Jack Heald: Welcome back everybody to the OZExpo Podcast. I'm your host, Jack Heald and I am joined today by Martin Muoto who is the founder and managing partner of SoLa Impact Fund. Martin, welcome to the OZExpo Podcast.
Martin Muoto: Thanks for having me, Jack. It's a pleasure to be here.
Jack: So, tell us really quick, give us kind of the high-level overview. I call it the 30,000-foot overview of SoLa Impact Fund. What you do, where you're at.
Martin: Great, Jack. SoLa Impact is a series of funds primarily focused on the greater Los Angeles area and more specifically in areas that have been historically neglected. So, we primarily invest in affordable housing in south central Los Angeles – Watts, Compton – in some of these low-income communities. And we're focused on both preserving, and refreshing, in other words, rehabbing but also building, affordable housing. And increasingly a component of the fund is also focused on the commercial space in the OZ. Our latest fund, which is $100 million Opportunity Zone fund focused on Opportunity Zones in these areas.
Jack: Very good. I want to come back to that in a minute and find out a lot more detail about SoLa Impact fund and the work you're doing in the L.A. area. But let's find out a little bit more about your background, how you ended up in this business. It looks to me like you went to the Wharton School of Business.
Martin: I did. I actually grew up in Nigeria, West Africa and came to the States when I was 18. I was fortunate enough to have a full scholarship to go to Wharton at the University of Pennsylvania and I really spent the first decade of my career in venture capital and private equity, primarily at a firm called General Atlantic Partners and an offshoot of GA. and for those that may not be as familiar with General Atlantic at the time we did companies like Priceline and e-Trade.
And since then they've done Facebook, Uber, and some of the more interesting and successful companies’ technology. Well, from being effectively in Greenwich, Connecticut to getting down to south central's a little bit of a story in and of itself, but I had come out to Los Angeles to help run one of our portfolio covers. The company was a very tough turnaround.
We turned it around successfully and sold the company and I started investing in real estate around 2006, primarily on nights and weekends. And as the story goes, I was investing, I bought a multifamily building in Venice, in Los Angeles, which has become an incredibly too-cool-for-school area.
I tend to describe it as the Brooklyn of L.A. For those that might not be as familiar with the L.A. Topology, I had also invested in Echo Park and right around that time, this was 2008, 2009. I really wanted to take a much more analytical approach to investing in real estate. In other words, I had spoken to dozens of brokers and everybody had a point of view, you know what, West Adams was going to be the next Venice or Lincoln heights and I really wanted it to be led by the data.
And so, over a very long weekend, I effectively downloaded the entire MLS that listed all of the available, multifamily deals out there. And I spend a great deal of time analyzing. I ran a bunch of sophisticated algorithms against the data, but in reality these were just complex excel queries. But they helped me look at every metric that a seasoned real estate investor would look at.
Price per square foot, rent per square foot, cap rate, proforma cap rate, gross rent multiplier. And I was really looking for yields. I was really looking for good cash on cash returns. And I came up with about 30 properties that on paper I found it very hard to believe that these were in Los Angeles, meaning that if, these were located in Macon, Georgia or South Bend, Indiana, I would go, OK, great.
I you see things that have less than a 10 gross rent multiplier or you know, high single digit cap rate. But in Los Angeles I was investing at two to three percent cap rate in Venice or a bit barely at a four percent cap rate in Echo Park. And, and so I had these 30 properties and I went and went out to, to, to explore these properties. So, the listings would say, do not drive the properties and I'll walk the properties. They would say do not disturb the tenants. I would knock on doors and talk to the tenants.
And as I drove these areas and I got to know the areas fairly well, it dawned on me that other investors were not investing in these areas that were historically neglected. And a lot of these areas still lived with the stigma of Las Angeles in the 80s and 90s.
The crack cocaine epidemic, the Bloods and the Crips the L.A. riots. An so most investors were not investing in this area. And so I decided because partly because I had grown up in West Africa and I said, “People are making a big fuss about this, but these are great areas and I got to know the communities and I got to know the tenant base.” And my simple investment thesis was if we could attract top half of tenants, these were good, hardworking people that wanted a safe place for their kids. So sorry, that's the long-winded version of how I started investing in the areas that I invest in today.
Jack: That's a great story. Oh man. I would like to hear more about those initial investments in south central.
