Reaching Out to Minority Investors
By: Dan Ruh, senior vice president, real estate development, Al. Neyer
A team led by Al. Neyer and Jostin Construction convened a group of 43 largely middle-class, minority, first-time investors to purchase two parcels in Cincinnati, including this 165,000-square-foot office building, which was renovated and leased (primarily to the Christ Hospital Health Network) before it was sold.
A Cincinnati-based developer enables a diverse group of community residents to invest in and benefit from a commercial real estate project.
FOR GENERATIONS, Cincinnati has played a unique role where race relations are concerned. The city is set along the Ohio River, which forms the border between Ohio and Kentucky and long served as a literal and symbolic obstacle for slaves seeking safe passage to freedom in the 19th century. More recently, the city brought its residents together after riots erupted in downtown Cincinnati in April 2001, spurred by the police-involved shooting death of Timothy Thomas, an unarmed 19-year-old African American man.
The incident and the four days of riots that followed heightened racial tensions in Greater Cincinnati and had a lasting impact on the economic vitality of the city’s urban core. Some businesses fled to the suburbs, influential community groups led a boycott on downtown businesses and many Cincinnati retail and dining venues welcomed fewer and fewer patrons. But the Queen City’s downtown business community pulled together to sponsor initiatives aimed at reuniting the city, including making investments in area educational programs and increasing minority hiring.
Appealing to New Investors
Commercial real estate developer and design-builder Al. Neyer wanted to take this effort a step further and give individuals from diverse backgrounds a seat at the table. The Al. Neyer team was inspired by a health care client, The Christ Hospital, which was looking for more space to grow and wanted to invest in its Mt. Auburn neighborhood. The team reached out to a partner they knew would help champion the effort.
Al. Neyer asked Albert Smitherman, president and CEO of Jostin Construction, a minority-owned construction firm based just north of downtown Cincinnati, to help bring together a group of interested investors. “We sought out people who had been working hard, maybe for five years or as many as 20 or 30 years,” said Smitherman. “I was looking for people who woke up every day, worked hard, but hadn’t been invited to the room where the deals are made. These were middle-class people who had been saving their money every day. They weren’t millionaires. They were working hard to do things like put their kids through college.”
“We knew this segment of our community wasn’t included in major real estate dealings, and it was important to us to change that,” said Molly North, Al. Neyer president and CEO, who was part of the team that executed this deal. “We were aware of some key real estate opportunities on the horizon, and we wanted to make sure the people who lived and worked in the neighborhood were able to be involved at a more significant level.”
About a quarter of the people approached passed on the opportunity, in some cases because they didn’t have the liquid assets needed, and in others because they were nervous about the uncertainty and risk involved, said Smitherman. Eventually, the team convened 43 investors — young, old, black, white, men and women — only four of whom were considered wealthy or regular players in the commercial real estate industry. The remainder included single parents, people approaching retirement and other middle-class people unfamiliar with real estate investment.
Community organizer Freeman McNeal said he didn’t have to think long about participating. He knew that a project involving Smitherman and the Al. Neyer team would lead to success. “When someone reaches out to someone who doesn’t have a lot of money, and says, ‘We want to develop new wealth, and we want to develop it in the black community and in the neighborhood itself,’ this was a great, great opportunity,” says McNeal. “It brought in people who had never entertained such ideas.”
Smitherman and executives from Al. Neyer joined with first-time investors, some of whom invested less than $5,000, and purchased two parcels, including a 1960s-era 165,000-square-foot office building, in December 2011 for nearly $7.6 million. The team knew that the parcels’ location on Taft Road, north of downtown Cincinnati near many hospitals, would be appealing to the client. The Christ Hospital’s 555-bed main campus was less than a mile away, offering a chance to support growth while consolidating operations and making a meaningful impact on its surrounding neighborhood.
Investors were subject to all typical equity capital risks, including the potential loss of all or a portion of their investment as well as capital calls based upon their prorated share of the overall equity investment. Had a capital call occurred, investors would have been required to make their prorated investment or be diluted by investors making up the respective shortfall. At the time of the initial investment, there was no definitive plan to either sell or hold the property. Had it been held, it would have taken several years to recoup the investment, but a sale or major recapitalization event would have been required in any case to provide any level of investment return. The real estate capital markets as well as the debt markets were quite volatile at the time of the initial investment, so return expectations were conservative.
“The most important part of this [project] is the diversity,” said McNeal. “Everyone worked together like a family. If we disagreed, we took it on and moved forward. We knew that if we succeeded, it was together. If we failed, it was together. As long as we stayed true to each other, we knew we were going to be able to move forward with this opportunity.” Fellow investor Bridget Patton agrees. “Not everyone in the group knew each other, but [we] were only one or two links removed. So we made some new connections and a great sense of, ‘We did it together!’ It was a great sense of comradery as a team.”
Construction crews renovated the office building and leveled a second, aging building to make space for a parking lot. The Christ Hospital became the property’s primary tenant in spring 2012, and the minority investment group sold the property to an out-of-town investor in late 2013 for $22.5 million. The sale was completed in response to a tightening market, coupled with the market’s desire for strong credit tenants such as those offered by the hospital’s lease.
Smitherman said he is working with the Al. Neyer team to find more investments that will spur the entire community. “The people we included in this opportunity didn’t put [the money they earned] back in the bank,” Smitherman added. “They saved some, but then hired another local person to paint their house, or maybe install new carpet. Middle-class people who put more money back into the local economy. Wealthy people would have taken the profits and put it in another annuity or in the stock market. They wouldn’t infuse the local economic landscape the way our investors have.”
According to Freeman McNeal, this group of investors is eager for a new project: “In the city of Cincinnati, regardless of your background, this is proof you can come together and find inclusive opportunities for success and parity.”