• Are environmentally designed to "maximize the use" of power, water, existing buildings and other resources.
  
• Encourage mixed-use and mixed-income neighborhoods.
  
• Reduce use of open space by developing in the urban core.
  
• Use "underutilized properties' such as brownfields- polluted land that can be reclaimed.

Most of the developments will be in the counties of Yolo, Sacramento, El Dorado, Placer, Sutter and Yuba, as well as around Stockton, Lodi and Modesto, Esquivel said. Esquivel expects to "close" the fund - have all investors signed on - by June.

Pacific Coast Capital and Nehemiah:

Pacific Coast Capital partnership was formed in 1998 by Zoger and three partners. Three of them, including Zoger, are former bank officer and the fourth is a lawyer. Their aim was to make real estate equity investments in tandem with bank and other investment sources. They set up the $200 million Bay Area Smart Growth Fund I LLC in October of last year. The fund, like Nehemiah's, aims at promoting mixed-use, infill development.

The Nehemiah Corp. of California is a private, nonprofit organization that promotes home ownership and community redevelopment. The company runs The Nehemiah Program®, which calls itself the country's largest down payment assistance program for homebuyers. The company reports it's down payment help has resulted in $11 billion in residential sales to more than 100,000 families.

Nehemiah also operates three existing foundations that help young adults; help social service groups find housing; and give grants to faith and community-based groups.

In other news, Nehemiah this week formed an alliance with Miami-based Homebuilders Financial Network - a mortgage banker that manages in-house lending operations for 19 homebuilders that generate $5 billion in annual sales.

The alliance aims to provide down payment assistance and home loans to new homebuyers in the builders' subdivisions.

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