Building Capri Capital Brick By Brick

Nestled between Baldwin Hills Estates–one of the country’s wealthiest majority African American neighborhoods–and Crenshaw–the location where the classic film Boyz n the Hood is based–is Baldwin Hills Crenshaw Plaza. Situated on 43 acres in South Central Los Angeles, this 865,000-square-foot shopping mall may still be a diamond in the rough. However, Quintin E. Primo III considers it his crown jewel.

Acquired for approximately $136 million and followed by a nearly $30 million renovation, the mall also happens to be Capri’s largest retail property acquisition to date. A tour of the property–with its open, airy spaces; lush, green exterior; immaculately polished tiles; and sleek, modern look–shows that the money spent has had the desired effect. “This entire area was redone,” says Primo, chairman and CEO of Chicago-based Capri Capital Partners L.L.C. (No. 9 on the BE Asset Managers list with $3.60 billion in assets under management), while walking through the mall’s newly renovated food court. “We replaced the flooring and lighting, and opened up the space by relocating an escalator. In addition, higher quality food outlets were added with new tenants, and a children’s seating area was created,” says Primo, whose firm–through one of its funds–acquired the property in 2006.

Anchored by Sears, Macy’s, and the nation’s only three-story Walmart, the mall’s roughly 100 other retail stores and kiosks collectively employ nearly 1,000 people in a community that needs all the jobs it can get. “The Eighth District is the only community that has added jobs even with this most severe recession, and just last year we added 3,700 jobs to our community,” says Bernard C. Parks, a City of Los Angeles councilmember representing the Eighth District, where the mall is located. “And a large part of it was the jobs that were created in the Baldwin Hills shopping center with the addition of new businesses.”

As an institutional real estate investment management and development firm, Capri raises capital from such pension and retirement plans as the Los Angeles County Employees Retirement Association and Teachers’ Retirement System of the State of Illinois to create funds. Through these funds, Capri acquires or invests in multifamily and commercial properties. These are typically held for periods of five to 10 years before being sold or refinanced. During that period, Capri often oversees the renovation or market repositioning of these assets with the goal of increasing value. Investment returns are generated for clients (minus the firm’s management and incentive fees) through distribution of the properties’ ongoing cash flow, and net profit from the sales or refinancing of the properties.

In addition to being an astute businessman, Primo has been a musician for most of his life. He’s played in jazz bands and sits in on keyboard for his daughter’s rock band, and he is able to adapt, change, and go the unconventional route if the situation dictates, in both music and business. Case in point, he founded Carter Primo Chesterton, a real estate investment management firm, in 1992 and spent 12 years building it into a $7 billion entity–the largest African American firm of its kind at the time. But in February 2005, the Harvard Business School grad did the unexpected: He sold the firm’s $5.2 billion mortgage loan portfolio.

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For his second act, Capri Capital Partners invested some $529 million into 39 multifamily properties that were collectively sold for more than $1 billion between 2004 and 2011. Now Primo looks to expand his firm’s investments overseas, seeking out the sweet spots in Africa, the Middle East, and India. For embracing the fluidity and improvisation that embraces both its CEO’s jazz roots and embodies the spirit of entrepreneurialism, Black Enterprise names Capri Capital Partners its 2012 Financial Services Company of the Year.

Son of a Preacher Man
Primo attributes his father, the first African  American bishop elected in the dioceses of Chicago and Delaware, as the inspiration to become an entrepreneur. “As a priest and pastor, my father was responsible for the operations of the church and the financial condition of the church,” Primo recalls. “He was literally president and CEO of a congregation without a safety net. So, I saw that, I grew up with that.” That upbringing also instilled a sense of philanthropic responsibility, and he continues to be active in many charities such as the Primo Center for Women and Children, the Capri Foundation, and the Chicago Alliance to End Homelessness.

The 57-year-old CEO went on to attend Indiana University, where he earned a bachelor’s degree in finance and graduated with honors in 1977. After receiving his M.B.A. from Harvard Business School, he went to work full time at Citicorp where he was promoted several times until he eventually headed up its Midwest real estate investment banking operations as vice president and manager of the Chicago lending team. During that time, he reconnected with his high school friend, Daryl J. Carter (the name Capri is an amalgamation of Carter and Primo), and together they formed the company in 1992.

It was a good pairing. Primo had the real estate know-how and Carter had experience originating construction loans for Continental Bank before heading the Western commercial real estate division of Westinghouse Credit Corp. The duo gained $100,000 in capital from Chesterton International, a London-based real estate company, and later gained $65 million from the state of Connecticut’s pension fund to manage, which they placed mostly in real estate investment properties. Confident in their ability to thrive, Primo and Carter bought out Chesterton’s stake in their business in 1997 for approximately $4 million.