Martin: Yeah. So, now we're at sort of 2008, 2009, 2010. So, over the course of about three or four years, I bought 10 buildings using my own money. Many people thought I was crazy because they were like, “This is the hood. These are tough areas.” There's incredibly high perception of climb. A lot of folks said, “Well look you're not going to get paid. You know, you're going to have a lot of evictions and a lot of problems.” And my view was, “Look, if you took a different approach, which is to build an incredibly good product, rehab these units, these apartments extensively offer them to the community and really have high expectations of the tenants, they would live up to that expectations.” There’s several case studies about teachers that have low expectations of students and they live up to them and teachers.
I have high expectations of students. And so, over the course of three years, 10 of buildings, all of which I still own today, I did everything sort of initially myself. I did open houses. I collected the tenants, collected rents. I literally dealt with evicting and negotiating with drug dealers and pimps throughout the process.
And so, I learned the entire business from the ground up using my own capital over the course of that period. And so that was my entree into areas and the truth is that, as I said, the large majority of tenants are good, hardworking people that want a safe place for their kids. Now, certainly there is a segment and if you pick the wrong segment, you're going to get a run for your money.
And I certainly made a lot of mistakes along the way, but ultimately that was the genesis of what has been. I met my operating partner, Gray Lust. He was managing a set of buildings, about 200, 300 buildings in North Hollywood and Korea town. And this is now 2013 or thereabouts. And we would compare notes and he would talk about which senior lead officer police officer he was dealing with and how he was dealing with this specific situation. And, and we ended up partnering up and we started our first fund in late 2014 and we're now on our third fund, which is the Opportunity Zone Fund.
Jack: OK. Well that leads very naturally into the question I was gonna ask next.
Golly, I’ve got to tell you, Martin, I'm so excited when I talk to folks like you who are living the spirit of the OZ program. Really living it out. And I don't mean to cast aspersions on others, but the reality is this type of program does and will attract people whose primary goal is – or maybe whose only goal is – just a good return. And they're less interested in the spirit of the program, which is to drive investment into these distressed communities.
So, you've been doing this well before the OZ program ever got started? 2000, right?
Martin: Right. We joke that the, we didn't land on the Opportunity Zone, the Opportunity Zone landed on us. So we've been here over a decade doing basically the same thing with the same business model over the course of that period. And then as, as you pointed out sort of a year-and-a-half ago, the Opportunity Zone legislation was enacted and sort of, clarified. And we launched the Opportunity Zone only six months ago, but we heard about it from, an associate a year ago. We were in the middle of our second fund. And so just to give you a little bit of context, Jack, our first fund from 2014 was a $10 million fund. We, we bought 35 buildings, 265 units, and have incredible returns in that fund.
Jack: $10 million?
Martin: I'll give you a little bit of more context in that. Our second fund is a $55 million fund. We launched that two years ago. We bought 115 buildings, a little bit over 1,000 units, which is exhausting as I say it. And I think about it. And then we're now on our third fund, which is a dedicated OZ fund. But that process demonstrates a little bit of our business model, meaning that we're very focused on buildings that are typically between 10 and 30 units. So, they're usually too small for institutional investors. But yeah, typically too big for mom and pops. We find that to be a very sweet spot. There's a lot of really good inventory, meaning that there's a lot of available buildings, but they're we're often buying some of the toughest, often some of the most delinquent buildings in the neighborhood. And then we buy these buildings and then we put a lot of money into them to refurbish them, to deal with all the historical issues with the building. And then the units inside, we do an extensive gut renovation and then offer them back into the market. And that's a little bit of the secret sauce. I mean, it sounds very easy when I describe it, but as you can imagine, it's a lot of heavy lifting in between.
Jack: Terrifying frankly. 115 buildings?
Martin: Okay. From separate transactions. But I think we are now, if not the largest, certainly one of the largest, the most acquisitive, companies in the market for the type of product that we do. A meeting that the number of buildings and as a result, a lot of the brokers in the community know us and work very closely with us. And as a result, we're often getting great deals and really we've found that about 60 percent of our deals are off market at this point. So it's taken a lot of hard work with a lot of folks involved to make it work. But the engine now kind of continues to hum.
Jack: Well, if I was guessing, I would say that you are exactly the type of organization that the Opportunity Zone program was designed for.
We talked about this very briefly before I started recording, so I need to make sure that we get this recorded. Talk about SoLa, talk about the organization SoLa and all the things that SoLa provides to Opportunity Zone market, because our listeners need to understand that we're not just dealing with a fund that acquires properties.
