News Column

Remaking the Inner City

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"The most frequent thing I hear when I visit one of our communities is, 'Thank god someone is building new homes in this neighborhood,'" says Henry Cisneros, chairman and CEO of American CityVista.

Launched in August 2000, American CityVista is an urban construction venture involving homebuilder KB Home, Mr. Cisneros, and a handful of other investors. In less than three years the company has sold more than 1,000 homes in five city developments. American CityVista has built or is in the process or building 12 such communities in California, Texas, and Arizona and expects to build 1,400 homes in the year ahead.

Though the company specializes in so-called infill development projects - urban sites that have, in the words of Mr. Cisneros, "been written off" - all of the construction is aimed at middle-market buyers. Prices range from about $75,000 in Laredo, Texas, to more than $300,000 in Sylmar, California.

"It has been very successful. All the developments have either sold out or are on the verge of being sold out," says Mr. Cisneros, a former secretary of Housing and Urban Development and former mayor of San Antonio. Hispanics have accounted for about 70 percent of sales, he adds.

According to the September 2002 issue of Forbes magazine, American CityVista had to that point earned a gross profit of $27 million on revenues of $135 million. Mr. Cisneros says the actual figures are considerably more modest, though he declines to provide specifics.

KB Home owns 35 percent of the company; Mr. Cisneros and his partners own the balance. All told, the venture has seven principals and offices in San Antonio and Los Angeles.

In addition to its own development projects, American CityVista will soon begin building communities in California cities as part of Pacific CityHome, a partnership involving Washington Mutual and backed by the CalPERS (California state retirement fund) investment portfolio. American CityVista was selected to participate from among more than a dozen development firms.

As American CityVista's success demonstrates, building communities in inner-city areas has advantages. To begin with, there is considerable demand for new construction near urban job centers and schools. And local governments often welcome - initially at least - building ventures that promise to alleviate urban blight.

J. Thomas Black, an urban development economist and consultant, says the demand for city housing construction will only increase as baby-boomers age and the number of childless households grows. Prospective homebuyers without children need not worry about schools and playgrounds, and tend to focus instead on amenities such as proximity to work and cultural attractions, he points out.

The U.S. economy's continued reliance on work done in offices also will fuel demand for higher-density urban housing located near such buildings, he says.

"This is not at all new. There was discussion about the need for this sort of thing back in the '70s, and today there are a number of companies that specialize in urban redevelopment," says Mr. Black, citing Atlanta's Post Properties as an example.

American CityVista is unique in two related respects, however. Taking advantage of KB Homes' resources, contractor relationships, and expertise in large-scale construction, American CityVista builds sizeable communities. Each of its development projects to date boasts more than 100 homes, and one - Lago Vista in San Antonio - is expected to have 600, of which 270 have already been sold. In comparison, much urban housing construction is decidedly small in scale.

As a result, the company is able to offer medium-priced homes, as opposed to the low-income or upscale housing usually associated with city renewal projects. To help spur sales among middle-market buyers, American CityVista has arranged a financing deal with Fannie Mae, whereby buyers can get mortgages requiring neither down payments nor closing costs.

"The key is taking advantage of economies of scale. That's what's driving the success of this venture. We're in effect harnessing the capabilities of a national builder," says Mr. Cisneros, who also previously served as president of Spanish-language TV broadcaster Univision.

The company works with regional builders as well. For example, it is constructing its first Pacific CityHome project, a 150-home community in the Central California city of Santa Maria, with the help of Watt Builders. Other local partners include the Dallas Housing Authority and Southern California's Montage Development.

Mr. Cisneros also has launched American Sunrise, a nonprofit group whose focus is community redevelopment projects in San Antonio. The organization is building and refurbishing scores of units in some of the city's poorest neighborhoods.

American CityVista goes to considerable pains to make its communities attractive. Each development has identifying design elements and a range of floor plans and models. The company's Cielito Lindo community in Laredo, for instance, features a contemporary South Texas theme.

Urban renewal has long been identified as a major challenge facing U.S. cities. However, Mr. Cisneros says American CityVista does not engage in community redevelopment in the traditional sense. While the company does work with local governments on land-use issues, it does not partner with government redevelopment agencies.

"This is a case of the private sector looking for market opportunities," says Mr. Cisneros. "These are market transactions. And what we're seeing is the wave of the future. The 1990s saw a lot of this on a small scale. Other companies will begin doing this for the reason that it is so hard to find land to build on anymore."

Bruce Karatz, chairman and CEO of KB Home, agrees - to a point.

"I think that our positive experience so far bodes well for others to attempt something similar. But we [American CityVista] bring together some unique attributes," he says, citing his own firm's extensive experience serving the first-time-homebuyer market and both the background and the indefatigable efforts of Mr. Cisneros on behalf of the project.

KB Home is one of the nation's largest homebuilders. The company built more than 25,500 homes and reported revenue of $5.03 billion last year. The former number includes units built in France by Kaufman & Broad S.A., a KB Home subsidiary. The company has domestic operating divisions in Arizona, California, Colorado, Florida, Georgia, Nevada, New Mexico, North Carolina, and Texas.

According to Mr. Karatz, one of the biggest challenges American CityVista has had to contend with is revenue shortfalls at the local level, which often prompt cash-strapped municipalities to opt for retail outlets instead
of residential developments.

"As a general matter, communities recognize there is a huge shortage of housing, particularly for middle-income residents. But when it comes to actually making decisions about development projects, they take the easy way out by putting in a car dealership or some other tax-revenue-generating operation. It's going to be a continual challenge," he says.

As a result, American CityVista continues to meet with opposition from some local officials, despite the firm's impressive run of success to date.

Victor Miramontes, American CityVista's vice-chairman and COO, says the key to overcoming such resistance is highlighting the potential economic benefits of residential development. He cites Toyota's recent decision to locate an $800 million Tundra manufacturing facility just south of American CityVista's Lago Vista community in San Antonio as an example of the economic vitality that residential development often occasions. The plant will initially employ about 2,500 workers.

"In no way are we saying that Lago Vista was the only or even the main reason that Toyota picked that site. But we feel that it was a contributing factor in the decision," says Mr. Miramontes, formerly the CEO of the North American Development Bank.

"What we're saying is homeownership is the cornerstone of community renewal."

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