Keys To Successful OZ Investing, With Caliber Funds

In this webinar, Chris Loeffler discusses Caliber’s Opportunity Zone fund, which has acquired holdings in Arizona, and is targeting additional holdings in Colorado, Texas, Nevada, and Utah.

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Webinar Highlights

  • An overview of Caliber, a full service real estate investment company headquartered in Arizona.
  • The bottom line tax benefit that exists in Opportunity Zone investments, and strategies for maximizing the QOZ tax incentive.
  • What makes “middle market” real estate an attractive investment opportunity.
  • Characteristics that Caliber looks for when evaluating potential target markets.
  • A case study in developing a behavioral health services facility in Phoenix.
  • How lease incentives to local businesses are driving a revitalization of downtown Mesa.
  • The investment opportunity created in private real estate markets by the events of the last two years.
  • Three key ingredients to successful Opportunity Zone investing.
  • Target returns and key assumptions for Caliber’s Opportunity Zone fund.
  • An overview of Caliber’s current portfolio as well as assets in the pipeline.
  • Q&A with webinar attendees.

Featured On This Webinar

Industry Spotlight: Caliber Funds

Caliber Funds

Caliber Funds is the private equity arm of Caliber The Wealth Development Company, an Arizona-based corporation that services the capital of individual investors and disburses them into private real estate assets across the Southwest. Caliber offers a diversified portfolio of commercial real estate properties, real estate-related equity investments and other real estate-related assets, each of which Caliber Funds believes are compelling from a risk-return perspective.

Learn More About Caliber

Webinar Transcript

Jimmy: Chris, I’ll turn it over to you. You got 30 minutes. Go for it, man.

Chris: Well, as Jimmy mentioned, I’m going to go through a presentation on Caliber, and then we are hosting a breakout session. What can you bring into the breakout session? Obviously, questions about us, our fund investing, but also, kind of anything you want to discuss. If you’ve got projects to look at, it’s always a good thing to talk about. If you wanna talk through, you know, different structures and strategies but, you know, you don’t wanna be a part of a sales pitch, that’s fine, too. We can just go through whatever it is that you want to cover. Hopefully, we’ll make it a good breakout session and create a really dynamic discussion. So, with that, let me rock and roll through here.

Hopefully, you all can read this. Basically, it means what you all know what it means, which is that we try our best. We try to tell you everything we think is gonna happen. But, of course, nothing in the future is guaranteed. So who is Caliber? What do we do? Why is it interesting? The company is a full-service real estate investment company. We’re a vertically integrated platform, which basically means that we help you invest into different forms of real estate funds, and opportunity zone fund being one of those. We then go out there and find great deals, invest in those deals, acquire them, finance them, develop them, construct them, and then manage them for, hopefully, a successful cash flow and a successful exit.

The company has about a half a billion dollars in current assets under management. And we have about a billion five in what we call asset-centered development, which means we own land that we’re currently developing to build out another billion five worth of real estate. So, we have a pretty good view, not only in what we already own but also where the dollars are going in the future. And we’re constantly running a pretty sophisticated platform to secure new opportunities for you, as well as continue to manage and build the ones we already have.

I was thinking through how to structure this conversation to be as successful as possible, considering the fact that you’ve probably heard quite a bit of information on opportunity zones already. So I thought I’d start with what is the bottom line on the tax benefit for me, potentially, and then how do I achieve that bottom line with Caliber? So, first and foremost, on the screen, you’ve got, essentially, a comparison of a million-dollar traditional investment, coming from a capital gain, and a million-dollar QOZ investment. On the left-hand side, you can see you have a million-dollar cap gain. Maybe that came from selling stocks, or maybe it came from selling your business or selling a piece of real estate. And in a traditional investment, you’re gonna have to pay taxes on that capital gain.

So after your first round of taxes, you invest the 720 that’s left. After 10 years at an 8% annual growth rate, you’re at a million five. You pay another round of taxes when you sell your investment, and you net down to a million three. So you start with a million, you net down to million three. If you use the exact same fact pattern in an opportunity zone investment, because of the way the tax incentive works, you actually net out about a million nine, which is three times the profit of a traditional investment with effectively the similar or the same risk because you’re earning the same rate of return.

