In this webinar, James Brunger discusses Capital Square’s most current OZ fund, a luxury, mixed-use, 297-unit multifamily and retail development located at 320 West South Street in the Warehouse District of Raleigh, NC.

Webinar Highlights

• An overview of Capital Square, a leader in 1031 exchanges that has become a successful operator of Opportunity Zone funds as well.
• Why Capital Square has historically focused on single-asset deals in the Southeastern U.S., and why Raleigh is a natural progression of that strategy.
• An overview of the location for the current project in the Warehouse District of Raleigh, close to major downtown landmarks and attractions.
• Financial details of the current equity raise of $48 million, including target IRRs and distributions.
• How Apple’s recently announced plans will translate into jobs and economic activity in Raleigh.
• Q&A with webinar attendees.

Featured On This Webinar

• James Brunger on LinkedIn
• Capital Square

Industry Spotlight: Capital Square

Capital Square has launched five qualified opportunity zone funds since July 2019, for investors seeking the benefits provided by the Tax Cuts and Jobs Act of 2017. The funds are expected to construct four mixed-use multifamily properties in the Scott’s Addition designated opportunity zone within Richmond, Virginia and mixed-use multifamily and retail property in Charleston, South Carolina. The sixth fund, now open to investors, will develop a mixed-use multifamily and retail development in Raleigh, North Carolina.

Learn More About Capital Square

• Visit CapitalSquare1031.com
• Tax Advantages of Opportunity Zones
• Capital Square Developments

Webinar Transcript

Jimmy: Capital Square is a big player in the 1031 exchange marketplace. And they have quite a few different qualified opportunity zone funds. Is that right, James? How are you doing today? Good to see you.

James: Hey, I’m doing great, Jimmy. Great being here. Thanks for your time. Thanks for putting all this together. Yeah, we have a…this is our sixth offering. So we’re very fortunate. Even during COVID, we had some great success in not only funding but getting started on some projects as well.

Jimmy: Excellent. Tremendous. Well, I’ll turn it over to you, James. You’ve got 10 minutes. Hit the ground running. And hopefully, we can save time for one or two questions toward the end here, right? Go for it.

James: Yeah, absolutely. One of the interesting things about me is I hate being late and I hate it when others are late. So, hopefully, I can keep this to 10 minutes. And I’ll do my timer as well. But good afternoon, everybody. My name is James Brunger. I am executive vice president of Capital Square. I run distribution and sales. In addition to a number of other things, I sit on the development committee, executive management committee as well as the asset…or investment committee. So, I’m very excited to be joining you today. Capital Square, we are a $3 billion AUM firm, as Jimmy noted. We are the second-largest syndicator of 1031 programs called Delaware Statutory Trusts. We have 15 years of history as a development company as well. And for a tax-advantage real estate company, economic opportunity zones were a natural progression for us, especially on the development side. We were thrilled when the legislation came around, and frankly very thrilled simply for the fact that a lot of the projects that we had already identified frankly under LOI or owned land ended up being designated. So most of our projects have been great real estate deals.

A quick note on the agenda, it does say multi-asset. We are not a multi-asset firm. Even in everything we do, we really are single asset, and especially in the opportunity zones, we are single asset. This project is a single asset multifamily, 297 unit multifamily tower in the heart of Raleigh, North Carolina. An interesting note, out of our $3 billion in assets, about 70% are multifamily assets located in the Southeastern United States or Texas. That’s core to who we are, core to what we do, especially secondary and tertiary markets, so non-gateway cities, and really our specialty, we know the markets well, we know the brokers well, we know the real estate well, we know what’s going on in those markets from the ground up. Raleigh is a very natural progression. We own quite a bit throughout North Carolina, and especially in this area. So introducing the project real quick for you. This is, as I said, a 297 unit multifamily tower, right in the heart of Raleigh. Back up on the site, you can see where the site is. Just to give note, this is the center of Downtown Raleigh, the BB&T building, largest office tower. This is the Convention Center, Red Hat Amphitheater. Our site will look down on the Red Hat Amphitheater, just across from the train tracks. So really an outstanding location, 437, about a 1.3 per unit parking with 16,000 feet of ground-floor retail.