The $7 Billion Men
By 1998, the duo went acquisitive again and through the backing of two pension fund clients bought Washington Capital, a Fannie Mae mortgage lender, originator, and servicer, for approximately $40 million in 1998. It was a case of the minnow swallowing the whale as Capri had $500 million in assets under management compared with Washington Capital’s $2.7 billion commercial real estate loan portfolio. “It was a business that many private organizations and large organizations kind of turned their noses up at–a government lending business,” says Primo. “It wasn’t as sexy as lending against office buildings and hotels and retail properties.” Sexy or not, the acquisition provided Capri with the size and scale needed to finance additional multimillion-dollar real estate projects. The portfolio grew to reach the $7 billion range.

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Within the next three to four years, as banks were seeking fee income

to improve their profitability and leverage their platforms, large institutions were buying out niche players in the commercial debt markets. This in turn drove up the valuations for these smaller businesses. While it made it difficult for smaller players without the deep pockets of a global banking institution to compete, those large banks were buying out these boutique operations at huge multiples. “All of a sudden, what used to be small mortgage bankers were now institutional arms, the very companies with huge capital,” recalls Louis W. Hoyes, partner, vice chairman, and chief investment officer at Capri.

That $40 million was suddenly worth considerably more. “We ultimately sold that business five years or so later for about $85 million. We were given an offer that was too good to pass up,” says Primo. When the sale closed, Carter, whose expertise was related to the mortgage finance business that was just sold, collected his share of the profits and joined the CharterMac Mortgage Capital, but remained a partner until 2006. Primo re-invested in the business and created the investment advisory business that exists now as Capri Capital Partners. He later bought out all his partners in 2006 with the assistance of a large institutional investor.

Going Shopping
From that point on, Capri would continue to raise funds from institutional investors and use that capital to make many significant acquisitions, including the following:

– 360 Residences, a luxury 23-story high-rise mixed-use project containing 213 apartment units and approximately 10,630 square feet of commercial/retail space in San Jose, California.

– North Bethesda Market, a mixed-use project in North Bethesda, Maryland, that consists of 397 multifamily units, plus 199,000 square feet of retail space.

– First Avenue Tower, a 196-unit luxury apartment tower with about 3,200 square feet of ground floor retail space on Manhattan’s Upper East Side.

– 1500 Locust Street, a 45-story, 610-unit apartment building in Philadelphia that includes 8,900 square feet of ground floor retail and a 13-story public parking garage.

But according to Primo, the firm’s most significant deal–Baldwin Hills Crenshaw Plaza–came by way of a friend who was its property manager at the time. Baldwin Hills Crenshaw Plaza first opened its doors in 1947 and was one of the first malls in California.

The property had changed hands several times and the quality suffered as investors had not put money into refurbishing. In 1995, Kenneth Lombard and Magic Johnson opened up a Magic Johnson Movie Theater next to the mall. “I would say [previous mall owners] were more focused on income and revenue than they were on trying to find the connectivity between the quality of tenants and who the shoppers are in the neighborhoods,” says Lombard.

Enter Capri. In 2005, Capri’s assets reached $2.7 billion. But as always, Primo was looking for the next deal. “A very good friend of mine, who I’d known at that time for 20 years who was then the property manager of the mall, called me and said, ‘Listen, we’ve been managing this property for many years. It is now, we understand, up for sale. We think it would make a great addition to your portfolio,’” recalls Primo. A meeting was set at the Peninsula Beverly Hills with the two owners of the mall late one morning.

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The years hadn’t been kind to the mall. The movie theater, no longer owned by Magic Johnson, lacked the modern amenities moviegoers seek, such as stadium seating and the ability to show 3-D films. The shopping center itself, now a third-tier “C-level” mall, had been offered to the market for more than 30 days when the Capri team submitted its nearly

$136 million bid. By the time of the brunch meeting, Capri was on the short list and one of three or four finalists for the mall. Still, the owners wanted to make sure Primo and Capri were the right fit to restore the mall to its former glory.

In his pitch to the owners, Primo recommended that they sell Capri the mall not only because Capri would be the highest bidder, but that as a minority-owned firm, management understood the local market. “We felt that this would be a major win for the community, again moving from the mall being managed as an island into the mall being an integral part of the broader community,” says Primo.

