Capital Offensive : Inner Cities Make Headway in Search for Growth Funds

What if you recognized that the words inner city stood for untapped business opportunity rather than a place of destitute poor people that business hastens to avoid?

And what if you knew that the uppermost need and desire of the African American community and all the other communities living in inner cities was not for more welfare or protection from crime in the streets, but for capital formation?

Well, if you knew all that you would understand the realities of this time in the inner city, particularly the poor neighborhoods of Los Angeles and Southern California.

Smart people in business and government and social work are all agreed now that capital formation, the fancy name for putting together equity in a home or small business, is the new key to the American Dream.

That’s why the city of Los Angeles will start up a Community Development Bank in January with $435 million in capital for loans and venture investment in small businesses.

“This area has seen so many calamities that it’s ahead of the rest of the country in small-business support,” says Rockard Delgadillo, head of economic development in Mayor Richard Riordan’s office.

That’s why Mark Whitlock, a former banker, is heading FAME Renaissance, a small-loan program connected to Los Angeles’ First African Methodist Episcopal Church. Whitlock has made 63 loans to restaurants, furniture manufacturers, food markets and other businesses.

And it’s why John Bryant runs Operation Hope, a 3-year-old organization that has funneled bank loans to 30 new homeowning families in inner-city neighborhoods and arranged financing for several entrepreneurs.

“Homeownership builds capital. If you have equity in your house, somebody will give you a loan to start a business,” says Bryant, whose organization helps banks fulfill obligations under the Community Reinvestment Act, a 1977 law that requires FDIC-insured lenders to spread the money around.

Yes, but what’s new, you ask. Aid to inner cities is an old and discredited story. What’s new is a shift in thinking toward self-help and entrepreneurship that the Oct. 16 march of African American men in Washington threw into sharp relief. The pre-march period was shadowed by rhetoric calling business owners in poor neighborhoods “bloodsuckers.”

But the march itself was a demonstration of renewal and commitment that more accurately reflected inner-city thinking these days, especially in Los Angeles, where there is great admiration for Magic Johnson, the basketball star-turned-businessman, who has built a stunning complex of 12 movie theaters near Crenshaw in a joint venture with Sony.

Johnson--and Sony--were responding to commercial opportunity, not charitable impulses. “African Americans buy 25% of all movie tickets sold in America,” notes Bryant.

The real question is why the opportunity was left for Johnson and Sony. Why wasn’t the area overrun with movie houses?

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The answer is that inner cities are underserved. RLA (formerly Rebuild L.A.) found that residents of Los Angeles’ inner cities--South-Central and East L.A., Pacoima and Pico Union--were capable of spending more than $1 billion a year on groceries but that markets serving them had capacity to sell only $600 million a year.

The area was underserved. And the same could be said for parts of Santa Ana, Reseda and North Hollywood.

Big companies, from supermarkets to banks, cite fear of crime for not putting branches or stores in such neighborhoods.

But often the problem is overstated and the opportunity ignored, as independent grocers are proving. Mike Shalabi heads a family company that owns R Ranch grocery stores in Santa Ana and Los Angeles and opened an R Ranch store last March in South-Central, with help from Councilman Mark Ridley-Thomas, Supervisor Yvonne Brathwaite Burke and RLA.

Sales in the new store are 50% greater than anybody expected, says Shalabi, who was born in Colombia of Palestinian parents. He is a member of a grocers cooperative that holds down costs of insurance and inventory compared to the major chains.

Some costs are higher in the inner city but business is better than elsewhere, Shalabi says.

Is Shalabi a “bloodsucker”? Hardly. His stores employ neighborhood people and promote them to managers, preparing them, in effect, to own their own stores when they can get the capital.

That won’t be easy, however. It costs $3 million to $5 million to open a store, and banks will only lend 70% on premises and inventory. So family capital, or special loans, are needed.

That’s why there is a new stress on capital formation and why African Americans today are looking to the examples of Asian communities that pool money to start businesses, or to Latino-owned businesses set up with an equity stake from uncles, cousins and other extended family members.

They are looking admiringly, not resentfully.

“We need access to capital,” says Whitlock, who left Wells Fargo Bank to help FAME channel $3 million in loans. “We want the opportunity to fail,” Whitlock says, pointing out that there is no safety in lack of capital.

One ironic problem is that African American communities are like most American communities, without extended immigrant families to turn to for an equity stake.

Still, in Los Angeles’ inner city, a start is being made. Of 63 businesses Whitlock has backed in three years of making loans, 58 are succeeding--and building capital to start new ventures. In inner cities, as everywhere, success breeds success.

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Areas of Opportunity

Smart business people are finding growth markets for all kind of goods and services beneath the image of grit and crime suggested by the words inner city .

* African Americans, with buying power estimated at nearly $400 billion in 1995, representthe ninth-largest consumer market in the world. * Only 35% of inner-city Los Angeles residents are homeowners, but of the other 65%, many pay as much rent as would carry a mortgage, if they could get one. * At the Baldwin Hills Mall in South-Central Los Angeles: Wilson’s Suede & Leather store posted top regional sales in 1994, the Disney store sells more videos than any other Southern California store, and sales at the Sears store are up 34% over last year. * American Savings Bank’s most profitable branch in 1994 was in East Los Angeles. * Independent grocers who have opened stores in the inner city report sales 30% above the expectations of lenders and food marketing experts.

* Operation Hope has funneled $4 million in home loans to inner-city residents in the last three years; a homeownership seminar at First AME Church this Saturday is expected to attract 50 to 100 potential homeowners.

* Los Angeles’ Community Development Bank, opening in January, will include $64 million for venture capital investments in inner-city businesses.

Source: Operation Hope