So how do you get this maximized QOZ tax incentive? One, you know, I’ve got a couple of things for you to consider. One, I think you need to grow the value of the capital because about 80% of the tax incentive comes from the benefit that shields you from future taxes on the value growth of your investment. So that means you have to be investing in real estate or real estate-related investments that actually increase in value substantially over a 10-year period. Investing for cash flow is great. And we certainly do produce cash flow on our investments, but you need to be focused on growth in terms of this particular structure. Two, I think you need to make a lot of bets. If you are out there making a single bet in a single market for 10 years and hoping it works out, there’s a lot of risk associated with that.

So if you wanna maximize risk-adjusted return, you’ve gotta make a bunch of bets. And if you do that in a multi-asset fund structure like we do, then you can compound your gains within the fund. So, say you take a building, you turn it around, you maximize its value, and in five years, you sell it, double the value of your equity, you can actually do that again. So you can reinvest that compounded gain within a 12-month period. You have some interim tax issues you’ve got to manage through, but that’s how you compound the gains within the fund and generate the best possible rate of return. And then you’ve got to find a way to maximize your exit.

The structure of an opportunity zone fund allows you to wind down the fund and sell assets one at a time, which is always optimal if that’s where you’re gonna get your best price. But we think there’s gonna be opportunities after the 10-year mark to sell our fund as a portfolio or to potentially roll it up vis-a-vis an upgrade into a public security, which is great because if you end up owning shares in a public REIT, you as the investor can then decide, “Hey, I wanna sell my shares today,” or “Maybe I wanna stay in for 15 years or 20 years, and I wanna get the cash flow on this investment and shield myself from taxes on the upside or the value growth of the investment for a longer period of time.” So maximizing your exit strategy should maximize your tax incentives as well.

How do you achieve that in the world of real estate? Our thesis is, you do it in middle-market real estate. And so, what we find in this is you’ve got kind of a U curve. And this U curve, it represents the amount of competition that we face when we’re trying to buy assets. So in the institutional market, which is typically investments that are $100 million or more in size on a single asset deal, there’s a lot of competition. We’re fighting every REIT in the country and every large investor wants to deploy capital. On the entrepreneurial side of the market, which is typically $5 million or less in size in projects, again, you’re fighting a lot of entrepreneurs, a lot of folks who pretty much can hang a shingle tomorrow and start a real estate investment business, and the competition is very strong.

In the middle market, which we define as $5 million to $15 million projects, we find that there’s a lot less competition because you have to be both sophisticated enough to deal with the complexity of a $25 million deal and entrepreneurial enough to acquire those types of projects outside of the institutional framework that most of our institutional competitors use. So, that is where the opportunity lies. And as you can imagine, that’s where Caliber invests.

The other piece of it is you’ve gotta invest in great markets. The opportunity zone program was great in that it built out these 8,700 census tracks across the country, but which specific census tracks are the best to invest in? We think that those are located in what we call the Southwest and Mountain West regions that we invest in. And we think that those are located in the cities that had really great state-level leadership and local leadership to pick census tracts that made sense for development and for growth. So, we focus pretty deeply in those areas, kind of, conflicting with that story of out-migration. We have a lot of in-migration in almost all of our cities that we invest in, and that’s a great driver for growth in value appreciation.

And then, from a structure standpoint, how is your investment structured? As an investor, typically, with Caliber, you’re coming in as a limited partner. You’re putting your money into a fund, which is structured as a limited partnership. And the partnership itself owns real estate holding companies that then own real estate. So, as direct as you possibly can be as an investor owning a partnership interest in the fund, the finance, the real estate, these real estate holding companies are structured as qualified opportunity zone businesses to conform within the law. And then Caliber, as the general partner, is the decision-maker. It’s signing on the financing. It’s taking risk alongside you. And then it’s also delivering services to the real estate to ensure that these projects go from point A to point B successfully. We have a track record of doing this over the last 13 years. And as far as the assets we’ve sold so far, our investors have realized a 2.1 net equity multiple or better, which basically means if you put $100,000 in over roughly a 5-year period, you’ve gotten $210,000 back.