A Little Help From a Friend
Capri acquired the property, but still had to win over a skeptical local community who heard empty promises of revitalization from previous owners and now bypassed the shopping center in favor of spending their money in nearby Culver City or El Segundo. Meetings were held with residents, local officials, and community leaders. “We invited people from all rungs in the community to come to the mall and tell us what they wanted us to do,” says Primo. “What types of tenant mix did they want to see? What types of stores did they want us to seek?” But other developers had made promises before. The community wasn’t easily won over.

To that end, one of the first tenants Capri signed was the Debbie Allen Dance Academy. Primo, a friend of the award-winning actress/dancer/choreographer, learned the studio was in need of a new home. “He knew I was having a struggle. I was in a place where I couldn’t afford the rent and I was determined to keep going,” says Allen. Primo and Allen worked out a deal whereby the dance studio would relocate to an 8,454-square-foot former restaurant at the shopping center and sign a long-term lease paying less for rent than at their previous location.

Allen’s presence and the studio’s outreach into the community helped solidify relations with the locals. “We do a lot here in the community. We have a ‘free dance day’ a couple of times a year,” says Allen, a tenant at Baldwin Hills Crenshaw Plaza for three years now. “We have performances and we raise money to help kids get here. It’s just been a great situation all around.”

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A $30 Million Facelift
Still, the mall was in need of a great deal of work. With the economy and real estate market being what it was in the wake of the financial crisis, Capri had to be frugal with its investment while also delivering the upgrades promised to the local community. Primo brought in Lombard, an African American businessman who once partnered with and oversaw Magic Johnson’s business ventures, and later served as president of Starbucks Entertainment from 2004 to 2008. As president of the Capri Urban Investors subsidiary and a partner at Capri, Lombard oversaw the renovation and management of the mall.
The executive team allocated about $30 million for the renovations, and Lombard worked with the construction companies to develop a strategy to get the most bang for the buck. They also committed to hiring at least 30% of the construction workers from the local community. In addition to the food court renovations, they took nearly three years to:

-  Paint the exteriors.

– Install state-of-the-art technology in the movie theater, allowing for IMAX and 3-D films. A new, slick exterior was installed, as was plush, stadium seating. It now operates as Rave Cinemas Baldwin Hills Crenshaw Plaza 15 and shows first-run films.

– Install a children’s play area near the Sears location.

– Re-design the community room, which is now 2,000 square feet and can accommodate up to 200 people.

– Renovate the exterior of the bridge that serves as a transition from the mall to the Macy’s to allow for a brighter, modern look.

With occupancy around 94% and new tenants such as the Post & Beam, Staples, and Buffalo Wild Wings, Lombard says he expects the mall to become cash flow positive this month. “We figured out ways to make [the mall] much more attractive and inviting to our customers,” says Lombard. “We needed to transition from what takes place when you’re operating a C-level mall to how do you operate a mall that we have now taken to an A level, and make sure that the operating side of it–whether it’s maintenance and housekeeping to security–are in place.”

Councilman Parks complimented Capri for selecting a team that was stationed locally who understood the community. “They’ve done a great job of listening to the community and giving them things that the community has been asking for: sit-down restaurants, a Staples store, and a clean and wholesome environment for shopping,” he says. “I think they saved that shopping center.”

Venturing Abroad
While 100% of Capri’s ventures are in the United States, Primo expects the company’s revenue streams to begin to shift to more international investment business. “It’ll start with a couple of key transactions, a couple of key acquisitions that we will make very similar to the key acquisitions that we made domestically. So, we can establish operating platforms in key countries, key regions outside the United States.” In seven to 10 years, Primo expects perhaps as much as 50% of the company’s top-line revenue to derive from international investors investing in the U.S. or Capri investing in markets outside of the U.S.

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Instead of going to China or Brazil, where many of Capri’s competitors have invested, the company is primarily researching three regions of the world: Africa, the Middle East, and India. “We believe that these three regions are connected at the hip and have been for the past 1,000 years in terms of trade and immigration,” says Primo, citing the millions of Africans in the Middle East and Arabic peoples in Africa and India. “So, there is this interconnectedness to these three regions. What’s good for one is good for the other two.”

In business, thinking globally is not an option, it’s an imperative. “Whether you’re Capri or McDonald’s or Coca-Cola, the key to the long-term health of U.S. corporations lies outside the borders of the United States,” Primo asserts. “We have studied for nearly four years where we should plant our flag. Everybody says they’re so surprised. ‘You haven’t made one dollar of investment in Africa or the Middle East yet?’ Nope. Thank God we didn’t. We didn’t four years ago because we had a big global recession.”

It appears that Primo is at work on another profitable tune.