OZ Pitch Day - March 7, 2024
In this webinar, Garrick Monaghan discusses the need for affordable housing in the Bay Area and the Riaz Capital Ozone Fund III.
- An overview of Riaz Capital, a Bay Area-based development and asset management company focused on addressing the housing needs of the urban workforce.
- How rent collections and occupancy have fared in the Bay Area amidst COVID-19 volatility and disruptions.
- Plans for Ozone Fund III to build 1,600 new residences in the Bay Area, focused around Oakland.
- Breakdown of the target portfolio, split between micro-living, adaptive reuse, and other multifamily repositioning.
- The Riaz Capital investment thesis, including resistance to market cycles and focus on resident experience.
- How a focus on stable customers translates to predictable performance, even in extremely challenging environments.
- The unmet need for housing in the Bay Area, and the opportunity this creates for low-cost but high-quality construction.
- The key aspects of housing for the Riaz target market, including a focus on functionality, location, and convenience.
- Projected cash flow and investment returns for the Riaz Opportunity Zone fund.
- How Riaz commits to making and measuring impact to align with the intent of the Opportunity Zone program.
- Q&A with webinar attendees.
Featured On This Webinar
Industry Spotlight: Riaz Capital
Riaz Capital is a workforce housing developer headquartered in Oakland, CA. Their development strategy positions them to potentially capitalize on delivering substantial and sustainable returns to long-term investors. With dozens of workforce housing projects in their pipeline across the San Francisco Bay Area’s Opportunity Zones, Riaz Capital is launching Fund III, which will be a California Workforce Housing Fund.
Learn More About Riaz Capital
- Visit RiazCapital.com
Jimmy: Garrick, how are you?
Garrick: I’m doing well. How are you, Jimmy?
Jimmy: Excellent. Excellent. Looking good there. Thanks for joining us today.
Garrick: Thank you. Thank you so much, Jimmy. And thanks everyone for joining. So some of you may recall I was an attendee back last at the end of last year, discussing Riaz Capital’s Ozone Fund II. So this time around appropriately, I’ll be here discussing our next vintage offering, the Riaz Capital Ozone Fund III. Let me dive on in.
So first of all, for those of you who aren’t familiar with us, Riaz Capital is a San Francisco Bay Area based development and asset management company. We’re focused on addressing the changing housing needs of the urban workforce. And before I dive in and talk about this offering, I wanted to address head-on some of the questions that I know we’ve been getting and are probably on a lot of other folks’ minds, which are what’s been happening in housing, particularly in the Bay Area. There’ve been a lot of headlines about people leaving, what have collections been like over the last year during the pandemic. And one thing that we’ve found is that our segment of the market, this urban workforce housing segment, has actually been remarkably stable during what has been actually a very volatile time elsewhere in the market. So for the key 13 months from April of 2020 to April of 2021, we averaged in our existing portfolio of about 1500 units here in the Bay Area, collections of 94% and occupancy of 95% portfolio-wide.
So while other headlines and places in the market, people were talking about 70% occupancy and all these disastrous thing, we were actually having a fairly stable year. It wasn’t our best year by any means, but it was by no means a disaster. And we were actually able to distribute money back to investors during this period. So the stability in the urban workforce housing segment has really proven itself over the past year. And that means really good things for folks who choose to invest in this asset class.
So this next round fund that we’re developing our Ozone Fund III is going to be building about 1600 new residences in the San Francisco Bay Area centered right here in Oakland which just to go back for a quick second is actually where we are headquartered. This is our headquarters building and art house studios, one of our adaptive reuse projects and now one of the largest small business centers in Oakland. We’ll be raising about $100 million in equity for this fund targeting an investor equity multiple about 3.2 times your investment and 15% over the ten-year investment hold.
Importantly, we’re very focused on the, that our investors are getting from their investment. So we target an average cash on cash in this fund of about 11%. In other words, if you put a million bucks in, we’ll be distributing back to you on average, about $110,000 a year. We’re also unlike our prior development funds, going to be acquiring sites at various stages of development. So we’ll actually have a couple of stabilized properties by the time we call the final amounts of capital in this fund.
We’ll also have several projects benefiting from an acquisition pipeline that are already in negotiation today, and several projects that will be well into entitlement, and we’ll still be working to acquire and identify additional sites as well. So we’ll have sort of a range of deployment timing. In the fund, we’ll also have three key deployment models. About 65% of the fund will be new micro living properties. Twenty percent we’re reserving for adaptive reuse projects because we’ve seen some opportunities come up in the market for distressed hotels and potentially offices that can be converted into multifamily. And then we’re also reserving an additional 15% for other multi-family repositioning.
Riaz Capital has been developing in the Bay Area for over 20 years. We have about 30 real estate professionals, $500 million in real estate assets under management, and about a 36% IRR across 12 exits over the past 10 years. We’ve worked in various types of residential real estate over that 20-year history all the way back from luxury single family homes and condos and the high-end neighborhoods in San Francisco, Pacific Heights, Russian Hill, and all the way up to, you know, more mass market affordable products. And we’ve experimented with other things that try to reach this workforce housing segment, specifically co-living, we’ve done historic preservation project. We’ve done mass market luxury buildings. And all of that has really brought us to where we are today, which is our micro living strategy.