We also have a long track record in the opportunity zone space. We were one of the first funds in the country to open. We’ve been on the speaker circuit. As probably some of you may know, we’re out there kind of building the industry and helping all of our colleagues in the opportunity zone space succeed. We have other opportunity zone investment funds we’ve collaborated with in the past. And, as an example here, we spend a lot of time with state, federal, and local government, touring them through sites, showing them how projects are working, showing them real examples of success for the program to hopefully promote, you know, support into the future.

A couple of other examples of some projects we’ve done recently, we just completed a behavioral health hospital conversion. So this was an adaptive reuse project. We acquired an assisted living facility that at the time was boarded up, gutted it, it renovated it, brought in a new doctor group as a tenant and signed a 20-year lease. On this project, we acquired it for $11 million. We put another roughly $12 million into it. And we’re into it for $23 million. It leases at about $2.4 million a year in net income, which is better than a 10% cap rate on cost. And we think it’s worth around $35 million today.

A great example of how real estate-related investment funds like mine are actually driving business growth as well, we’ve acquired a large portion of historic downtown Mesa. And one of the things that we’re doing is we’re providing significant lease incentives for business creation. This is a deal that we’ve done with Launch Pad that we’re now, I think, heading into construction on. And what it allows us to do is help them open a new co-working location, gives them relocation expenses to open their business, gives them all their tenant improvements. And it’s driving the growth of their business into a new location, while also being a real estate investment for us.

If you join us at Caliber, you’re joining a community of over 1,200 investors who have invested over $500 million in equity with us since inception. And the best thing about the Caliber community is we get together, we do it virtually, we do it in person, less in-person the last year-and-a-half than virtually, but, certainly, we’ll be back in-person soon. And you get to be amongst a group of like-minded individuals who probably have a lot to offer you, not only as a colleague in the investment process but also as a way to learn about how to invest in private equity real estate.

So just digging in the fund quickly here, I wanted to talk about why you would invest in an opportunity zone fund, in general. My thesis is pretty simple. We think that, due to COVID, the disruption that’s occurred in the real estate markets and the private real assets, is what they call that category, is the greatest disruption we’ve seen since the 2008 financial crisis, which happened to be the best buying opportunity in modern times for real estate. So, while certain categories of real estate are still hitting all-time highs, in terms of their value, there’s a lot of disruption in the market, there’s a lot of busted developments, and there’s a lot of opportunity for us to acquire investments or invest into communities that really need those dollars, but also do it at a basis that makes a lot of sense, that creates tremendous upside for us as investors.

And just as a little piece of our history, when we started, we started in the trustee sale auctions. We started buying, you know, foreclosure properties, nonperforming notes, bank-owned properties, bankruptcies, etc. So, while we are a traditional real estate investment development fund in this particular category, we are applying the distressed real estate investment skill set that we have, as we go out and look at future opportunities. In addition, I think you’ll find that you’re in good company. Frequent estimates that we are basically gonna see alternative assets grow from a $10.7 trillion market to a $17 trillion market in the next five years. And that’s as investors are looking for a place to go with their dollars outside of stocks, bonds, and insurance products.

The three things that I think that make a fund successful in this space are the right combination of infrastructure at the fund level, meaning being able to execute at an institutional level, not screw up your tax benefit, manage all the finance tax reporting, etc, that’s required, combined with an entrepreneurial deal structure and kind of deal flow infrastructure. So you’ve gotta have a track record investing these turnaround deals or these new construction projects in the middle market. You have to have regular deal flow coming in because this capital comes into the fund. You’ve gotta place it rather quickly. And you have to have, most importantly, number three, the ability to execute. So, that demonstrated ability to source properties, develop properties and manage assets, that’s what you’re relying on with us. As an investor, you’re making a 10-plus year commitment to our relationship. It’s kind of like going from dating to marriage after the second date. And you’re relying on us to be able to go out there and continue to execute on this type of a strategy for you for quite a long time and probably through several market cycles.

Within our fund, just as a quick look, we’re targeting a 13% investor…or a fund-level IRR, essentially. And that translates down to you, depending on when you invest in the fund. We’re targeting an equity multiple at the fund level of two-and-a-half times, which is fairly achievable, considering the fact that we’re doing real estate development. We obviously wanna exceed that number, but that’s a good quality target for you to look at. And we’re combining opportunistic and value-add strategies. So we’re both building and doing heavy redevelopment, but we’re also doing some value-add components to enhance management and enhance profitability of the assets. And, in essence, we have a very diversified fund because we’re focused on place-based investing, going to the best opportunity zones and the best locations in our region, and investing in the projects that makes sense for those communities at those times.

