Creating Impact with Essential Housing in Opportunity Zones, with Clark Spencer

Clark Spencer

After raising over $200 million for Qualified Opportunity Zone investment, how is one OZ fund creating impact with essential housing?

Clark Spencer is senior vice president at Grubb Properties, a vertically integrated real estate operating company founded in 1963.

Click the play button below to listen to my conversation with Clark.

Episode Highlights

  • How Grubb Properties approaches Opportunity Zone investing.
  • Essential housing as multifamily development for residents making between 60-140% of area median income, and how it differs from workforce housing.
  • The Congressional intent of the Opportunity Zone initiative to produce economic impact for the residents of the areas that receive investment.
  • Some of the main benefits of structuring a Qualified Opportunity Fund as a Real Estate Investment Trust (REIT), including the ability for the fund to sell property without resetting a fund investor’s 10-year-hold clock.
  • The challenge of raising capital in the private asset marketplace during a global pandemic.
  • Which capital channels have been most successful for Grubb Properties so far, and how they were able to raise $200 million so far.
  • Opportunity Zone and broader real estate market trends to keep an eye on in 2021.
  • Tips for real estate deal sponsors: how to shop a deal to an Opportunity Zone fund, and specifically the types of deals that Grubb Properties looks for to fit into their pipeline.

Featured on This Episode

Industry Spotlight: Grubb Properties

Founded in 1963, Grubb Properties is a vertically integrated real estate operating company and a leader in addressing the housing affordability crisis through its Link Apartments brand. Since 2018, they have raised over $200 million for Opportunity Zone investment.

Learn more about Grubb Properties:

About the Opportunity Zones Podcast

Hosted by founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. And joining me on the podcast today is Clark Spencer. Clark is senior vice president of investments and fund manager for the Grubb Properties Qualified Opportunity Fund. He joins us today from his home office in Charlotte, North Carolina. Clark, welcome to the show.


Clark: Thanks Jimmy. Happy to be here.

Jimmy: Yeah, happy to have you on, Clark. Well, let’s just dive right in. Tell us about your fund, the Grubb Properties Qualified Opportunity Fund. What types of properties does Grubb invest in, what’s your investment thesis, and what makes your fund different?

Clark: Absolutely. So Grubb Properties, like a lot of other Opportunity Zone providers started sort of getting into the OZ game in 2019. We’ve had a series of vintage year funds. In the last two years, we’ve raised over $200 million for Qualified Opportunity Zone investment and are gonna be launching our 2021 vintage fund in the coming weeks.

We’re really excited about Opportunity Zones. We invest in Opportunity Zones really to provide what we call a central housing. And we do that through a product called Link Apartments. That’s a nationally branded apartment multi-family product that we have created in-house and develop in-house both in Opportunity Zones and in traditional market location.

That essential housing target that we use for our Opportunity Zone program and for Link Apartments really focuses on multi-family development for people making between 60% and 140% of area median income, which we see as really a broadly underserved market in the multifamily space, and one that especially works well with Opportunity Zones. Because we think that it can integrate well into the Opportunity Zones communities without necessarily delivering massive luxury product into these Opportunity Zone areas.

Jimmy: So it sounds a little bit like workforce housing, but I think it’s different. So can you explain how essential housing, as you call it, is different than workforce housing?

Clark: Absolutely. So essential housing, I think, especially coming out of the pandemic is something that really touches a lot of people and brings a lot truer sort of in this world, you know. Essential housing really is for those essential workers, and especially young workers. You know, it’s again between 60% to 140% of AMI. In most of our markets that’s between $35,000 and $80,000 a year of income.

So who are those people? Those are teachers and nurses and police officers, firefighters, municipal workers and also some young professionals college graduates who are coming out and maybe entry-level accountant positions or banking positions, things like that, who fall into that range. And really does target that sort of millennial, early Gen-Z, market. Whereas traditional workforce housing you often think of as a lot of garden styles, there’s sort of three- and four-story product.