Martin: I appreciate the question. I think that our approach, and we do it for two reasons. Number one, we are very clear that we're a for-profit company and we want to generate incredible result returns for investors, but a very close second priority is that we want to improve our tenants’ lives and improve the community. And so, we spend a lot of time doing it. And by the way, we fundamentally believe that that strategy makes economic sense. It's shores up our returns and that allows us to really ensure that the community prospers. So, I'll give you a specific example. We work with about 25 nonprofits that are dealing with various constituents and various social issues. Some of them are focused on homelessness, some of them are focused on domestic abuse.
About 11 to 14 percent of our tenants are veterans. So, we deal with a lot of veteran’s programs and these are very well intended nonprofits, government agencies or government agencies. But across the board, their number one issue is affordable housing. And so, especially in a city like Los Angeles, finding high-quality, affordable housing is very difficult. A lot of our tenants because of their disadvantages also received some type of government subsidies.
So yeah, depending on the building between half and two-thirds of the tenants may receive some type of government subsidy. And about one-third of them are market tenants. What I will say in something that we are very proud of is we believe in uplifting, not approved uprooting. So 98 percent of our tenant base are ethnic minorities. Yeah. Two-thirds of our tenants are low-income and one-in-three of our place tenants meaning tenants that we have put into our buildings since we acquire them, one-in-three of those have been homeless at some point in their lives.
So that's both an encouraging and, and a great statistic, but also discouraging in the sense that you see the magnitude of the problem around us. And so, I think we are one part of that much broader solution, but certainly tackling some of these issues.
Jack: You mentioned you were “long L.A.”
Martin: We are long L.A. for many reasons. Apart from the obvious that it's a fantastic city, I think that L.A. is finally beginning to look at some of the things that have been structural problems for decades. And, the first is public transportation. So, L.A. is on the world's largest metro expansion and I figured every public infrastructure works. That was the word largest was probably in Asia somewhere, but L.A. is literally building out rapid transit lines, light rail, and bus lines throughout parts of the inner city. Some of that is being propelled by the preparation for the Olympics, which is another reason that we're long L.A. So, we're finding that public infrastructure is you beginning to, to get some significant investment while the short-term numbers don't show it.
L.A. is really focused on dealing with the issue of homelessness and they've made over the past 12 to 18 months some significant changes in the zoning regulation that allow you to build much denser around public transportation and particularly if you're building affordable housing.
So, 80 percent-plus of our units within our new construction projects are affordable and therefore we're getting the dual benefit of that. So, I'll put it this way, which is that if you look at L.A., and many have followed this that are sports fans. We have the 2022 Super Bowl coming to L.A. We have the 2026 World Cup and L.A. is hosting the 2028 Olympic. So those are some great tailwinds for investments in L.A. overall. But specifically, we believe that they're going to significantly help some of the more historically neglected and impoverished areas.
Jack: What is the reputation that SoLa has in the communities where you're coming in and actually doing the renovation? The gutting, the reconstruction. Is that “SoLa” on the label. Is the community aware of your organization in particular? Does that question make sense?
Martin: It does, it does. I'll tell you this historically we have been purposefully very low profile for a number of reasons and we tend to be low profile guys anyway. We were not much of now days seekers to fame, but we are very focused on doing the work and making sure that the results speak for themselves. I think that the community as a whole has embraced us significantly. And our tenants are disproportionally pleased. Now again, you'll work in a tough neighborhoods and you deal with real issues on a daily basis. So, there's always a lot of dog in the fight. But, I think that what we have begun to do, and, and I think you point this out, in some of your questions a lot of the narrative in opportunity zones has been around the tax breaks and a lot of the public attention has been around areas that may be exceptions to the OZ spirit, meaning that Hudson Yards in New York and this area in West Palm Beach that say Opportunity Zone that on the surface really shouldn't be.
And I think that the press has picked up a lot of this attention and has probably highlighted the inconsistencies in some of these areas. We decided to take a more active role in pushing back on that narrative because we believe that fundamentally the investments, albeit some may go to these outlier areas, but the investments are going into areas that have desperately needed capital for decades. And we see this across south central, well, it's common. These are areas that investors have historically overlooked. And may now be getting a small portion of the capital required to really stimulate those economies and begin to show real progress.