A small example of some of the things we’ve done so far, we’re building energy-efficient townhomes. I just mentioned the behavioral health hospital. We have acquired this large portion of downtown Mesa, which is right next to the Arizona State University New College campus that’s being built. We’re building a private school expansion at Rancho Solano with a tenant in tow. And we just completed the construction of a Doubletree Hilton Hotel.

In addition to that, not only will you know, as an investor, what you’re investing in the fund that we currently own and be diversify across that pool of assets, but you also have some visibility to the extent that we can share about what we’re acquiring next. And we have two large developments that we’re acquiring, and one of what I think is one of the best census tracts in the country. One is a mixed-use development, doing office R&D. We have tenants in tow to move into those spaces, as well as sort of an innovative residential and entertainment component. And it’s a smart city-oriented development. So it’s infusing that development with technology around smart cities.

And then we have a wellness campus that we’re building, all within a medical corridor, to try to satisfy a massive increase in demand for medical-related real estate projects. And then we’re building traditional apartments with market-rate apartments, with HUD takeout, which is some of the best, cheapest financing you can acquire. In addition, as an investor with Caliber, you’re gonna get an impact investment report that we release quarterly in conjunction with any NES/JTC. They’re helping us on the impact investment rate of return. And you’re gonna be able to see not only what is your financial IRR, but what is your impact investment rate of return along the way.

And then, last but not least, on fund structure, the offering is a maximum of $500 million. We have a 1.5% management fee, over 6% preferred return with an 80/20 split for a $1 million minimum investment or a 75/25 split for a $250,000 minimum investment. The fund is audited by Deloitte. Tax counsel is Mr. Mark Schultz, who’s an expert/celebrity in the space these days. And we have one of the best teams in the country, investing in one of the best regions in the country. So, if there’s anything else that we can cover, I’m happy to take some questions now. And, otherwise, we’ll hop into it in the breakout session.

Jimmy: Okay. Fantastic. We’ve got time for several questions. I’ve got another 10 minutes or so before we have to break for lunch, and then we’ll get you in your breakout session. We’re gonna use the same Zoom link that we used for the breakout session earlier. We’ll use the same one for Chris’s session in a minute. And I’ll get that posted in the chat in just a couple of minutes here. And then if you want to join Chris in that breakout session, you’re free to do so, or you can just kind of hang out in the main session. We’ll be on a lunch break. I wanna encourage you to chat with Chris if you have any questions, though. But let’s get to some live Q&A here for a few minutes. Where did my question go here? Here we go. Let’s see. Paul asks, and he said this very early on while you were rifling through your first couple of slides, he says, “Chris, where is the deferred tax liability payable in 2026/27?”

Chris: Yeah, I’ll flip back to the other slide here so we can get there. Basically, it comes out in 2027, as you mentioned, in my little model here. It’s this guy down here, coming out through here. And it’s an important thing to notice, everybody knows that you’ve gotta pay your taxes in April of 2027, but you can’t really sell your investment until, you know, four-plus years down the road. And so how do you do that? So every fund is handling that differently. Our fund thinks that the best way to do that is through a debt-based distribution. So, we’re using very little debt on our fund. And in 2025, we will likely do some refinances, pull out some proceeds out of our assets and distribute those debt proceeds to you as an investor, which would be a tax-free distribution, based on the structure of what we’re doing. We think it’ll be about 20% to 40% of your invested equity, maybe more. And that would allow you to have the cash on hand to pay your taxes as needed.

So, it actually is interesting, because if you deploy $1 million dollars into real estate for the next five years, we can grow that value of that real estate pretty significantly to enhance the ability for us to draw some debt against it. And using debt to make that distribution doesn’t force us to sell assets in the interim. So, I think it’s the right strategy. I think a lot of fund managers are doing that. And I think, to the extent you’re in a multi-asset fund with lots of different assets that are in different stages of their lifecycle, you can have probably a higher likelihood that that strategy is gonna be successful than if you’re in a single asset fund that, you know, God forbid, something like COVID happens or something in 2025 or 2026 and you own a hotel. Well, it’s like, okay, you’re not refinancing that asset anytime soon, and then how are you gonna pay your taxes?