It is catered more towards families and larger floor plans. You know, this product is sort of your traditional five-, six-, seven-story stick-built multi-family product that you see a lot of. We’re just able to get to that income target range through a lot of interesting cost basis and recurring cost reduction techniques, as well as our design techniques that allow us to deliver a product that we think is currently sort of under supplied in the market.

Jimmy: Good. And where are you investing in properties? Are you regionally-focused or is it national?

Clark: Sure. So Grubb Properties is in our 68th year in business. We were founded in North Carolina and North Carolina and the Southeast has traditionally been our home. But we have been expanding in Opportunity Zones across our two existing funds. We’ve invested in properties here in Charlotte, North Carolina, in Chapel Hill, North Carolina, as well as the DC suburbs. There’s actually a property in DC Proper as well as Winston Salem, North Carolina, Los Angeles, Denver.

So we’re really targeting what look at as a few different types of markets, both growth markets, but then also stable markets sort of growth markets being places like Charlotte and places like that, stable markets whether they’re tier one A, sort of your gateway markets like a DC or an LA or markets that have government centers like or universities or hospital systems like a Denver market, places like that. And so we’re certainly expanding and using Opportunity Zones to expand our market out of our traditional Southeast footprint. But we’ve been seeing a lot of success in our traditional markets, but as well as our new markets.

Jimmy: Good. Shifting gears a little bit now, the congressional intent of the Opportunity Zone initiative, obviously to anyone who’s listened to this podcast before it’s to provide impact to underserved communities and to help lift these communities out of poverty and to serve a really underserved segment of the population. What is Grubb Properties doing to adhere to the intent of this program?

Clark: Absolutely. I think that’s a great question and it’s one that’s very close to my heart and one that is very quite sort of broadly at Grubb Properties, what we’re trying to achieve. I think that from a fundamental level, the Link Apartments product and targeting that sort of middle income under-supplied housing inherently has impact, both because it’s providing an under-supplied market with housing that is needed, which I think ultimately can relieve pressure on naturally occurring, affordable housing. Because a lot of people, you know… I think what we’ve seen is because this sort of middle market isn’t being served, people who fall into it often end up in what is naturally occurring affordable housing rather than sort of mandated affordable housing that ends up pricing out people who should be in that naturally occurring affordable housing.

So I think it can relieve pressure there. But going beyond that, we actually wanted to do something in our funds sort of beyond our traditional Link Apartments properties that we think are…that do have that type of positive economic growth story. And because of that, what we actually do is we take 10% of the funds that we raised, and we target them specifically towards what we call our community development initiative or community development projects. And that can be a variety of different things and I’ll give you an example, but it’s really to even further fulfill the intention of the program.

So within that 10%, we actually cap our returns to the investors on that 10% segment at a 10 IRR which is actually sort of in…you know, our ball park range of our expected return is a 10 to 12 IRR over the 10-year period. So it’s really a cap on our performance, not on sort of standard performance. And then we also don’t charge an asset management fee on that 10% of the capital. That’s sort of our give back and combining with our investors.

Anything above that 10% IRR cap, we donate back to the communities that we’re working with. So in our 2019 fund, because we’re more advanced there, we actually have a project that we’re undertaking there that we use a lot of things that we’ve learned about in our Link Apartments project, but it’s not actually branded as Link Apartment. It’s gonna be branded as Cycle Apartments, and it’s located here in Charlotte, North Carolina. It’s actually sort of an innovative community here. It’s the first multi-family development that the city council of Charlotte has approved that has zero resident parking.

You might’ve thought about that when I said Cycle Apartments. We’re pushing biking and transportation alternatives. It’s located right near Greenway. And because we’re not paying to build that parking, we’re actually saving an incredible amount of costs because a parking space especially in a structured deck, generally costs what, $25,000, $30,000 of space. By not making that in that investment in the property, we’re able to actually or able to deliver half of units in this project as truly affordable housing unit, which is increasing the affordable housing stock in the community that we’re investing in. So that’s sort of an example of the type of project we’re looking for within that segment. And we’ll continue to try to find things like that going forward in the program.

