The Urban Investment Opportunity

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The Case for Urban Investing
State Treasurers  NAUPAAnnual Conference
Canyon-Johnson Urban Fund, L.P.
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Our Mission
The Canyon-Johnson Urban Fund, LP was formed to
identify, enhance and capture value through the
development and redevelopment of real estate in
densely populated, ethnically diverse urban
communities. The Funds objectives are to seek
current income and capital appreciation and, in
addition to meeting its investment goals,
Canyon-Johnson is committed to providing for and
fostering economic opportunities for the
residents of the urban neighborhoods in which the
Fund invests. The Fund was closed to
additional investors at the end of 2002 after
having received nearly 300 million in
commitments and since its first investment, the
Canyon-Johnson Urban Fund has been proving that
there is a tremendous real estate opportunity in
densely populated urban communities and their
surrounding metropolitan areas.
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Defining Urban Real Estate

• Social Investing in low income communities
  without regard for return on capital, often
  driven by tax credits.
• Re-gentrification Investing to change the
  character of an urban community which
  typically involves the displacement of the
  communities existing residents. Demand for
  these projects is often times difficult to
  quantify.
• Revitalization Investing in densely populated,
  ethnically diverse communities characterized
  by a large mismatch between supply and demand
  such as housing and retail.

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Fundamentals of Revitalization -A Growing Ethnic
Population

• Ethnic-minority populations now represent over
  35 of the US population and are heavily
  concentrated in Americas urban communities
• Americas ethnic population is growing at seven
  times the rate of the general population
• Immigrants and their children are expected to
  make up 50 of the projected population growth
  over the next 30 years
• Fannie Mae study predicts population of 25
  largest cities will grow by 75 within 10 years

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Fundamentals of Revitalization -Significant
Mismatch in Supply and Demand

• Retail
• Top 44 US cities have over 1 trillion in retail
  purchasing power
• Ethnically diverse inner cities possess 331
  billion in retail purchasing power
• Due to population density, collective spending
  power is up to six times greater per square mile
  than that of suburban markets
• Minority residents have 75 fewer retail options
  than suburban counterparts
• In many minority communities, upwards of 40 of
  demand is going unmet
• Retailers experience superior sales per square
  foot in urban locations
• Housing
• Top 50 cities short 2.5 million housing units
• Fannie Mae study predicts population of 25
  largest cities will grow by 75 within 10 years
• 1997-1999 Housing prices rose at more than double
  the rate of inflation and rent increases exceeded
  inflation in all three years

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Fundamentals of Revitalization -Pro-growth
Environment

• Unlike suburbia, cities must rebuild tax base
• Must get land off city balance sheets and back on
  the tax roll
• Jobs must be created where the people are states
  have huge incentives to get people off
  unemployment and risk losing federal aid if they
  are not successful
• Empowerment Zones and other governmental
  incentives to attract investment
• 23 Empowerment Zones and 66 Enterprise Zones
• Grants, federal wage credits, sales tax refunds,
  property tax relief, reduced utilities cost, tax
  exempt financing and equipment tax deductions

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Fundamentals of Revitalization - Lack of Capital

• Estimated that only 1 of US domestic private
  equity capital is currently targeted toward real
  estate development and businesses in core urban
  areas
• Investor Related Challenges
• Misperception of greater risk
• Misperception of social objectives versus
  economic objectives
• Lack of qualified or underwritable sponsors or
  joint venture partners
• Manager Related Challenges
• Requirement of additional investment disciplines
  to capture market opportunity
• Lack of information or research to support
  investment
• Incomplete understanding of government incentives
• Lack of investment track record
• Lack of proprietary deal flow

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What are the Keys to Successful Urban
Revitalization?