So, the other thing we’ve done in our fund, since we’re mixing residential with more opportunistic asset classes like a little bit of hospitality and a little bit of, you know, kind of, entertainment and things like that, we get the return profile from the really sexy stuff. But on the residential side, we can maximize the debt on those properties because they get the cheapest possible debt, the best possible terms. So we might have an asset with no debt at all and another asset with as much debt as it can handle. And at the fund level, you’re still gonna see less than a 50% loan to value.

Jimmy: Yeah, that’s helpful getting that liquidity out to the investors so they can pay their tax liability April 2027.

Chris: It’s important.

Jimmy: Yeah, several more questions here coming in now. So, glad we’ve got some time for these. Alex asks, and he’s referring to one of your earlier slides, “To key ingredient number 4, specifically, what do you, Chris, think about non-exit that is QOF buy and hold?”

Chris: So we have a couple of those. As an example, in our fund, we built some energy-efficient townhomes that are condo-mapped. We’re gonna hold them as rentals for 10 years, and then we’re gonna exit these V condo sales because we think that maximizes the value of the exit. So we’ll certainly do deals where we hold them for 10 years at a time. I think you really have to follow what makes sense in the asset class, you know. And hospitality as an asset class runs in pretty deep cycles, high highs, low lows, and so you wanna catch the high high, and then redeploy that. Other asset classes, you know, may not have as deep of a cycle. But, in general, you’re gonna find that most real estate, once it’s bought, developed, stabilized, and then the cash flow is optimized, that’s typically the maximum value point to sell. It doesn’t mean that holding it for another five years is a bad idea. It just means that you’re not gonna see nearly as much value growth, which if you could sell that and do it again, in another five-year cycle, that’s where you’re gonna really drive, more like a three, four times equity multiple versus a two times equity multiple.

Jimmy: Good. Really timely question from Matt here. It looks like we’re getting to him just in time. He says, “Chris, could you take an investment today? Today is my 180th day from gain on January 28th.” And he provides his email address, which I’ll pass along to you. It’ll be in the Q&A for you to go find there.

Chris: Yeah, sure. Absolutely. The way we designed our fund, which is a little different than most of our competitors, is we are dynamically, essentially, investing the fund as dollars come in while we are also consistently acquiring assets. So, to give you a little more background on Caliber, we have a non-QOZ real estate development fund, that is just a normal development fund. We have a core fund that we’re launching soon. We have a private lending fund. And then we have a programmatic syndication strategy. So, that means that we’re out there buying deals and letting people invest in a project-by-project basis as well. So because we’re so active and we’re doing so many projects, every deal runs through a single investment committee. It doesn’t matter if it’s an opportunity zone project or a non-opportunity zone, the investment committee is out there sourcing and running deals on a regular basis.

If it happens to lie in an opportunity zone and it happens to qualify for the program, we push it through that channel. If it’s going through a different channel, then we push it through the different channel. So, what that all means is we have a really, really active deal pipeline. And if you have dollars coming in, unlike a lot of our competitors, where we have to close the fund for new investments until we line up the next deal and then we open it and then we close it and we open it and we close it, we can keep our fund open, we can take in capital on a daily basis, and we can match that capital into a QOZ project within six months without risking violating the rules of the rule of law. So, in essence, that’s what we do. That’s a little bit more of how the sausage is made at Caliber.

And I guess, on that note, every deal we do within our opportunity zone fund is a QOZB itself. So if you’ve already created your own opportunity zone fund that you’re personally managing and you need a place to place your own capital, you can actually co-invest with our fund at the deal level with Caliber. So, it doesn’t preclude you from investing with us. You just can’t invest into our funds. You have to invest in the projects that we invest in.

Jimmy: Fantastic. Good answer there and helpful for that gentleman as well. And Chris, I believe his email should be appearing for you in the answered section of the Q&A, if you wanna grab it.

Chris: I will. I will send you a note.

Jimmy: Let’s see. We got time for a few more questions before we break and get that breakout session open. I’m gonna post the link to the breakout session right now. Nobody’s gonna be in there for a few more minutes as we wrap up here, but there’s the link in the chat for the breakout session we’re gonna have with Chris when we close down here for lunch. We got several more questions I want to get to right now, though, first, Chris, if we got some more time.