Jack: Alright. I guess the next question I wanted to ask you about was about SoLa, the organization. You've got the funds, when it comes to the actual renovating of the properties, you acquire the properties, then they've got to be renovated. You guys also do that as well. Is that correct?
Martin: SoLa, our operating company now, has grown to about 60 people. When we started our first fund in two weeks, 2014, we were four or five people. We're now about 60 people in terms of employees in the operating company. And then we oversee about 200-plus contractors that are doing the physical work, that actual renovations. And again, across that contractor base a lot of them are from the community, are in the community.
And we disproportionately look for folks that are sometimes at risk but just need the opportunity whether these are cabinet makers, whether these are plumbers, whether these are electricians and I'll tell you, because our contractor base comes from the community that they love working on the buildings.
They can relate to them. Again, not to say that the renovations that they do in Beverly Hills or in the west side of L.A. or Santa Monica aren't fun for them but often when we finish a project, we've done this a couple of times, we will invite the contractors and their families to the project and actually show them the work that's done. And I'll tell you the reactions that we get are off the charts there. Remember a 15-year-old telling me, “Look, my dad's been in construction for 10 years. I've actually never seen the work that he's done.”
And you know, I see he's a tile guy and I see the quality of the bathrooms and it just makes me incredibly proud. So again, to us, these are business 101 common sense. Things that help us continue to be connected to the community and continue to give back to the community in both financial and nonfinancial ways. But it's a very important part of our operating philosophy.
Jack: Well, I want to take this one step, one layer deeper. You've got a team of roughly two hundred contractors and then once these buildings are complete, the fund still owns the buildings, I'm guessing, right?
Martin: Well we do. And, and just by the dent of, of the Opportunity Zone legislation, we'll be owning that we will own them for 10 plus years. So, by mandate now that an Opportunity Zone. Yeah. And again, in fact it is one of the features that we believe the, the administration was very clever in how it wrote the legislation. So, number one, you've obviously got to be in what are supposed to be low -income tracts and 95 percent of them are low income tracts.
Like the ones that we've historically operated in, number two is that the legislation requires that you do a significant improvement effectively doubling the cost basis of the building, not the overall purchase price but specifically of the building. In the as part of the fund in order to comply. And we have been doing that in historically and now we're doing it with more precision.
And then the third thing is that you've got to have a 10-year hold to get the full benefit of the Opportunity Zone tax advantage. And so, we've historically, as I said, I've never sold a building in our first and second funds. We've actually built, we had ten-year holds, but now that the legislation mandates it, it makes my negotiations with investors a lot easier cause I go, “Look, I'm not telling you that I want to hold this for 10 years. The legislation does it.” So, there's a number of things that the legislation got right in the way that it was written and the, and the line, sort of the long-term value-added component of really improving, low income communities.
Jack: You actually answered one of the questions I was going to ask, which is, “how have you been managing properties prior to Opportunity Zone stuff?” But obviously, if you say you've never sold a property then apparently that's what you guys have been doing all along.
Martin: Yes, we are long-term hold folks in fund one and fund two. We have to date not sold any properties at some point. Obviously we do plan tone. We, we, we think that there's a lot of good exit opportunities but, but in fund one and part of that is you have to be patient with these to fully realize the, the value and, and, and again, it's, it's a lot easier when it's legislated versus when you're negotiating that with a investors to align the long-term perspective.
Jack: Yeah. And I can't help but think that with the legislation being, you've got to hold this for 10 years, it weeds out some of less committed landlords and owners and therefore ensures a higher quality product throughout that entire 10-year life. I'm speculating here, but I'm just thinking about it.
Martin: It's a fair assumption. I think that the folks that are in it for the short term or that are in it for sort of fix and flip, we've never believed in that model. Folks have made a lot of good money fixing and flipping and again, casting those versions but, but I think for communities like South L.A. and like Watts and Compton, and by the way, this is the same Erie, Pennsylvania, it's the same in a lot of communities in Alabama and throughout both rural and urban America. You've got to really look at these from a longer-term perspective. And I do think that it self-selects to people that really have the patience or the means to be to take a longer-term perspective.
Jack: I want to highlight that it self-selects to the type of people who had the patience to take the longer-term perspective. Martin, let's turn the conversation just a little bit from what SoLa is and what SoLa does to Martin Muoto, the person. You grew up in Nigeria. How is it that a kid from West Africa ended up getting a scholarship to the University of Pennsylvania? Tell us a little bit about that story.
