Fund Stunted By Economy

SAN DIEGO, CA - A local investment fund formed five years ago to spark revitalization in older communities and spur development of affordable middle-income housing has become yet another casualty of the prolonged economic slump. Operators of the San Diego Smart Growth Fund, which held the promise of leveraging as much as $500 million in commercial and residential development, say they had little choice but to dissolve the fund as opportunities for new projects dried up.

Making matters worse was a decision by major investors, including CalPERS – the California Public Employees Retirement System – to no longer contribute to the fund. The San Diego Capital Collaborative, which acted as the fund adviser, is also closing its doors in response to the depressed economic climate and the demise of what was once a $90 million fund.

"The reality is, over the last 18 months, the economy has fallen over the cliff, and there is no new development occurring," said Barry Schultz, who headed the collaborative. "Therefore, from CalPERS'perspective, they didn't want any more investment in the fund. "Until we are able to stabilize the housing market by reducing the inventory of foreclosures, we're not going to be able to create an incentive for new development."

On the positive side, the Smart Growth Fund was able to invest $30 million in five projects in Chula Vista, Carlsbad, San Diego's College Area and El Cajon, although a couple of them are currently stalled because of the depressed real estate market, Schultz said.

Three of the projects were residential, including single-family homes and condominiums, while the two others were designed as office condos.

The idea behind the private equity fund was to attract financing for work-force housing and urban infill development in low-and moderate-income neighborhoods that ordinarily might not be able to secure such money.

Instrumental in managing the fund and attracting capital for it was Phoenix Realty Group, a private real estate company with offices in Los Angeles and New York that manages similar equity funds throughout the country.

"The San Diego Smart Growth Fund was a success to the extent we got institutional investors in low-and moderate-income census tracts," said Jay Stark, a managing director with Phoenix Realty Group. "But the market in San Diego has gone from bad to worse, and it's a tough hill to climb.

"There is still a tremendous need, though, for middle-market housing. For us, this is a long-term business and right now, we have a short-term market problem. We'll go back to investors at the appropriate time to do more things in San Diego."

Percy Vaz, of AMCAL Multi-Housing Inc. in Los Angeles, which received a $3 million investment from the fund for a planned 65-unit condo project on El Cajon Boulevard, acknowledged that the San Diego initiative was a victim of bad timing.

Vaz got as far as demolishing an old, run-down motel on the site of his San Diego project before deciding to halt work in the face of the housing collapse.

"Had it been a different time, the role the San Diego fund could have played would have been critical to delivering work-force housing," said Vaz, whose company also has worked with Phoenix Realty on an affordable for-sale and rental housing project in Los Angeles that was tied to mass transit. "But across the United States, financial institutions are pulling back because of the condition of the housing market."

According to documentation provided by CalPERS, which maintains a multibillion-dollar real estate portfolio, its investment in the San Diego fund realized a nearly 11 percent decline since the fund's inception in 2005.

Besides spurring investment in targeted communities, the fund was supposed to provide investors with a reasonable rate of return at the completion and sellout of housing and commercial projects.

In addition to acting as the fund adviser, the San Diego Capital Collaborative was also charged with crafting community investment strategies for each of its target neighborhoods: Barrio Logan, North Park, City Heights, the College Area and Normal Heights.

"I'm very disappointed we weren't able to keep the Capital Collaborative alive because I'm convinced there will be a continued need for socially responsible investment funds," Schultz said.

"Most of the investment in our low-and moderate-income communities has been through redevelopment agencies and government, which is now struggling. So there will be a big need for a private-public approach to new development, which was the model we were trying to build."