This will be a class A, highly amenitized, both interior unit as well as exterior common areas. It is a trophy asset located at 320 West South Street, which is in the Warehouse District of Raleigh. An area based on the 2010 census data that it was undercapitalized. Since 2010, there has been some capital moving into this specific area, as reorganization of downtown continues in Raleigh, namely because of some of the job growth that we’ve seen. Since we are short on time, we wanna dig right into the offering details. This is a $48 million offering. About 100 and so on the build total, $93 million on our GMP for the total construction cost, just over $93 million actually, $100,000 minimum open to accredited investors. We have taken less than that but without fail our average is right about $235,000 per investor. We do service over 3,000 investors and this is our sixth opportunity zone fund so we have been successful in continuing to raise throughout COVID. And thank you to anybody on the phone that’s invested with us before. This does carry a 7% preferred return compounded annually. Hopefully, that’s a little bit different than some of the previous presenters, but a cumulative preferred compounded return. We do have a tier split after that, a 90/10 split up to 11%. After 11% we go 80/20, and up to 16%, and after that, we go 50/50.

We are targeting net IRRs not including tax benefit in the mid-teens range, just below 15%. Loan to value is 65% and already have some great indications on our construction financing. We will hold obviously for 10 years. And we will also have this…as you can see upon liquidation, the manager would be paid back…required to pay back any distribution. So, a typical structure of what you see, a very good deal, an incredible real estate in the heart of Raleigh. We do have a local architect, JDavis, who has been signed on, and a builder who’s known well throughout the Mid Atlantic and Southeastern United States, W.M. Jordan. We have started raising funds, just recently launched an open on 7/19. On our $48 million raise to note, Capital Square will move in as a co-invest at 5% and executives at Capital Square will represent another 2.5%. So 7.5% between corporate co-invest, as well as 2.5% from executives at Capital Square. We’ll be investing side by side with the investors in this fund. We started the raise on July 19th. Thank you if you’re on the phone for those of you who already invested. We’re at $4.5 million raised, 10% down, 90% to go which is great. We’re actually 80% if you take the co-invest. We will, in our target, to break ground on April 1st of 2022. We do have this fully in title. There’s some final details in some of the construction, but we do have the GMP as we said in place. So this is pretty well set in stone. We may actually start demolition before the end of this year, which is great. We have been on time in our delivering, actually faster than scheduled and below budget on all of our other projects. To note, I’ll give you the address again, but at capitalsquare1031.com you can check out our other OZ projects, construction cameras, also just to get a better feel from us as a company.

Here’s the target apartment mix, to get into a little bit more detail. You see this really isn’t millennial, Gen Z magnet, although baby boomers are making up a significant number of empty nesters moving into this area and specifically Downtown Raleigh. A lot of the opportunities or a lot of the housing solutions that have been within this area have been condos, there really aren’t a lot of apartments, especially on the south side of downtown. So we do expect some pretty good demand here. You can see our average square footage, especially for three bedrooms, not a lot of them, but very, very large and highly amenitized, great, really class A project all the way through and through. We do expect to deliver the project, as I said, groundbreaking is official in April of next year 2022, with the delivery date of June 30th of 2024. So really about two years from now…I’m sorry, three years from now, we expect to fully deliver. We do expect to stabilize right at about April 1st of 2025. I bring that up only simply because we do have a 40% to 50% cash-out refinance, so tax-free cash-out refinance as our target. That target time frame is right, again, at April of 2025. We will also start quarterly distributions at that point, targeted to be between 5.5% and 6.5%. We expect that to be more than enough to offset any tax liability that should be paid on April 1st of 2027…oh, I’m sorry, April 15th of 2027. Obviously tax year of 2026, you don’t have to write the check until April. So ideally, we have plenty of time frame on our cash-out refinance with that 40% to 50% to be able to give you the opportunity to more than offset your tax bill. Just a couple of quick highlights on Raleigh. I think it might be on everybody’s radar, you know, a number of top universities throughout the area, massive job growth that continues a lot of the tech-based, really higher-end jobs and opportunities that continue through a very favorable business climate. North Carolina, falling just below our home state of Virginia. It is one of the best to do business in. Virginia ranked number one state to do business in. I wanna give a little plug there. North Carolina is in the top five. Yeah, year in, year out, but really the top five last year as well.