Jimmy: That’s great. Now, I love hearing about examples of fund managers that are doing things the right way and adhering to congressional intent of the initiative, kind of stay away from the bad press that we read about with this program sometimes. I’d love to hear stories about the ones that are doing it right. So keep up the good work there. I wanna talk about now your fund structure. Your fund is, it’s somewhat unique among Opportunity Zones funds in that it is structured as a REIT. I think there’s only a handful of funds that are doing what you’re doing. Can you explain how you were able to do that? Maybe you can go into some of the geekier parts of how the fund is actually structured and also describe the benefits that a REIT structure offers.

Clark: Sure. And always happy to geek out on Opportunity Zones. I’m a former attorney, so getting down into the nitty gritty of how the walls work is sort of one of my pastimes. But we decided to go with a REIT structure for sort of one particular reason. I think a lot of, or at least the few competitors that we have that are in the REIT restructure really are pursuing it to put a significant amount of the onus of managing the tax situation on the investors. And not in a bad way, but just essentially letting an investor through quarterly reevaluations and cash in and cash out, sort of choosing their own timing of their Opportunity Zone tax benefit, which is a perfectly good strategy. It makes a lot of sense.

We actually approach it for a different way. We’ve been investing in Opportunity Zones in our Link Apartments brand, actually going back to 2012. Our first Link Apartments project that was delivered in 2012 is in an Opportunity Zone. So we wanted to make sure that we were able to operate sort of in a consistent way across our portfolio, Opportunity Zone on or not. And what the REIT restructure allows you to do actually is it frees up some flexibility in terms of selling properties.

A lot of press around Opportunity Zone investing sort of conflate the 10-year hold period for an investor with a 10-year hold period on a property. And I think that’s primarily because most Opportunity Zone funds are structured as partnerships or LLCs, they’re taxed as partnerships. And so when you sell a property in that structure it passes through and if it’s before the 10 years, obviously an investor wouldn’t get the benefit. But if you actually read the Opportunity Zone on legislation, the 10-period is based on an investor’s interest in the fund itself.

And so what a REIT structure allows you to do is actually utilize internal taxable sales in a way that a partnership fund can’t do. So a partnership can execute a 1031, so can a REIT anyone who’s investing in real estate will understand that. But REIT actually can make taxable sale and they have two options when they do so. First is to pass through a capital gain dividend that looks very similar to a partnership sale, and actually is the ultimate mechanism.

There’s a special capital gain dividend after the 10 years…after the 10-year period that allows for the back-end liquidation with tax benefit. But a REIT can actually also pay tax internally rather than passing through a capital gain dividend that’s taxed to the investors. And when it does that, it can retain the capital that it receives from the sale and reinvest. And unlike a 1031 that actually…that investment can be split.

So as long as it’s reinvested in Opportunity Zone property, under the QOZ program, it gives a lot more flexibility. It can be split over multiple projects a new project, in an existing project, paying down debt, things like that. So it gives us a lot of flexibility. The other thing that we found though, after we sort of made this decision, is a lot of our investors really like it. Because, at least in our experience, and we are primarily raising capital from the RIA networks and wealth managers and people, and individual investors like that, is that a lot of those investors in Opportunity Zones don’t necessarily have a diversified real estate portfolio where they’re used to getting a complicated K-1 with multiple state tax plans.

And so, a REIT actually provide investors with a 1099 rather than those sort of more complicated tax liabilities on the partnership end, that for an investor who doesn’t have the real estate experience, maybe they’re coming out of their own small business that they’ve had a realization on, or you know, maybe their investment advisor bought them some low basis Amazon stock back in 2005 and they’re having a great run in and they’re diversifying. It gives a lot more sort of a tax simplicity experience for our investors. There are certainly tradeoffs there, obviously you’re not passing through depreciation and things like that. But we’ve found that that can actually be really attractive, especially for the investors that we’re targeting in our fund.

Jimmy: Got it. That makes sense. So is it…essentially, is it just set up at the QOF level as a C-Corp instead of as an S-Corp or an LLC partnership? Is that basically what you’ve done there, or is it more complicated than that?