• Recognize that traditional value oriented skills
  are not enough to capture the opportunity
• Past performance in suburban markets is no
  indication of future success in urban markets
• Requires an understanding that the process is
  inclusive rather than exclusive (public/private
  partnership)
• Requires an in-house ability to underwrite the
  urban marketplace
• specific locations within communities
• specific needs and goals of community
• operations within a specific community (safety,
  merchandising)
• Requires an in-house understanding of government
  process and how to capture the funds available to
  support urban growth

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Defining Success - CJUF Track Record

• CJUF has made or committed to 14 investments
  utilizing approximately 230 million of its
  committed capital, facilitating over 1 billion
  of urban revitalization
• CJUF has generated net returns to investors in
  excess of 30 IRR on realized investments and is
  positioned to meet or exceed these returns on
  outstanding investments
• CJUF has generated significant incremental tax
  revenues for the communities in which it has
  invested (i.e. real estate taxes, retail sales
  taxes, wage taxes)
• CJUF has generated in excess of 8,900
  construction jobs and 1,600 permanent jobs
  (strong focus on community hiring)
• CJUF has constructed over 1.7 million square feet
  of community serving retail, approximately 2,200
  units of affordable market rate housing, and 2.2
  million square feet of commercial space

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Multi-disciplined Underwriting Expertise

• Complementary experience across varying asset
  classes
• Significant skill and expertise in a variety of
  disciplines impacting asset values

Accounting
Legal
Architectural
Insurance / Risk Management
Real Estate Asset
Credit Analysis
Structural
Environmental
Government Relations
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Proprietary Relationships
Strategic Tenant Relationships Starbucks,
Washington Mutual Burger King Loews Cineplex, 24
Hour Fitness
Government Development Agencies
CJUF

• Investors
• State and City Pension Funds
• Community Development Banks

Ladera Center, Los Angeles
Real Estate Brokers
Local Partners
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Case Study - Capitol Court Milwaukee

• 700,000 square foot shopping center built in 1955

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Capitol Court (circa December 2000)
20 occupied, functionally obsolete
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Fundamentals of Opportunity

• Income Density
• Average household income misrepresents
  opportunity
• Focus on purchasing power/ square mile and
  compare to available options
• In the case of Capitol Court
• 250,000 residents within three mile radius (5X
  average in Wisconsin)
• 79 million of purchasing power versus less than
  40 million for MSA
• only 5 square feet of choice versus 15 square
  feet for surrounding suburbs
• Significant supply of strategically located
  land at low cost
• 56 acres purchased for 8 million before grants
  (3.43 psf)
• Existing zoning and entitlements
• Existing infrastructure
• Strong demand from national retailers
• Pro-active local government with clearly
  defined revitalization objectives

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Artists Rendering Site Plan
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Artists Rendering Phase I and Phase II Small
Shop Streetscape
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Redevelopment Highlights

• Size of the investment approximately 50.2
  million requiring 8 million equity
• 606,000 sf of new class A retail space
• 300,000 sf Phase I was 66 pre-leased and
  anchored by a 150,000 sf Wal-Mart store
• Leases representing an additional 18 of Phase I
  were expected to be signed in the immediate
  future
• 7.00 un-leveraged cash on cash return with
  executed leases in place
• Pro-forma un-leveraged cash on cash return of
  11.80
• 70 leverage provides for a 28 leveraged cash on
  cash return
• 6.5 million city assistance for
• Site assembly and infrastructure improvements
• Land cost on 56 acres reduced from 3.43 psf to
  .77 psf
• 1,500 new jobs projected and substantial
  incremental tax revenues for the City of
  Milwaukee

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Midtown Center as of April, 2002
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Midtown Center, May 2004
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Severance, Cleveland Heights, OH

• Redevelopment Highlights
• A 50 million, 650,000 sf redevelopment of a
  retail power center on 70 acres
• CJUF equity investment 16.1 million
• 4.7 million City assistance to improve the ring
  road surrounding the center