Martin: I think there's more than a bit of divine intervention along the way. I was fortunate while my parents could not afford to send me to the U.S., they did all they could to send me to the schools that might set me up for success. And they really invested in education. It wasn't so much cajoling as saying, listen, you're going to have to earn your way into a university, wherever that might be. And I was fortunate enough to do well in school and I was just talking to Gray, my partner the other day, and I remember that when I applied to universities in the U.S. I wrote them and I said, I cannot afford the application fee.
Meaning that the time it was like $30 or $40 or $50 to apply to really good universities. And I would write them and say, “Listen, I just want to be clear. I'm applying and I'm not paying an application fee.” And I think that probably half of them are shredded my application, but somehow or other, and I've been eternally grateful to Penn and Wharton they accepted me and gave me a full financial ride. I had to pay for room and board, and I arrived in 1989. And I had about $300 to $350.
And that was it. And so, the first several years, college was not fun. Of course, but I managed to survive and you know, the rest is history that now it sounds anecdotally fun, but, but in the time it was really stressful.
Jack: Well it's interesting. I'm slightly older than you, roughly the same age. And I think about the things that we do when we're young, that the amount of hardship and suffering that we are physically capable of putting ourselves through in order to gain the experience, to set us up for success later in life. And that's what I hear here. A young man who, with $300 in his pocket, goes to the opposite side of the world to a place he's never been and starts a brand-new life. And here you are 30 years later, making a tremendous impact in south central Los Angeles. That's just an extraordinary story. I'm so glad I've got you on the show. I love meeting folks like you. I really do. It's one of the things that makes my job so much fun. So, is your family still in Africa, or have you brought them to the States?
Martin: They’re currently in the states. My mother's Polish. So, you would not guess this, but my first language is Polish because my mother is Polish.
So, when I was at Penn and, and simply going through the experience that I did, I'm at call home and, speak to my dad and go, “Listen, it's very tough here. I've got no money.” And he'd go, "Listen, I was in Poland in the 60s, a black guy going to medical school in Poland.", I'd hang up the phone, go, “I got nothing. I got to stop complaining.” Suffering is relative and hardship and poverty. And I think we'll look one of the lessons do you know that, that, that I think we both can take away is part of it is about giving, folks opportunities. And Penn did that for me. And we are trying to do that for tenants and particularly our tenants’ kids. The other is, we look at that difficult circumstances and situations that others would consider to be very adverse and still great things come out of that. And, and we believe that. And then that is what we try to manifest in the community that we invest in, in and through our fund.
Jack: Alright. I want to sum up here. You started roughly 10 years ago with a $10 million fund. And how many properties did you say? 15, 30?
Martin: I bought 10. Our first fund bought 35 our second bought, bought 115 and now we, we will do another multiple of in the Opportunity Zone.
Jack: Extraordinary. Well, Martin. I appreciate you taking the time to talk. I would love to, frankly, I'd love to just spend a couple of hours picking your brain about the work that you do, getting all the details. But we've gone we've gone about 30 minutes here. That's a good length of time for conversation. Have you gotten any last words for our listeners?
Martin: Jack, I really appreciate the opportunity to introducing me to your audience. I think that the Opportunity Zone is an incredibly important piece of legislation that I fundamentally believe will improve these communities if done with good operators and good investors. And we've had the unique privilege to have some great investors that really are aligned with us not only financially, but in terms of our social impact. And you know, I hope that your investors, your audience really kind of, evaluate the opportunities and participate in what I think could be, a real game changer here.
Jack: Well, let's give folks the opportunity for folks who are interested in partnering with you and the kind of investing, the impact investing that you're doing this low-income housing that's so desperately needed, especially in southern California. How do folks get a hold of you and find out more information?
Martin: I am on LinkedIn. I think I think you shared the information. Martin. Last name is Muoto. Best way to reach me is Martin@solaimpact.com.
Jack: Very good and I will remind our listeners to this contact information for Martin will be available on the podcast website so you can go there to pick it up as well. Martin, thanks so much for your time. this has been really, really encouraging. I love to see these kinds of this kind of impact investing that's actually occurring in making a difference in the lives of the people in need it the most. On behalf of Martin Muoto of the SoLa Impact fund I'm Jack Heald for the OZExpo Podcast. Thanks for joining us. Please be sure to press that subscribe button to get updated when the next episode is released. That's happening all the time and we will talk to you next time.
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