Sule Aygoren Carranza is managing editor of Real Estate Forum.

[IMGCAP(1)] As the US population expands and land becomes more difficult and expensive to obtain, the importance of revitalizing our nation’s urban and downtown communities grows. Experts say doing so is not only a public benefit, but also provides an opportunity for real estate developers and investors. On the institutional front, investors are increasingly getting involved in such projects as well. It was only a matter of time before vehicles were created to focus on investing on urban redevelopment.

Enter Urban Strategy America Fund, a vehicle created by New Boston Fund that promises to generate triple-bottom line returns to investors by developing work force and affordable housing in projects that promote economic development, environmental sustainability and smart growth.

The first and largest of the fund’s projects is Olmsted Green, a mixed-use, mixed-income sustainable community in Boston. USA Fund is partnering with Lena Park Community Development Corp. on the $180-million project, which will include 287 work force housing condos, 153 affordable rental units, 83 units of affordable seniors housing and a 123-bed skilled nursing and mental health facility. The first phase will be delivered this spring. The development is situated on the 42-acre site of the former Boston State Hospital, which sat vacant for 25 years and is said to be the largest parcel of developable land in the city. The city’s zoning commission has approved the site to qualify as Boston’s first Chapter 40R Smart Growth Overlay District, which makes the city eligible for $350,000 in state incentive payments plus $3,000 per new home over the underlying zoning. The 40R Smart Growth program encourages dense and affordable residential development in town centers, downtowns, near transit or on vacant or industrial land.

Another project, Winooski Falls, is the largest redevelopment initiative to date in Vermont. A public-private effort between the fund and HallKeen, the complex offers 213 units, 70 condos, 156,000 sf of office and 16,000 sf of retail, as well as preserves more than 100 acres of adjoining riverfront property for open space and recreation.

Its most recent investment is Wyomissing Square, a 13.3-acre class A, mixed-use urban community in Wyomissing, PA that includes 248 apartment units, 14 townhomes, 31,000 sf of retail, 60,000 sf of office, an 18,000-sf restaurant and a 135-room Marriott Courtyard hotel. The fund entered into a joint venture with the Bozzuto Group to redevelop a portion of an older industrial building into the 248-unit, four-story apartment component. Work began last month and delivery is slated for early 2010.

In a recent conversation with, Kirk Sykes, president of USA Fund, discussed the fund, his view of the market and strategy for the future. Tell me a little about Urban Strategy America Fund. Why and how it was established?

Sykes: To answer that, we have to go back to 1955, when New Boston Fund started off as real estate developers. They switched from being developers to a fund structure in 1993. It was doing predominantly commercial acquisitions. They created six consecutive funds that acquired or developed up to $4 billion of assets. USA Fund was launched in 2006.

I had been a developer myself, predominantly doing urban and economic development deals through the 1990s and into early 2000. In 2004, I got together with New Boston Fund as a capital partner on [IMGCAP(2)] Olmsted Green, which is now the fund’s first investment. Within a year, it became obvious that there was a huge demand for urban and economic capital that wasn’t being met by the current marketplace. Even today, I think there are only a handful of urban and economic development funds.

That relationship expanded into an opportunity to make capital available to a wide range of developers through a joint venture structure. I think because we were developers to start with, we understood that space and the complexity and opportunity that was present in taking on challenging deals and getting risk-adjusted rates of return for investors.

Geographically, we operate on the entire East Coast but predominantly in the markets of our investors, so we have an office in the Southeast, the mid-Atlantic and one in the Northeast. Out of those offices, we engage in joint ventures. The organization is fairly unique in that it’s a 200-person, vertically integrated fund. We have our own 30-person development group that operates out of our Northeast office. We also handle portfolio management and asset management–it’s sort of one-stop shopping for people who want to invest in the markets we’re interested in. What are your primary areas of focus?

