LA-Based Fund Aims To Raise $1B For Investments In Black And Brown Neighborhoods
Los Angeles investment fund manager and housing developer Martin Muoto is planning to raise $1B to invest in Black communities and communities of color in major urban markets.
After the summer, companies and investors across all sectors of commercial real estate — and the financial institutions that fund them — pledged billions to close the racial wealth gap and work to undo the financial legacies of systemic racism. Muoto, who is Black, said that there has been a tremendous focus on the problems of racism, and he believes people want to focus on possible solutions.
“We said, ‘OK, let's give these firms a conduit to actually do what the PR and the lip service says,’” Muoto told Bisnow.
The $1B endeavor, called the Black Impact Fund, would actually be two funds: one of $500M for qualified opportunity zones and another $500M fund for projects near but not in those federally designated areas. The latter is aimed at entities that already receive significant tax incentives, including endowments and pension funds, and will offer institutions a way to participate in Black Impact Fund projects.
Raising money and investing it in Black and Brown communities has been in Muoto’s wheelhouse for several years now. Muoto is the CEO and founder of SoLa Impact, an urban real estate fund with properties throughout South Los Angeles. He runs a total of three funds with more than $180M in investments.
The Black Impact Fund also allows for a portion of all asset appreciation and fees earned to fund the affiliated nonprofit Black Impact Community Fund, which will be used to add housing stock, both for sale and for rent, to the communities that house the fund’s projects.
The idea for the Black Impact Community Fund was a direct response to what Muoto calls “a valid criticism” of the Opportunity Zone program, which helps wealthy investors become even wealthier without providing similarly substantial gains to the communities in which those investments exist.
That wasn’t the original goal. When the OZ program was created by the Tax Cuts and Jobs Act in 2017, it was touted as a win-win plan that would encourage investment in distressed areas while offering breaks on capital gains taxes for the investors.
Investors direct their capital gains into Qualified Opportunity Zone funds, allowing them to put off paying taxes on those gains, and the money in those funds is invested for a minimum of five years in real estate or a business in any one of nearly 9,000 designated areas across the country.
The zones, chosen by state governments, were supposed to be primarily in low-income or historically disinvested neighborhoods. But in Los Angeles and most big cities, critics noted that many OZs are located in neighborhoods that were already experiencing a wave of investments.
By committing a fixed percentage of the appreciation to additional housing creation, Muoto said the Black Impact Fund has an answer to the question of how they are enriching the community through their projects. Muoto said that this one will be publishing updates on how much was generated through the community fund, and the projects that the money was used for, in an annual social impact report.
Critics of the current version of the OZ program, including President-elect Joe Biden, have called for reforms that are like Muoto’s self-reporting on steroids.
Biden has proposed a three-part approach that would require detailed reporting on the community impact of OZ investments and the disclosure of that reporting; setting up restrictions on which projects can receive the program's tax benefits based on that impact; and incentivizing investors to work with local organizations and nonprofits to create a community benefit plan for each investment.
“We cannot close the racial wealth gap if we allow billionaires to exploit Opportunity Zones tax breaks to pad their wealth, rather than investing in projects that benefit distressed low-income communities and Americans that are struggling to make ends meet,” a page on Biden’s campaign website reads.
Urban Institute research analyst Jorge González says it is certainly possible that the momentum toward building an equitable economy for all Americans born out of the summer’s urgent, heated protests and racial reckoning could drive investors to funds like Muoto’s with stated goals focused on ensuring community benefits.
Gonzales is a co-author of a widely referenced June 2020 Urban Institute report that reported that as it is now, the opportunity zones program is not providing the economic or community development boosts to the areas it sought to improve through investments.
“I think there’s a possibility that this would be a catalyst for some investors who were not even interested or aware that they could do impact investing,” González said.
But González noted that the investors who participate in the program are doing so in order to make a return. He said many of the mission-driven investments he has seen through the course of his research are not able to provide the internal rate of return that investors expect. If the return is not sufficient, those investors are not going to be interested.
Muoto’s previous funds have specialized in multifamily rental housing, and have recorded double-digit average annual returns since the launch of the first fund in 2014. Muoto says multifamily is predominantly what the Black Impact Fund will be investing in. The “sweet spot” he is eyeing is 50- to 100-unit buildings, which he said generally means between $10M and $25M in total development costs.
The Black Impact Fund launched at the beginning of December, but Muoto said there are already a number of individual investors locked in and about a half dozen institutional investors, including university endowments. Muoto said he expects to have funds raised in three to six months, which he said is typical, though he did add the caveat that institutional investors can take more time to lock in decisions.
“The response has been overwhelmingly positive,” Muoto said.