We find that most of our investors care about five key things, and those have ultimately become the key principles that we’re focused on as our asset managers and developers. First and foremost, we wanna keep capital safe and therefore we’re very focused on being resistant to market cycles. Everyone over the last year has been reminded that the market goes through cycles and fluctuations. And particularly when you’re investing in assets that have 10-year investment timelines, 12-year investment timelines or more, you need to be able to ride through those market cycles and not try and plan on just timing an exit appropriately.
We, in order to do that have really focused on serving this workforce housing segment of the market that we’ve found to be incredibly stable. Second, we’re really focused on resident experience. You know, I think the question a lot of folks ask themselves is the tenant experience important to you when you’re effectively acting as a landlord. And for us, that’s a very key thing to make sure we’re paying attention to and providing a high quality resident experience because it means you have a more stable investment asset, and it means that you can benefit from a lot more upside when you’re providing a good quality product to your resident.
Third, we need to be cost-effective, which really means becoming an efficient builder. And that’s been a core principle for us from the beginning. And this really works in concert with that prior principle of focusing on the resident experience. Because we know what our residents want, we don’t build anything that our residents don’t want. And I’ll get to that in a second with a little more detail.
Fourth, we’re really focused on providing strong cashflow for our investors. We think of, you know, if this is a 10-year, 12-year investment timeline, we wanna have investors to be earning something throughout that period, not just waiting on a payday at the end of the term. And then finally, we are aligned on ESG and impact principles which means that we’re very much aligned with the initial intent of the Opportunity Zone legislation and it was a natural choice for us to move into the Opportunity Zone space.
First and foremost, the stability of our investment and development is founded upon the customer that we’re leasing to. And as a resident, we’re very focused on serving the young single workforce professionals who are very common, particularly here, in really all of our cities in the country today, but particularly here in the Bay Area who earn roughly $50,000 to $120,000 a year. And for us, the average resident is about 32 years old, has a 690 credit score and earns about $61,000 a year. These are generally middle-class professionals, often at the earlier stages of their career. And as a result of this residence stability, we have very good investment performance.
In our most recent opening in October of 2020, by no means the best leasing market to be entering, we opened our doors on that property at 70% leased and took us 30 days to become fully leased. Again, throughout the 13 months of the pandemic across our portfolio, we’ve averaged collections of 94% and occupancy at 95%. So this stability is really driven again by the stability of this workforce resident.
Keeping the focus on this slide, just to keep things moving, I know we’re short on time, is the Bay Area has a significant shortfall of housing for this moderate income segment of the market. It’s estimated that we needed to build about 430,000 units of housing over the last 20 years for folks who earn between $50,000 and $120,000 a year. In that time, we only built 22,000 units of housing. So this shortfall of 408,000 units is what we’ll be delivering units in this fund into. That is the unmet need that will guarantee good lease up speed and competitive rent.
Ultimately, we’re looking to serve a gap in the sort of spectrum of asset classes and stages of life that many of the developers are looking to serve. We wanna be catching folks really at the end of their student years and the early days, there are a couple and everything in between, which particularly here in the Bay Area, where the average marriage age continues to climb, it ends up being a longer and longer period of most people’s lives. And, you know, up-to-date, most people haven’t had adequate housing options at this stage life.
Just to put some hard numbers on that for folks who earn between 68,000 and $104,000, which is the qualifying income, somebody would need to rent one of the average Bay Area new construction studios once you factor in all the full living costs of laundry, cleaning, utilities, furniture, internet that qualifying income differential is a market of about 820,000 people here in the Bay Area. So that’s a massive unmet need and a huge underserved population that most competing new construction simply prices itself out of being able to serve. Our goal is to be this low cost but good quality producer so that we can access a much broader pool of potential tenants for our buildings.
So what is our solution for this resident? We wanna be providing functional design, premium quality, convenient locations, transit accessibility, and appropriate amenities, all within the package of a studio for someone who otherwise would not be able to afford them. And the way we can be efficient with space really goes back to our founders high-end luxury design background, which is most people don’t walk into renting an apartment with a measuring tape and say, “Okay, I need X number of square feet.” Most people go in and they have a mental checklist that they’re running through, “Okay, can I do this, can I do that?” And as long as you meet that checklist, it doesn’t really matter if the space is 380 square feet or 450 square feet, somebody just wants to know that they can live in that space and do the things they need to do comfortably.
So as long as we check off, okay, do I have a comfortable bed? Do I have some closet space? Do I have a private bathroom, a kitchenette, living space? Do I have a workspace? Now that’s become obviously a key thing during COVID. If we can check off all of these things within a 375-square-foot studio, then we both serve the needs of our residents and provide greater efficiencies for investors and our capital.
