The Opportunity Zones Podcast is now on YouTube!
In this webinar, James Brunger discusses two Capital Square OZ funds, including a luxury, mixed-use, 297-unit multifamily and retail development in the Warehouse District of Raleigh, NC and a mixed use development in Charleston, SC.
- 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 secondary and tertiary markets in the Southeastern U.S.
- 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.
- Why Capital Square believes this is the Golden Age of Multifamily, driven by a deficit of housing starts over the past several decades.
- A virtual tour of downtown Raleigh, highlighting entertainment and convention facilities and more.
- Favorable demographic and economic factors boosting Raleigh, including Apple’s plans to make the city their main East Coast business center.
- An overview of Capital Square’s mixed use project in Charleston, where restrictions on hotels and AirBnb activity make it a unique investment opportunity.
- Financial details of the current equity raise for the Charleston OZ project.
- Q&A with webinar attendees.
Featured On This Webinar
- James Brunger on LinkedIn
- Capital Square
- The Golden Age of Multifamily Investing
- Pitch Deck [PDF Download]
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
Jimmy: Okay, James Brunger is going to be presenting two different opportunity zone projects that Capital Square is actively raising capital for right now. They have their OZ Fund IV in South Carolina, and their OZ Fund VI is in Raleigh, North Carolina. James, there you are. How you doing today?
James: Hey, I’m doing great Jimmy. Thanks for having me. How do I sound?
Jimmy: You sound great. Thanks for coming on. Well, you’ve got a 20-minute presentation. You’re gonna be going over two different projects. So I will turn it over to you.
James: Excellent. Thank you very much. Amazing to see Ashley there and everything that I learned. So thank you again for putting this all together. I know you have one long day and hopefully, everybody, all the investors, everybody interested on the phone today is still paying close attention. I’m gonna slow it down a little bit. I’m a little jealous of Ashley’s teleprompter there. I wish I had that going for me, but…
Jimmy: We all do.
James: …in real estate OZs, they’re a little bit more straightforward. So hopefully, you know, what we’ve got here today is a pretty good interest for everybody in the crowd. But thank you again, Jimmy, and I really appreciate it. So, everybody, this is my second time on. I really appreciate all of the great interests that we got from the summer program. My name is James Brunger. I’m the head of sales and distribution at Capital Square. Capital Square is based in Richmond, Virginia. We have $3 billion in total assets. We are known as a tax advantage real estate company. I’ll tell you a little bit more about Capital Square in just a minute because really what I wanna dive into today is our opportunity zone programs that are currently raising money. This first program I’m going to talk about is a project that I’ve presented over the summer for this crowd. We have been raising capital in it. It is called 320 West South Street. This is CSRA Opportunity Zone Fund VI. It is a 297-unit luxury mixed-use, primarily multifamily in the Warehouse District of downtown lovely Raleigh, North Carolina. And let me just change one quick thing here. It’s an incredible program. We’ve had it open for about a month and a half. I’m gonna get a little bit more detail in the offering as well, but for us as the firm, out of our $3 billion in total assets, about 60% of what we do and what we own are multifamily properties located in the Southeastern United States, including secondary and tertiary markets, non-gateway, that’s really core of our specialty.
This fits exactly where we are, and especially in Raleigh, which is a vibrant, growing city. The biggest opportunity for us and why we love cities like Raleigh is the fact that it’s also the state capital of North Carolina. So those of you not familiar with the Southeastern U.S., we are. Capital Square, this is the core of what we do. Lovely Raleigh North Carolina, this is the current skyline that you see, nice opportunity, mainly a business center, convention center. Not a lot of housing solutions in the Downtown Raleigh area, although there is a lot of great activities as well as business center for the city.
So what is our project here? Capital Square Opportunity Zone Fund VI, 320 West South Street. It’s a 297 mixed-used 20-story luxury multifamily project in an opportunity zone that will be 8,300 square feet or so of ground floor retail, and a nice parking deck that includes 437 spaces in a downtown urban city center. Parking premium is a lovely amenity to have. This project, obviously, provides about 1.5 coverage per unit. That’s a really nice coverage area, especially in Downtown Raleigh.
More details of the offering. We launched this offering raising $48 million of equity. We, at Capital Square, do have a GP component in this, 5% of the equity, and then executives at Capital Square making up 2.5% of equity with their own capital as well. That’s how much we believe in the deal. This is an accredited only, Reg D 506(c) offering. The offering is carrying a 7% preferred return, and then a waterfall structure that really incentivizes us to try and hit it out of the park for our investors. The waterfall structure, after the 7% preferred, goes to a 90/10 split up to 11%, and then after 11%, an 80/20 up to 16%, and then after that, a 50/50, again, motivating us as the investment managers to truly try and get the best return possible while that 7% preferred returning as much cash as possible, as fast as we possibly can.