Chris: Yeah, I try to make this presentation quick so we can spend more time on questions, because questions are probably more valuable for everyone to get answered than, you know, our canned discussion. So…

Jimmy: I agree. Agreed. No, this is helpful. And we got plenty of them coming in. So this is great. John asks, “Chris, can you pay out cash flow from profits before the five-year hold? And, if so, how are those payouts treated for taxes?”

Chris: Yeah, so I’m not your CPA. Consult your CPA. You’ve had the disclaimer. But I used to be an accountant with PwC, so I have a little bit of background in that world. Bottom line is the capital gains and the value growth of your investment is what’s protected from taxes, as long as you hold for 10 years. What I distribute out to you in current income vis-à-vis rents is going to be taxed as ordinary income, theoretically, and it’s gonna be passive. So if you have passive losses that might offset your passive gains, maybe that would be a good tax strategy for you. And we happen to have funds that produce those.

So, theoretically, if you’re getting income distributions out of your opportunity’s zone fund, you’re gonna be paying taxes on that. Now, normally, when you make a real estate investment, there’s a depreciation shield that comes with that, where you make a million-dollar investment and we’re depreciating your million dollars over a period of time. So you might be getting distributions but you’re paying taxes on those distributions for a while. When you make an investment into an opportunity zone fund, you’re coming in with no basis. So, we have to produce basis for you in the form of maybe profits on the real estate or profit from sale or something like that, which we will then pass the depreciation through to you to reduce your basis. And so you will get some form of a depreciation shield for your distributions. But it’s more likely, in this type of an investment, that you’ll be paying taxes on those distributions. And, you know, you make an income, so you’re paying taxes.

Jimmy: Good answer there. Let’s talk about passive losses. Does your structure allow for passing through passive losses to investors?

Chris: Yeah. Yeah, it does. And what we do at Caliber is we typically do a variety of tax planning strategies. We’ll do a purchase price allocation when we acquire an asset, and then we hire a group that does cost segregation studies, which is essentially combining engineers and accountants to go through a building and figure out what all the parts and pieces are and what can be accelerated in depreciation, and what, you know, can be moved out of that 39.5-year property and into 5 and 15-year property and into personal property. And so we try to accumulate all of that so it’s usable when we need it, as we produce income, that we can pass that out to you. Otherwise, kind of, Caliber holds those passive or those depreciation losses as the fund sponsor, because we guarantee the debt. And we also then absorb the first round of gains, typically.

So, as an investor, we’re trying to maximize your tax strategy internally. We’ve got an incredible internal tax team, mostly ex-Deloitte guys that do that. And, you know, there’s all kinds of fun things you can do in real estate investing. Like they have a thing called ghost depreciation, where it’s like, you take that board and you say, “Well, that wallboard, you know, has three years of life left on it, but I’m also gonna replace it. So I’m gonna immediately expense the three years, then I’m gonna replace it with five-year life property, and then I’m gonna expense that and so there’s…” Don’t hold me to any of this, because I’m not a CPA, but that’s kind of how it works. We get into the details.

Jimmy: Yeah, consult with your accountant again, right?

Chris: Yeah.

Jimmy: Oh, let’s see. We got an anonymous attendee asks…he or she wants to know, “When will the fund start distributing annual dividends?”

Chris: Yeah, so we’re trying… Right now we’re setting expectations around three years from the day that you invest. We have several assets in the fund that are now producing regular cash flow. And we’re using that cash flow to pay fund expenses and then we’ll start to kind of accumulate it and think about producing a distribution reserve so that when we start producing distributions, they come out to you in more of, you know, a predictable formulaic way every quarter. But, you know, as most investors, no matter who you’re investing with, me or anybody else, you should be thinking, “I’m making this investment. It’s like a delayed return annuity. Three years from now, the company will have deployed my money, built a building, gotten it to cash flow, and eventually be able to produce distributions.”