One big note, Apple has announced they will be moving 3,000 employees and creating a new campus in Raleigh. So, really excited to be able to take advantage of what we see. It is not only very good, stable rent growth, you can see some challenges on rent growth during COVID. Still held up extremely well on a comparative basis. But then beyond that on reflation, two to five-year forecast, as measured by CoStar, as well as Yardi. Above that 3% with that 10-year above 2.5% rent growth. This project itself we expect to be able to deliver slightly above that, which give you a little more scale on forecasted downtown rent growth. And the main reason why, there really is no supply for housing in Downtown Raleigh, and really no supply like this. Just wrapping up with the two minutes that I have. Capital Square, $3 billion, it’s led by Mr. Louis Rogers. He has over $6 billion in total real estate transaction, primarily in the 1031 space. Our developer, lead developer, and EVP of development, Mr. Adam Stifel, with 15 years and over $400 million in real estate development, primarily multifamily located in the Mid Atlantic and Southeastern United States. Chief investment officer, head of strategy is Mr. Witt Huffman. He was at JBG Smith, a $4.5 billion public company with $650 million of multifamily development under his belt. And Jake Baum, who is our development manager, also very skilled and experienced, 15 years with Adam, in particular. One thing to note, both Adam…or I’m sorry, both Jake and Witt do have their master’s from Georgetown. We are a 74-employee firm located in Richmond, a number of masters specifically focused inside of real estate, internal legal, asset management, you name it, we’ve got it all. So, very thrilled to be here presenting to you, to bring this project out in its extremely favorable location, just on a real estate basis. I’m gonna pull up if I can real quick our contact information Jimmy, that way if anybody wants to call me, feel free to reach out directly. Our website, again, capitalsquare1031.com. We do have all of our projects, OZ projects, construction cameras listed there. And also anybody who’s in the 1031 space, might as well take a look at our offerings that we have available for you if you’re looking for an exchange as well. So thank you, Jimmy, really appreciate it.

Jimmy: Yeah, fantastic. Thank you, James. We’re right on time. We got time for one or two questions here. Apologies for the mistake on the agenda. I already fixed it just as you were talking. So it is now listed as single asset in Raleigh. I got confused, because I know you guys did multiple deals, but this particular fund does focus on this single asset. Thanks for pointing that out.

James: You’ve had a busy day. Well, you know, sometimes that happens when you stack up as much as you are.

Jimmy: Exactly. Exactly. A quick question here. Are there any incentives for investors who invest early in your fund?

James: No, except for the fact that the preferred return starts on the day that you invest. So obviously, if you’re in early, you’re gonna get that preferred return starting to accrue, again, it does accrue on a compounded basis annually, you know.

Jimmy: Good. Charles asked in the chat earlier, and I think you answered this, I think the answer is yes. You do have GMP contracts already set. Is that correct?

James: We do. And the total is about just under 94 million, quite honestly. We have internal construction management as well, led by SVP Michael Ollinger, a great deep history engineer, masters as well. Fortunately, everybody behind me is a lot smarter than I am. But they… Yeah, he thinks he’ll be able to deliver just over $90.5 million while still keeping the quality at the class A, class A plus that we expect to deliver.

Jimmy: Terrific. And then, last question for you and I’ll cut you loose here. How do you pick your construction partners? How many do you have? And how do you incorporate their fees?

James: Yeah, so W.M. Jordan, this is our first time actually working with them. And so, we have a full pro forma, this offering is a 5060 Reg B. The full pro forma goes through everything including all of the construction outline of the cost, as we see, full pro forma projections, analysis, cash-out, time frames, you name it, everything. In this case, we do a best bid contract. We meet directly with all of the builders. Frankly, we do like to work with builders that have a good history in our core market, Southeastern United States. We have known W.M. Jordan…they are our partner, on this project in particular. And the other ones we have chosen…we co-GP the project with Greystar. In that case, it was actually Greystar leading the choice. But we generally do a three-bid contract, take a look and then also look at reputation and history and what they’ve been able to deliver, frankly on time, right? Time, that means everything. You wanna be able to deliver on time. Get the stabilization faster. Get the refinance faster. Get the distributions faster. Oh, one thing I do wanna note if I can, we do provide cost segregation studies and allow for when we hit stabilization, so the question on depreciation which is an amazing benefit to OZ, again, depreciation recapture, also tax-free at the sale. We will have a cost segregation study for everybody and be able to work with their tax professional to accelerate and maximize the benefit of depreciation available in this project. So, last thing I want to note. Thanks.

Jimmy: Terrific. Appreciate that. James Brunger, from Capital Square. Thanks for being here with us today. I’m gonna cut you loose. We got to turn it over to our next presenter, but thank you very much.

James: Thank you, and be safe. Thank you.

Jimmy: You as well.