We are in the final phases of looking at construction financing. We are expected to break ground on this project on April 30th, 2022. When we bought this land, we were able to get an option on it in very early 2018. So one of the unique things about this is we were gonna do this deal anyway. It is a multifamily project by right, so by purchase, we are entitled to do a five-story. Once it was designated, we realized the opportunity around being designated inside of an opportunity zone here in the heart of Raleigh. We decided to go back, work with the city, get the entitlements, and push it up to this 20-story project that you see it is today.
Very excited to be able to work with the city, be able to add some additional housing solution right in the heart of Downtown Raleigh. Live, work, play, but most importantly, I heard Urban Catalyst earlier talk about the housing crisis. Our economic advisor, Dr. Peter Lindemann, the Wharton School professor of real estate, he’s written a great white paper for us about the golden age of multifamily, and really it’s all about the shortfall in housing construction starts over the last 25 years. We’re currently about 30% deficit of housing solutions in this country. In specific cities, such as Raleigh, or growing areas, you see that shortfall exacerbated. This gives us the opportunity to be able to provide Class A luxury vibrant mix of units inside of the downtown area. It really will be second to none, and the tallest residential-only tower in Raleigh.
We are gonna put state-of-the-art amenities. Some of those will be highlighted here in a minute. But it is a nice, generous mix of units and sizes as well. You see here, the mix includes studios, one-bed, two-bed, three-bed. Really focused on that one-bed. And inside of that one-bed plus, we do expect, as Raleigh is a millennial magnet, that this is gonna be both empty-nester baby boom, and also focused on those Gen Z, millennial, but mainly Gen Z as 63 million population strong of Gen Z are now age 23, hitting the prime renting years. Millennials continually extending their renting instead of buying, and baby boom downsizing pied-a-terre here, looking at city solutions, giving them the opportunity. You can see generous unit size. It really will be second to none as far as solutions for the Raleigh Metro service area.
The location itself, let’s spend a little bit of time on this. Again, we were going to put this out there as a multifamily, got designated as opportunity zone, and now rezoned as a tower. In Downtown Raleigh, you can see the main street, Fayetteville Street. This is the prime business center, BB&T tower. This is the convention center in Raleigh. So it is an active business hub right in Downtown Raleigh, right across from our site, looking down, of which we’ve angled the location of this to take advantage of the city skyline. And in particular, our rooftop amenity will take advantage of the fact that you have the Red Hat Amphitheater, an outdoor venue hosting a number of great concerts, including during COVID, and as we’ve seen, kind of the recovery as well. So very vibrant, active position inside of the city, and we take advantage of that in every way we can. Traditional Warehouse District over the last few years, the last decade or so, has been converted to the city center nightlife. A lot going on as far as breweries, restaurants. Nightlife activity, housing solutions have not been able to follow. So part of the reason why we’re adding to the housing stock is because there is a massive demand.
For those of you, a little bit more information on Raleigh. So the site itself is this nice corner lot. As I stated, we will begin construction on April 30th to 2022. We likely will start demolition just after the beginning of the year. Inside…this picture is slightly old, but inside of the area, you have had a number of conversions, townhouse projects across the street, a nice condo project that is completely sold out. Just off about three miles away, you have North Carolina State University and all of the population students there. We do not expect this to be a major student housing simply for the fact that it’s gonna be a luxury right in downtown. It would not be unheard of though to see some graduate students look at this location.
That being said, Raleigh itself continues to grow mainly because of its educated, very educated work base. It has been voted as a very friendly state for business. And as such, you’ve seen a number of Fortune 500 companies moving positions into the Raleigh area, taking advantage of universities, such as Duke University, University of North Carolina, Chapel Hill, and obviously, NC State. Those highly educated, very smart workforce is something that everybody wants to tap into. It is a magnet for that 18-hour lifestyle. It’s consistently ranked as the fourth fastest-growing state. North Carolina is a fourth fastest-growing state from July ’19 to July ’20 and actually accelerated more during the pandemic of last year, 2021.
It has been, as such, also a very hot market for stabilized and fully developed properties. We have seen cap rates on that side of the world ticking down below 4 with cap rates at purchase around 3536 and fully stabilized luxury multifamily properties.
It’s no secret Raleigh is…you know, ideally you’ve heard of it even if you live across the country, but we do have a number of very large companies in the area and continuing, including IBM, Cisco, Fidelity Investments, to name a few, as well as SAS. In addition to that, Apple just recently announced they will be moving 3000 people to the Raleigh area. As part of that, Raleigh will become their main East Coast business hub and corporate center, which obviously just speaks again to the overall growth and trajectory of where Raleigh sits inside of the market. What does this mean for the multifamily market specifically in downtown? It’s been an amazing year. For anybody who’s owned an investment in Raleigh, congratulations. A multifamily investment in Raleigh, we’ve seen rent growth ticking over 15% and projected to continue through the first half of 2022. There is a massive demand with almost zero new supply, which is leading to these outsized rent growth numbers that you see here, according to Yardi Matrix. This also puts a 10-year rent growth number at a…scheduled to be 3.6% with occupancy at 96%. We are underwriting this project at a 3% rent growth. We are also underwriting occupancy at 95%.
