Ex-mayor seeking $300 million for distressed properties in Southwest

Posted By Mike Padgett

Aug. 5, 208

Former Phoenix Mayor Paul Johnson and his newest team of real estate and financial veterans are seeking $300 million to buy distressed properties in Arizona, Nevada and Southern California.

Their company is Southwest Next Capital Management LLC. Johnson is president and chief executive of the company, which was incorporated in Arizona in July.

The company is looking at office buildings and other commercial properties as well as residential developments.

“The types of assets we’ve been looking at have been places where infrastructure has been partially built or not completed, and for whatever reason the developer has decided to not complete the project,” Johnson says.

The properties would be “banked” for two to four years, and liquidated as prices return to normal.

Johnson and his partners also are considering the purchase of loans from a variety of lenders interested in selling them.

The company is seeking investments from Wall Street-type investors, such as hedge funds and large financial institutions. So far, Southwest Next has raised about $50 million.

“We hope to expand it to $300 million over the next six to 12 months,” Johnson says.

He adds that if that effort is successful, the total amount could be raised to $500 million.

Johnson says his company’s search for distressed properties in metro Phoenix will be limited to “inside the beltway,” referring to the freeways that loop around the Valley. That’s because, with fuel costs at $4 a gallon and unlikely to drop, the high costs of commuting will make homeowners try to live closer to work.

“I think you’re going to see a change in people looking for more affordable housing built in the interior (of the freeway loops), and the closer they are to the employment centers, the higher the likelihood that you’re going to be able to sell housing,” Johnson says.

“The way consumers are looking at buying homes has dramatically shifted in the last six months, and I think it’s shifted forever,” he says. “I don’t this is going to be temporary. They’re much more willing to look at different types of product (housing) to make sure they’re closer to work.”

He adds that he and his partners, along with other investors and real estate developers, are keeping tabs on the light rail system, called Metro, which is to begin operations Dec. 29.

“You’re going to see a tremendous change in development patterns (along the light rail route),” he says. “You’re going to see a lot of different types of product begin to occur, from a housing and commercial standpoint.”

The company’s acquisition efforts will be headed by Johnson, Joseph Meyer and Jay Michalowski. Meyer is a real estate executive who for 20 years helped develop several multifamily developments with more than 7,500 units in the Southwest. He was a general partner with apartment community developer Gray Development.

Michalowski has experience with Wall Street investors. James Mullany will oversee asset management.

The company’s name, Southwest Next, was chosen because the focus is on Arizona, Nevada and Southern California, and “because we believe there will be a next cycle,” Johnson says.

“We believe the market will improve,” he says. “Obviously, nobody really knows the timing of that, but we’re high on Phoenix. We still have 80,000 or 85,000 people a year moving into the Arizona market. Sooner or later, supply catches up with demand and this is a good place to be.”

Johnson believes the Arizona economy will “start to turn the corner” and improve in 18 to 24 months.

Johnson was Phoenix mayor from 1990-94. He remembers those years as a time when astute investors bought large inventories of distressed real estate as a long-term investment. After the real estate price pendulum swung back, those companies sold the properties and made substantial profits.

Johnson also is chairman of Berkana Homes, a Phoenix company that designs and constructs high-density affordable housing communities on infill land that has sat vacant for years.

Aug 5th, 2008

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