Tenants include Tops Grocery, Borders Books,
Home Depot, Marshalls, Office Max, Wal-Mart, Key
Bank, Regal Cinemas, Blockbuster, Footlocker,
Funcoland, GNC, Ballys Health Club, Payless
Shoes, Radio Shack
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Sunset Vine, Hollywood, CA

• Development Highlights
• A 115 million, 625,000 sf mixed-use project on a
  3.4 acre city block consisting of
• 300 loft-style apartments
• 87,000 sf retail
• Parking garage
• 20 unique signage opportunities
• CJUF equity investment 18.6 million
• Tenants include Bed, Bath Beyond, Borders, Baja
  Fresh, Verizon, Kabuki Restaurant
• Joint venture with local developer Bond Capital

Sunset Vine Aerial
Sunset and Vine
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Park Place, Brooklyn, NY
Project rendering view from Flatbush Avenue
Project rendering view from Park Place

• Development Highlights
• A 28 million, 90,000 sf mixed-use project
  located at 145 Park Place, in the heart of
  Brooklyns Park Slope district
• 47 market-rate residential condominiums, 25
  underground parking stalls
• 4,500 square feet of ground-level retail space
• CJUF equity investment 10 million
• Joint venture with Anderson Associates

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State Place, Chicago, IL
State Place rendering
Courtyard garden/pool

• Development Highlights
• A 96 million mixed-use project at the corner of
  Roosevelt and State Street in Chicagos South
  Loop on the site of the former Chicago Police
  Department Headquarters, comprised of
• 243 condominium units 84 Terrace units and 159
  Tower units 406 parking stalls
• 67,000 sf of ground floor retail pre-leased to
  Walgreens Drug Store, Multiplex Health Club and
  Spa, Verizon Wireless, and Charter One Bank
• CJUF equity investment 14.7 million
• A joint venture with Mesirow Stein Realty,
  Northern Realty Group and Loewenberg Associates

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Downtown Dadeland, Miami, FL

• Development Highlights
• A 167 million mixed-use urban village
  comprised of seven buildings
• 416 condominium units
• 122,000 sf ground floor retail
• 1,013 parking spaces (123 spaces on-grade, 890
  spaces in an underground parking garage)
• CJUF investment 14.7 million (equity), 25.1
  million (mezzanine debt)
• A joint venture with Gulfside Development

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Smart Corner, San Diego, California

• Development Highlights
• 114.8 million ground-up construction of
• A 19-story tower with 301 for-sale lofts
• A 5-story 103,000 sf office with ground-floor
  retail presold to the San Diego Housing
  Commission
• 640-stall parking structure
• CJUF equity Investment 21.7 million
• A joint venture with Lankford Associates

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Midtown Grand, Atlanta, Georgia

• Development Highlights
• 81.5 million ground-up development of
• 452 for-sale condo units in two towers
• 70,000 sf ground-floor retail to be developed by
  Selig Enterprises
• CJUF participating mezzanine investment 12.2
  million
• Development Team Daniel Corporation

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Charles Village, Baltimore, Maryland

• Property Highlights
• 66.6 million ground-up mixed use development
  consisting of
• - Phase 1 68 lofts 12,500 sf ground floor
  retail
• - Phase 2 83 traditional condos above 28,000 sf
  ground floor retail
• - Johns Hopkins University bookstore Barnes
  Noble
• - City-funded parking structure and street
  improvements
• CJUF equity investment 16.0 million
• Development Team Struever Bros. Eccles Rouse

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Urban Investing Profitable Investing
A) Existing infrastructure

• Superior risk adjusted returns to other
  investment opportunities
• Provide for and foster economic opportunities for
  the residents of these communities
• Theses benefits exist because of the strong
  underlying fundamentals
• Significant supply of strategically located land
• Existing infrastructure
• Pro-growth environment / government assistance
• Large concentration of consumers who are
  generally under-served
• Large concentration of labor
• Increasing population and spending power
• Strong retail demand / strong housing demand
• Lack of equity capital