Clark: Well, it’s an LLC taxed as a…that elects to be a REIT. So it’s an LLC with shares, essentially.

Jimmy: Got it.

Clark: It’s not a C-Corp. REITs don’t need to be C-Corps, they can be LLC. It actually also gives us some interesting flexibility because a traditional…and this will get even more geeky. You know, a traditional REIT is often set up as operating partnership. That operating partnership can be a or is our Opportunity Zone business that we’re investing in. So it’s through an Opportunity Zone business allowing us to access the 31-month working capital allowance and things like that. Gives us the timeframe that we need. But also because it’s an operating partnership, anything that we wholly own under that operating partnership is actually tested at the 70% level, rather than at the 90% level for your sort of operative Opportunity Zone tax.

So it actually gives some portfolio flexibility as well. Not one that we’ve utilized too much because we have, you know… At Grubb Properties, we have our traditional funds that are also in the market, that are investing in non-Opportunity Zone locations. But the structure is actually interesting because you could theoretically invest 30% of your capital in non-QOZ locations through the structure and retain your Opportunity Zone sort of status, which is interesting.

Jimmy: Right. Yeah. That 70% asset test does allow for a lot more flexibility. You’re right about that. We’re in the midst of a global pandemic, Clark, and it’s roiled the markets, especially last year, first and second quarter of last year, really roiled the markets. What’s keeping your investors awake at night? Especially maybe thinking back to raising capital for your 2020 vintage fund, what questions have your investors been asking? What’s been the biggest challenge of raising capital during this time?

Clark: I mean…I think especially in 2020, just the general uncertainty around… Investing broadly, I think hurt investing across the entire private asset market and Opportunity Zones certainly weren’t immune to that. I mean, I think we still had good success, especially for the conditions that we were operating in. As I said, across the two years across the two funds, we raised over $200 million. So we’re really excited about where we are, broadly in the program.

You know, I think, broadly, in the real estate community and it’s something that Grubb Properties…one of our techniques of getting to those…that lower basis that I talked about, that we really used more in our traditional funds than our Opportunity Zone funds, is actually combining office and multifamily using what is suburban or actually formerly suburban and now urbanizing office to get to…value add office, to get to a surface parking lots that we convert into multifamily sites.

The office part of that equation has become an interesting sell in the last 10 months. But yeah, I think that there’s still certainly opportunity there. But that type of investing, I think, always is gonna raise an eyebrow in our potential investors. And so that’s one of the headwinds we’ve been sort of seeing. And I think Opportunity Zones broadly, a lot of it is a lot of it is ground up development. That’s a lot of what we’re doing in the Link Apartments. But in our 2019 fund we did make some office…some value add office acquisitions that we’re planning on…that we still have in a portfolio and are executing on. We didn’t do that in the 2020 portfolio for some of those units for the COVID reasons.

But I think that that’s sort of what are Opportunity Zones going to look like? Because if the idea is that we’re transitioning areas but we go into a recession, are those areas gonna transition as fast as they otherwise would have? I think for some of them they will. You know, I think… You know, one of the things I always talk about with Opportunity Zones is no two Opportunity Zones really are physical areas are really alike sort of as mirror images of one another, and there’s so much diversity in the zones themselves. I think that something like 7% or 8% of the land area of the United States is located in a QOZ. So you have everything from super rural Opportunity Zones to very, very urban Opportunity Zones.

And I think that some of the markets that were on the edge in 2019 may not have been as attractive in 2020. I think that’s sort of the general pushback. But I think also some of the volatility in the market in 2020 is gonna create a lot of opportunity. I’m sure you hear that part on this podcast way too often, but create a lot of opportunity for 2021 because I think whether it’s gained passing through from high net worth investors, investments in hedge funds or things like that, or just get their own trading on the market I think that there were some hedge funds that were over 100% return last year. So I think 2021 is actually gonna be a really great year to capture some of the gains that were made in 2020 in the overall market.

