Building Inner-City Equity

A major development in the 10 years since the Los Angeles riots is that everyone connected with the economy of the inner city--bankers, businesspeople, church groups and economic development organizations--has gone from promising charity to directing capital investment for small- business expansion and homeownership for the poor.

The neighborhoods torn by riots a decade ago may not show dramatic improvement yet, but more capital investment and mortgage financing have become available to low-income areas in the last few years.

The efforts are serious business: Institutional investors, private equity firms and other big players are finally beginning to invest in minority businesses and urban areas, and are expecting market rate returns. Government programs are pushing the new approach, but mostly it results from the need to invest the funds in enormous pension and individual retirement accounts that swelled in the economic and stock market booms of the 1990s.

As a consequence, a new financial order is taking hold in the inner city. If such investments, only now beginning to gain momentum, create new homeowners and help minority entrepreneurs, Los Angeles and other areas of Southern California will tell a different story 10 years hence--if a 20-year anniversary is marked to recall the days of rage and violence of 1992.

Meanwhile, trends are mostly up. Homeownership has increased very little among low-income residents of South-Central Los Angeles, partly due to a sheer lack of available housing.

But mortgage loans are on the rise from major banks and savings associations--fulfilling their government-mandated duty to lend in distressed areas, with help from such church groups as FAME Renaissance Center, the development arm of the First African Methodist Episcopal Church, and West Angeles Development Corp., the economic assistance effort of the West Angeles Church of God in Christ, and from nonprofit organizations such as Operation Hope and the Greenlining Institute.

The church organizations educate poor families about applying for and maintaining mortgage loans and establishing good credit ratings. Homeownership is doubly important to the inner-city economy because a residential property can be used to raise capital to start a business.

In the area of business creation, minority entrepreneurs and urban areas are getting more respect from investors these days. There are ambitious programs, including a $1-billion effort led by state Treasurer Philip Angelides and the state’s public pension funds to make capital available to inner-city businesses and real estate projects.

The “emerging market” of America’s inner cities has become a fashionable subject, from the think tanks of Harvard Business School to Southern California’s Milken Institute, which is working with development organizations in Los Angeles. Basically, economists see large populations in the nation’s central cities as investment targets with fewer risks than projects in developing countries.

Institutional investors are organizing funds to invest in and lend to minority-owned companies. Merrill Lynch & Co., for example, raised a $77-million fund four years ago for home mortgages and business investments. Now it has attracted investors to a new $159-million fund for investments and loans to minority businesses.

Yucaipa Cos., the private equity investment firm of Los Angeles supermarket magnate Ron Burkle, is authorized to invest $200 million of California Public Employees’ Retirement System funds in low-income communities. Yucaipa recently hired former President Clinton to advise it on such investments, which are eligible for tax breaks under the federal New Markets Tax Credits program that became law during Clinton’s term.

The companies of Earvin “Magic” Johnson are investing more than $200 million in shopping center projects in Southern California and nationwide. Former basketball great Johnson also is a co-owner of Founders Bank of Commerce, now the largest African American-owned bank in the country after the merger in 2001 of Los Angeles’ Founders Bank with Boston’s Bank of Commerce.

It all adds up to “more capital on the table for minority entrepreneurs and a greater openness to lending to minority-owned and urban-area businesses,” says Brian Argrett, managing partner of Fulcrum Capital Management, a 10-year-old Culver City firm that has brought about $40 million in equity investments to small local companies.

But that doesn’t mean poor neighborhoods are suddenly booming. Nationally, less than 2% of the $2 billion a year in private equity investments by pension and mutual funds goes into minority neighborhoods. And Los Angeles trails even that average.

“There is a huge gap here in Los Angeles between supply and demand as it relates to equity capital targeting minority enterprises,” Argrett says.

Early Investment in Projects Hard to Find

Developer Chris Hammond, who built the Chesterfield Square shopping center, the first major center to open in South-Central Los Angeles in a decade, says investment at early stages of inner-city projects is hard to come by because many financial firms find high returns more easily elsewhere.

And Bob Gnaizda, president of Greenlining Institute, a San Francisco-based nonprofit backed by church and civic groups, complains that environmental and bureaucratic municipal restrictions are causing a severe housing shortage in Los Angeles, keeping renters who can afford to buy from achieving homeownership.

Still, compared with 10 years ago--or with the decades following the Watts riots in 1965--the region’s inner cities offer a more dynamic story.

Ellis Gordon is an example. A former officer of Founders Bank, Gordon and fellow banker Peter Barash set up a small-business investment company in 1997 to give advice on capital access and financial management to minority businesses.

In 1999, entrepreneur Mike Archibong brought them a chance to acquire Chemrich Laboratories Inc., a 30-year-old Los Angeles firm that was doing $1.4 million in annual sales making private-label equivalents of popular remedies, such as Pepto-Bismol, Ny Quil and Robitussin, for 7-Eleven and other convenience chains.