We’re also very focused on location and convenience because those also drive the leasing decision. We wanna make sure we’re transit oriented. Oakland sits here at the hub of the San Francisco’s Bay Area transit infrastructure, the BART line. And we locate our buildings in vibrant neighborhoods, particularly whether this younger, professional resident wants to be living. And then when we can, we’ll provide appropriate measures in the building, lounge space, gym space and particularly for those residents who often don’t own a car, bike storage.
We wanna be efficient with capital, which means we spend about $250,000 per residence versus the Bay Area average about $570,000 to build a new residence. This is fundamentally why we can achieve better yields than the average new construction in the market. We’ll jump to the cashflow here, just to show what an investor gets over a 10-year investment period. We’ll spend the first few years deploying capital, some smaller operating distributions in years four and five. Years six and seven, we’re refinancing our assets and providing larger cashflow back to investors, such that by the end of 2028, folks will have received about 72% of their investing capital. Again, we have another operating period and in year 11, we’ll liquidate our investments for about a $2 million distribution back to investors per million dollar invested.
I just wanna touch really quickly on the ESG and impact story here, because true to the intent of Opportunity Zones, that’s really what that legislation was hoping to achieve. And we believe we’ve really aligned this strategy well with that mission. We’ve focused on three key areas for measuring our impact transit, equity in housing and emissions and efficiency. So our buildings are very well located from a transit perspective. We have a 92 walk score versus the urban average, an 88 bike score and a 75 transit score.
These are housing that’s available at a 24% rent to median income ratio, which is very good relative to HUD affordability guidelines. And we have a zero displacement policy, so we’re not pushing out any existing residents to build this. The index score that really measures housing plus transportation costs is so here a low number is good. We’re hitting about 32% all-in housing and transportation cost index versus the national average of nearly 68%.
At the end of the day, we’re being efficient with building, so we provide about 240 square feet per resident, which means we’re not building unnecessary space versus the national average of over double that. And we’re providing lower emissions and all electric buildings. Just to summarize really quickly, we’re providing a 15% IRR projected, 50% IRR and equity 3.2X equity multiple or 11% cash on cash.
The folks on the call who were here, obviously for the Opportunity Zone benefit, we can calculate that as about a 6% increase to the IRR. Another 1.8X on the equity multiple, giving you a 21%, 5X and 17% cash on cash. You can find more information about our team on our website. We have a lot of experience right here in Oakland. We’ve been doing this type of development for the last 20 years, and we have an advisory board of folks who are also rooted here in the community in both finance tech and real estate backgrounds. Let me go ahead and pause there and see, we may have had a couple of questions come in. Jimmy, do you wanna MC for me?
Jimmy: Thank you there, Garrick. That was great. I have a question for you actually. You know, the fact that you’re in California, I know I’ve heard a lot of headlines recently about the mass exodus from California and people not returning to that area of the country, the Bay Area in particular. And also the fact that California is not a OZ tax conforming state. What are your thoughts on how you counter those investor perceptions?
Garrick: Yeah, thanks for asking. So first off on California OZ compliance, we were disappointed by that decision. Ultimately, it doesn’t really change the fundamentals, but it’s a great option for folks who are trying to take advantage of Opportunity Zone benefits. The exodus of folks from California is definitely a dominant narrative, I would say, in news media that hasn’t really played out in reality here in California.
The “San Francisco Chronicle” did some really great reporting on this in particular, where they analyze where people are going who’ve been leaving San Francisco and it turns out those people just moved to the suburbs. Although San Francisco saw some declining high number of move outs really in the summer and fall of last year, the counties around San Francisco actually benefited. So there were move-ins coming to Contra Costa, Alameda, you know, Santa Clara counties.
And that to us was actually something we saw elsewhere in the country. It was just really accentuated in California and frankly, because a lot of people are looking at what was going on in the Bay Area. But that seems to be the trend in most urban areas around the country. The benefit for us is that our employers have been really big net beneficiaries of the last year. You know, when you have Apple and Google down the street who’ve made commitments to returning people to work in the office, it means there will be some draw that’s pulling people back into the Bay Area. And we’ve already started to see rents resetting to where they were pre-pandemic, even in the parts of the market that had seen significant drops. It’s starting to get more competitive to find units. And last year also was a very good year for sales in the market.
So it’s important to note that although a lot of renters left the Bay, it was a record year for condo sales, as well as single family home sales in San Francisco. So you know, the rumors of San Francisco’s demise have been greatly exaggerated, I would say.
Jimmy: Yeah, very, very good. I think that’s a fair answer to the question. Well, Garrett, time’s up, I got to move on to our next pitch here today. I gotta keep them rolling. Of course, as, as my colleague, Michael, just pointed out in the chat Riaz Taplin the main man over there at Riaz Capital was recently featured on the ”Opportunity Zones” podcast. I encourage you to listen to that if you haven’t already. Garrick, thank you for joining me today and it’s been a pleasure. Thank you.
Garrick: Thank you, Jimmy. It’s good to see you as always.