Jimmy: I do think that Opportunity Zones were aptly named. We do use that term opportunity to describe investment opportunities quite a bit on this podcast. Absolutely. So you’ve raised roughly $200 million in your OZ funds over the past couple of years. You mentioned earlier that you’ve had success raising from retail high net worth investors and through the RIA channel. But I wanna dive into that a little bit more. I wanna ask you specifically, where do you raise most of your money from, and which capital channels are you having the most success in? How are you able to raise that amount of money that you’ve been able to raise so far?

Clark: Absolutely. Yeah, so we have an internal team that raises our capital at Grubb Properties. Our director of investments, James Holleman, is our sort of Opportunity Zones lead. And he has forged relationships with active investing relationships with upwards of 30 different RIAs, but sort of ongoing relationships with probably close to 100 RIAs that we’ve had discussions with. So it’s been a lot of, sort of on the ground talking to people, explaining Grubb Properties and what we d,o and having us sort of be rolled out to their client basis.

I think as I talked about having experience in Opportunity Zones, being a vertically integrated real estate company that provides both the development services, the investment services, that’s obviously what sort of I do. And then all the way through to the property management has been a really good story for investors. And so a significant amount of our capital has come through those RIA channels.

Though we’ve also…you know, we’ve sourced sort of capital from two other kind of consistent sources. One is the Opportunity Zones directories. And there are a lot of directories out there that I think can be very beneficial for funds just by…literally just putting your name out there. There’s not a lot of upfront work on the part of the fund. You know, you sort of list your parameters, what you’re investing in and all that kind of stuff. And people…you know, investors use those. They also are good sources for projects, if that’s what you’re looking for as well, we get a lot of incoming on projects as well.

And then secondly, something that is similar to the RIA channels, but we’ve also found some success in is some of the crowd due diligence sites that are out there, not necessarily the crowdfunding like Fund Rise and things like that, but sort of closed communities, online communities of crowd due diligence that have provided a significant amount of capital for us as well.

Jimmy: Okay. Sounds good. Clark, that makes sense. I’ve got a two-part question for you about trends now, or trends that you’ve found interesting or worth keeping an eye on, you think. One, what are some general real estate market trends that you’ve been noticing lately? And then two, second part of the question is, what about Opportunity Zone specifically? Any Opportunity Zones trends that you’re keeping an eye on for 2021?

Clark: Absolutely. That’s a great question. I think broadly in real estate and I touched on this when we talked about the pandemic a little bit there’s been a lot of fear of commercial, especially retail but also office. And I think that there’s a lot of concern there that may be at least somewhat overblown. I’ve seen a number of articles fairly recently. The one that comes to mind was a Wall Street Journal article about probably six weeks ago talking about our city’s dead and is office is dead, and the basic thesis was no. And I think that’s what Grubb Properties really believes. I think office is going to change, you know. Is the future of office a high rise building that you have to usher thousands of people through elevators every single morning at launch, and then every evening? Maybe not.

But I think that mid-rise office, especially in transit corridors that have good transit access could be a huge beneficiary of sort of changing office environment. Because people are working from home and work from home is going to increase, but eventually people are going to go back to offices, and those offices may look different. But businesses will still fundamentally need some physical space.

And I think the other sort of countervailing trend there that is, or is countervailing to what we’ve seen in the market over the past 20 years is square footage per employee has been reducing for a long, long time. And I think that’s actually part of what people were fearing so much in going to their offices during COVID. Because if you’re in a situation where you’re using desk clumps rather than offices or even divided cubicles, obviously you’re in much closer contact with more people.

So I think that trend also may start reversing and square footage per employee might actually start going back up. So you’ll see a lot of… I think you could see a lot of sort of counter pressure in the market that may end up stabilizing the office market. In the multifamily side, I think that the affordability issues and that there’s a central workers and the central housing that we’re trying to pursue through Link Apartments was already doing really well and was already a market that we were capturing, I think incredibly well. But I think that that’s just going to continue to be more and more important as people really look at sort of costs on the… You know, individual tenants look at what their cost is on their apartment, what they need, what they don’t need in terms of amenities and space, and things like that.