With $1 million in financing from Fulcrum Capital and Merrill Lynch, and their own investments, Gordon and Barash bought Chemrich. “It’s a business with upside potential,” Gordon explains, because Chemrich’s former owner hadn’t wanted to expand the business, “and we are forced to grow because we have interest to pay and [investment] returns to make.”

A tiny firm such as Chemrich, which with 15 employees operates below the radar screen of the larger suppliers to big grocery chains, exemplifies the needs of minority-owned firms and the difficulties of investing in them, Gordon says.

“Most finance companies won’t take the time and trouble to deal with such small companies.”

Those difficulties are one reason major banks failed so badly in their attempts to get money to local stores and businesses in the wake of the 1992 riots. Gordon, who worked at Founders Bank in those days, recalls “heady times.”

“We would have meetings with major lenders at 7 in the morning until 9 at night, trying to come up with projects and financing,” he says.

But not much happened because potential borrowers weren’t big or sophisticated enough to qualify and major lenders weren’t flexible enough to make the loans.

Even today, large investment companies, such as Shamrock Partners and Yucaipa, often have targets beyond the capacity of most inner-city firms. Yucaipa, for example, is looking to invest $10 million to $25 million in bigger companies, such as minority-owned auto parts suppliers. Shamrock is looking to invest $2 million to $10 million in short-term financing in real estate projects in Los Angeles County.

Such investments will help boost the general availability of capital in underserved communities.

But for small companies, the flexibility and expertise of local banks, church organizations and investment companies such as Fulcrum Capital are needed as go- betweens.

“Access to capital is often a function of sophistication and relationships,” says Argrett, who has degrees in law and business administration from UC Berkeley. He cites Si-Nor Inc., a trash removal and recycling company in which Fulcrum, along with Merrill Lynch, has invested several million dollars.

When Fulcrum came in contact with Si-Nor two years ago, entrepreneur Silas Ugorji, an immigrant from Nigeria, had trash-hauling operations in several states and $4.9 million in annual revenue. But he had no financial relationships beyond checking accounts in a number of banks.

So Fulcrum Capital partners went with Ugorji to major bankers, showed Si-Nor’s financial statements and business plan and arranged more reliable financing. Today, the firm, based in Rialto in San Bernardino County, has grown to $14 million in annual revenue and is contemplating acquisitions for further growth.

Ugorji now owns about 75% of his company, and Fulcrum and its institutional investment partners own about 25%.

“We bridge the gaps between minority-owned companies and today’s capital markets,” Argrett says, referring to the vast amounts of private investment capital available in the U.S. financial system.

A shift has occurred in recent years that directly affects inner-city economies. Banks, for many reasons, have had to cut back lending to all borrowers, Argrett says. But private equity investing has “exploded” because of the growth to trillions of dollars in individual retirement accounts and employee 401(k) accounts. As investment companies have managed those accounts, private equity investing has reached into every corner of economic activity.

As a result, more capital has been made available to minority-owned businesses with increased emphasis on the requirement that they operate profitably and earn returns on that capital.

Increasing Role for Church Organizations

And that new financial order has elevated the importance of church development organizations such as FAME Renaissance that act as intermediaries between capital and the communities.

FAME Renaissance runs a business incubator, teaching business skills to potential local entrepreneurs, at its headquarters, a once-derelict building that the organization has restored on West Adams Boulevard. FAME Renaissance manages $5 million in venture investments entrusted to it by Wells Fargo & Co., Walt Disney Co. and other companies, and has invested in three small firms, says the Rev. Mark Whitlock, a onetime Wells Fargo banker who is now executive director of FAME Renaissance.

FAME Renaissance and similar church-related organizations also operate as mortgage brokers and bankers, helping to secure 250 to 300 home loans a year.

Progress may be slow, but a lot of changes are occurring, says Linda Griego, the entrepreneurial restaurant owner who headed Rebuild LA, or RLA, in the straitened mid-’90s after the initial post-riot enthusiasm faded. RLA had little funding at that time, so Griego put the organization to work identifying all the businesses that existed in Los Angeles’ many communities.

The result was the creation of groups of entrepreneurial business owners in food processing, apparel, plastics and biomedical instruments manufacturing so they could lobby City Hall as collectives and gain greater access to capital.

Today, in a tour of the area that was torn by violence and despair a decade ago, Griego sees home purchases by Latino immigrants establishing family capital and new stores opening on side streets between South-Central Los Angeles’ long and still distressed boulevards.

She cites Mercado La Paloma, an abandoned warehouse near 37th Street and Grand Avenue that has been restored as a covered market for small merchants by Esperanza Housing, a nonprofit organization that renews apartment houses by serving as a bridge for tax credit-assisted investments in affordable housing.

That combination of investment and entrepreneurial enterprise, with an assist from government and nonprofit institutions, is truly rebuilding L.A. today and will make it a more prosperous place in the decade to come.

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James Flanigan can be reached at jim.flanigan@latimes.com.

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RELATED STORY

Looking back: Today’s Times Magazine features an article revisiting the scenes of the 1992 L.A. riots. Accompanying video and photos are at www.latimes.com/riots.