(FORTUNE Small Business) – In the skid row district of Los Angeles, what passes for art is mostly graffiti on the front of boarded-up warehouses and stores. Yet this rundown precinct is the home--in a white building, behind barbed wire--of Inner-City Arts (ICA), which teaches kids everything from painting to drama and dance and is in the middle of a $10 million expansion.

The program was founded in 1989 by visual artist Bob Bates and Beverly Hills real estate developer Irwin Jaeger. ICA started with 60 young students and today offers classes in visual arts, dance, drama, animation, music, and ceramics to 8,000 kids a year, chosen by principals of 20 local primary schools. Classes are taught by professional artists and educators, among them visiting luminaries such as cellist Yo-Yo Ma, actor Lisa Kudrow, and violinist Itzhak Perlman. "In the process of doing art, the kids learn to focus, to concentrate," says Bates, 65, the program's artistic director.

"I thought it was volunteering, but it was like running a business," says Jaeger, 73, who met Bates when both volunteered at a local high school. Jaeger made his fortune in industrial real estate. His first firm, Jaeger Development, went bankrupt in 1995, but he bounced back with New Phoenix Management, which owns shopping centers around the country. Jaeger invested $250,000 to launch ICA, and it was a half-decade before the program won enough acclaim for him to raise money from others. Today ICA boasts a $1.5 million annual budget and was recently awarded $1 million by the Annenberg Foundation.

The program's success stories are legion. When he showed up at ICA a dozen years ago, Mario Larazza, now 26, recalls, "I was a big troublemaker." But he soon got interested in video production and acting. After short gigs in two TV series--ER and An American Family--he is starring in Herbie: Fully Loaded, a Disney film to be released this summer.

Last fall ICA added a 10,000-square-foot visual arts center to its performing arts complex, nearly doubling its size. The new center sits on the other side of a courtyard lined with palm trees and incorporates the first phase of a campus extension that will double ICA's size once more. Although the new space will allow ICA to accommodate another 2,000 students, it doesn't plan to spread its model to other cities. "It's not like creating a McDonald's chain," says Bates, "but a single, supreme burger stand."