And then I think retail could be really interesting because there there’s a lot of retail that doesn’t…you know, may not look as attractive as it did. But I think there was some retail that was very attractive. I think that you’ve seen the resilience of grocery stores, and especially groceries that can get into smaller footprints or into more urbanized space. I think there is a lot of opportunity there as well.

On the Opportunity Zone side I think it’s… You know, I think the trends will generally continue that the way they have been, I think. You know, as we talked about earlier, those select Opportunity Zones that are in sort of the really good path of growth locations will continue to flourish. You’re gonna see multi-family development there, multi-family job centers.

I think a good example of a project that we have like that is our project in the Denver area. It’s actually in Aurora, Colorado across from a place called Fitzsimmons Innovation Community, the massive hospital campus. It’s got three hospitals, university medical center, office and lab space. And I think the full build out of the campus is like 50,000 jobs. And that’s the place you wanna be developing things like multifamily right now, those sort of stable long-term jobs centers, whether that’s medical university jobs centers or government-based jobs centers, I think are all really stable targets for us, as well as transit access.

Because I think that may be another trend, is decreasing car ownership. Because if you have good transit access and you can give up a car payment rather than an apartment payment, I think that that’s a trade off that especially a lot of younger millennials and sort of the early part of gen-Z may start making.

Jimmy: Sure, that makes sense. I think a lot of good trends there to keep an eye out on, for this year and beyond. For anyone listening right now, Clark, who may have access to real estate deals that I’m sure they’d love to get in front of you potentially, can you tell us a little bit about your deal pipeline? What do you look for in a property when you’re going to acquire, and how many properties are you looking at and ultimately acquiring for development? What are the size of the deals that you’re looking for, typically? I guess, what would you tell someone who’s trying to shop you a deal, basically?

Clark: That’s a great question. I think it somewhat depends on the market. But as we talked about the markets that we’re looking at earlier we are looking for those more urban markets whether, you know… And that can be a lot of different types of urban areas, whether it’s a Charlotte or Nashville all the way to there’s Los Angeles Washington DC, even potentially in the New York area, Denver the Texas market.

What we’re generally looking for is, because we are vertically integrated and we do have our Link Apartments brand, and we do our own development, primarily we’re gonna be looking to acquire property, whether that’s raw land or an assemblage of existing properties that we would then replace with a Link Apartment. That’s really what we’re looking for. You’re generally gonna be wanting to find something that has either entitlements that are sort of already baked in from the municipal code or could be fairly easily achieved in a sort of a pre-closing timeframe.

Generally wanna find somewhere that’s 200 plus units, even 250 plus, especially in markets like a Charlotte or something, or you know, some of the Southern markets. I think we would look at smaller deals in a bigger market where… You know, sort of the rent trade-off makes a smaller deal make more economic sense, just in our model. And generally, like I said, looking to being a GP or a co-GP position, not looking to provide LP capital to existing deals.

Jimmy: Good. That makes sense. Well, Clark, thanks for joining me on the podcast today. It has been great, full of insight. It was great to learn more about the Grubb Properties Fund. Before we go, though, can you tell our listeners where they can go to learn more about you and Grubb Properties?

Clark: Absolutely. You know, is our website. It has information there on our Opportunity Zone programs, as well as our traditional fund programs, which as I said, we have a single strategy. So it’s both good for people who have opportunity or capital gains who are looking to invest in Opportunity Zones or make just traditional real estate fund investments. You know, the information on the website will get you through likely to, as I mentioned, my colleague earlier, James Holleman or myself. And always happy to talk to investors or people with deals.

And honestly, I’m happy to talk to people just about Opportunity Zones because it’s really a passion of mine. And I’m really excited to have been here today and gotten a chance to talk with you and talk with your listeners about sort of our perspective on Opportunity Zone program.

Jimmy: Likewise, Clark. I always enjoy speaking Opportunity Zones, of course. And for our listeners out there today, as always, I will have show notes on the Opportunity Zones database website for today’s episode. You can head over to to find the show notes. And there you’ll find links to all of the resources that Clark and I discussed on today’s episode. Clark, thanks for joining me. Appreciate it.

Clark: Thank you.