And anyone who’s producing distributions to you right away in the structure is likely just giving you your money back in the form of a distribution, which feels good, but it’s not necessarily, I would say, the safest or the most effective way to invest your dollars. So, it’s kind of like you put it in, you’ve gotta… What do we have to do with it? We’ve gotta go find deals. We’ve gotta build those projects up, and then we can produce cash flow. So, that’s the structure. We think once we start distributions, roughly three years from now, we will likely see that they’ll remain consistent and grow over time. And the distributions will be coming from both the regular income that we’re making, as well as some profit-sharing as we harvest gains.

Jimmy: Sounds good. Charles has a question for you about your net asset value. He asks, “What is the current NAV, and how do you justify that NAV, considering dislocation in some markets like hotel?

Chris: Yeah. Yeah. We run a global valuation strategy every year. And that’s done with using, kind of, the internal modeling structure that a REIT will use. So you do a discounted cash flow on the business plan for the asset. So, for example, if we have a 10-year development and we’re in year 1, and 3 years from now, we expect a cash flow and, you know, 10 years from now we expect to sell it, we actually take that entire model. We run it through a DCF process. We use market rate, cap rates, and discount factors. And then all of that is then evaluated by BDO, an outside accounting firm that does a valuation report for us that essentially validates the validity of our model and all the inputs that we use to give a third-party opinion on that. And then we roll that into a unit price.

And so what that means is, in our first time, we’ve repriced the fund, which was, as of 12/31 2020, we were up from $1 to $1.15 a unit which is the price you would pay now if you invested. We expect to reprice the fund again on September 30th, which is coming up actually very soon. And in that repricing, we had for assets at the time, or four major projects. Three of those were still priced at cost, and one of those drove the majority of the gain. And, to your point, the hotel asset, we actually devalued a bit below cost because of COVID. So, we try to keep it fair. We try to make it so that if you’re been an early investor and there have been gains in the fun, you’re locking those in. And if you’re coming in today, you’re coming in at a good quality price. You know, I can’t give guidance, but I can certainly say that I think that the way that we did the pricing this last round leaves room for upside in the deals.

Jimmy: Sounds good. A quick question from Dane here. He wants to know…excuse me, “Is Caliber’s K1 structure single or multiple K1s for the fund?”

Chris: It’s one K1. We got it out before the first tax reporting deadline this last year. We are highly focused on that. I can’t guarantee it will come out on time before the first deadline. So everybody… We always recommend you extend your taxes, and most people who invest in private partnerships do. But having said that, we’re very focused on getting out before the first deadline, which, assuming we don’t have any more COVID delays, will be April 15th of next year.

Jimmy: Yeah, that’s always helpful to get those as soon as you can to the investors. We’ll do a final question here, and then we’ll break for lunch and we’ll get that breakout session going. Lucy has actually got a few questions here. I’m just gonna get to one of them. And Lucy, you should step into the breakout session and ask Chris your other questions for clarification. But quick question for you now, Chris. Lucy asks, “I assume the invested money has to be in the fund for 10-plus years. Am I right? And in between, do you distribute any capital gains?”

Chris: Yeah. So what we’re gonna… If you want the full tax benefit of the program, you need to be in for 10-plus years. If you have a life emergency and you need to request a redemption, what you’re basically doing is you’re forfeiting the benefits you could have on a go-forward basis. There’s actually no tax penalty. So it’s not like an IRA structure where you’re gonna pay this big penalty for pulling your money out early. As long as we can fulfill your redemption requests, we will. And then at the time you take the redemption, you then owe those taxes that you’ve either deferred or that would be due. So, that’s an important component to keep in mind.

And as far as distributions go, what you’re doing is you’re buying a pool of real estate that we have to build and develop, because part of the program requirement is we have to either build from scratch or buy projects that require significant renovation. So for the first couple of years, you won’t see any income distributions. But then after that, those projects start to produce rents. And as the rents come in, we’ll start to distribute the rents, and so you’ll see distributions of typically rental income coming out of the fund, maybe a little bit of capital gain, but we’re gonna try to compound those gains and not give you a big capital gain until the end, which is protected from paying any future tax on that gain as long as you hold for 10 years.

Jimmy: Fantastic. Well, Chris, it’s time for me in the main session here to break for lunch. We are gonna hop into the breakout session for Caliber right now. Again, to join that breakout session, it’s gonna be in a separate session from this main session. Click on that link in your chat right now. Chris, thanks for joining us, and I’ll see you on the other side, man. Take care.

Chris: Take care.


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