Sykes: The fund is diversified, about half development and half acquisition. In the acquisition space, it’s a combination of value-added and core-plus investments. Half of our investments are in housing, both traditional multifamily and mid-market, work force housing. The other half is spread across the commercial spectrum, including the industrial, office and retail sectors. That diversification gives us the balanced returns we’re looking for along with the combination of acquisition and development. Who are the investors in the fund?

Sykes: We brought together 15 institutional investors–banks, pension funds, insurance companies¬ and the like–that were looking for a triple-bottom line return on investment, and were interested in economic and community development as well as, when possible, sustainability. What sorts of returns are you looking for in your investments, and what are your typical hold periods?

Sykes: We’re looking for pure acquisitions to be in the 10% to 12% range, and value-added transactions to be between 15% and 16%. For pure development plays, given the risks involved with that strategy, we expect returns north of 20%. So you’re looking at a blended return of about 15%. We have a three-year investment period and a six-year hold with two potential extensions at the discretion of our investors. We underwrite everything on a seven-year basis. How do you choose your development partners?

Sykes: We partner with developers and, in some instances, community development corporations. The CDC partnerships are typically in New England because we can augment the skill set of CDCs, which can unlock the access to that low land basis and the gap financing. By pairing their access and community mobilization expertise with our execution capacity, we can frequently undertake projects that others aren’t able to.

Amongst more traditional developers, we are looking for the top tier of sponsor we can identify. In the case of the Wyomissing project, we’re partnering with the Bozzuto Co. We feel confident, based on their prior performance, execution capacity and experience that they are the kind of partner we’re looking for. There’s no substitute for partner experience, depth of organization and familiarity with the product type we’re working in. Has the way you do business changed in light of the shift in the capital markets?

Sykes: The value of being around such a long time is that you’re able to develop debt relationships, and now is a time when relationships are very important. While the capital markets have become constrained, we’ve been able to access not only the equity we have, but also have debt providers that wants to place capital with us. And because the fund is comprised of not only pension funds, but also banks and insurance companies, a lot of our partners are the providers of the debt and tax credits we use. Where do you see the opportunities now?

Sykes: We believe that while cap rates will rise, there will continue to be strong opportunities in markets that are anchored by strong demand generators. Some of the markets we look to are anchored by medical and education institutions that provide a stable demand for housing and an attractive environment with amenities that people want to be associated with. We still think there are opportunities, we still have capital to put out and we’re not going to sit on the sidelines. A few of your projects include condominiums. Given the slowdown in that sector, will you be reducing the for-sale components in your investments going forward?

Sykes: In most markets, deals presented to us are being underwritten as rental projects with a potential condo exit, but it doesn’t become a central component. Where we are investing in homeownership, in a smaller manner, is markets we have confidence in. We take the mandate of providing work force housing seriously and we think it’s achievable when you have a low land basis, subsidies and gap financing through public-private partnerships. In some of the projects, including Winooski and Olmsted Green, there are substantial amounts of public investment because of their economic development components. That’s a great thing right now, because there are many market-rate projects that don’t stand on their own because they don’t have the low land basis or the gap financing. How many investments has the USA Fund made so far?

Sykes: We’ve currently committed $88 million to about eight projects and have another $44 million in five deals that are in negotiation. In addition, we have a pipeline of about another $100 million. And what’s your total investment capacity?

Sykes: About $190 million. Our strategy in raising a fund of that size was to be selective about the types of investments that we could make. I probably would not want to be managing a $1-billion fund today, in terms of having to get capital out. We’re looking for a few good deals. Our sweet spot is investing between $5 million and $20 million of equity, levered at about 75%, so deals that are between $20 million and $80 million. We do have deals in the fund that are $150 million, but they’re multi-phase transactions. When the fund is fully invested, it will basically have 20 to 25 investments of various sizes. When do you expect that to occur?

Sykes: We’re confident we’ll be fully invested by the end of 2008. And then?

Sykes: Raise another fund. We have a commitment to our current investors to succeed in our investments, and I would expect that some of them will renew their interest and re-up., There are also other investors who have expressed interest in the fund, given our activity to date.

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