Something about Capital Square on all of our offerings, inclusive here on our opportunity zones, we do like to be conservative. We also like to be very transparent. We are looking at return profiles right around 14.5% or so on an IRR basis, equity multiple of about 2.4%. We do have a cash out refinance focus once stabilized. So this project, we’re looking at full stabilization end of Q4 2024, about a 26-month construction schedule. We will target a 40% to 50% cash out refinance once stabilized. We are targeting Q1 of 2025 for that stabilized distribution. We will also start distributions once NOI is being earned. So once it is becoming stabilized, leased out, we can expect to be distributing to our investors on a quarterly basis with a target of somewhere between 5.5% and 6.5%.
So we are very conscientious with that 7% preferred return that we wanna get cashback out of this deal as fast as possible. We feel very good about this market. Obviously, there’s some great statistics and some really good information. The total raise on the Raleigh deal again is $48 million. Thank you to all of you who participated since my last call. We are now fully committed on almost $20 million. So we have about $28 million to go. Our minimum investment is $100,000. I’ll share my contact information shortly. If you are at all interested in this deal, please contact us. I do expect it to be fully raised out before the end of 2021, taking advantage of that 10% basis adjustment to your taxes for 2026 tax.
I do, very quickly, wanna mention one other offering we have open. This is Capital Square Opportunity Zone Fund IV. This is 529 King Street in Charleston, South Carolina. Charleston is voted as the number one domestic tourist destination in the country, Charleston, historic Charleston Peninsula. This project is unique. It is a 50-door luxury apartment hotel. The peninsula of Charleston has put a moratorium on any new hotel. It must be four stories and under, and it must have 50 doors or less. They have also put a moratorium on Airbnbs, limiting Airbnbs not registered as hotels to six nights a year. So from that, being a big, high tourist destination, very limited supply based on municipality control, what we’re seeing is a really great opportunity to take advantage of demand, and that’s what we’re gonna do on this project.
This project at 529 King Street is the main street in Charleston. Anybody who’s visited, you’ve been on King Street, it’s where everything happens. It is amazing. This is what they used to call Upper King Street. We are very fortunate that this is also an opportunity zone. We love this project. Our operating partner is a firm called Method, the brand that they run is called ROOST, very successful in the Greater Philadelphia area, Washington, DC, as well as Charleston. So we are very excited to bring this project out.
A couple real quick pieces on this, 50 doors, like we said, retail space, I’ll get to that in one second, valet parking. This has been acquired. We are moving to demolition on January, and January of next year. It is an 18-month construction schedule. I do have a timeline I’ll share in a second. The total raise was $13.7 million. We have about $4.3 million left. A slightly different structure. It does carry a 6% preferred return and then an 85/15 split above that. The main benefits to this is obviously Charleston itself. The market is outstanding. It did very well during COVID, still has retained much of its tourist destination through COVID, and only accelerated as COVID begins to wane, which is great. We are projecting a 15.5% IRR, 2.4% equity multiple, and a 10-year hold. As I stated on our other project, we do target a 40% to 50% cash out refinance at stabilization, which on this project really will be Q2 2024, and a little bit sooner. Main reason why it’s a much smaller project than our Raleigh project, it will take us less time to build, and also at 50 doors, likely less time to lease up and start operations as the apartment hotel.
We are expecting the average tenancy to be between one month and six months, as there is a massive demand for extended stay, both from out-of-staters as well as corporate. However, obviously, it has the capacity and ability to move to overnight and average door rate overnight. We do compare against some of the other hotels. Happy to give you more information on that.
When you take a look at the King Street location, like I said, second to none. I got to get to the money shot here, which is this right here. You’re allowed to build four stories. We want a fifth story. And the reason why we did is because of our courtyard design, working with our top-level architect to be able to create this courtyard for residents. As such, on our fifth story, we won the opportunity to put outdoor food and beverage rooftop, food and beverage, and this will be the fifth food and beverage on King Street. These are in massive demand. So we’re very fortunate that this project will have a couple of very unique things with it. That being said, we’re super excited to bring that out.
Just one more minute, and then we’ll go to quick questions. I know I’m running out of time, but I do wanna point out we have Capital Square as a whole over $3.4 billion in total real estate value today. We have been around since 2012 where our owner, founder, and CEO, Mr. Louis Rogers, has completed over $3 billion of securitized 1031 exchanges. However, his deep background in real estate extends mainly from his real estate law background. Our head of development, very successful in multi-families throughout the Mid-Atlantic and Southeast, our chief investment officer as well, very large firm experience, Natalie Mason recently joining us from the West Coast where she was very successful in the San Francisco Bay Area. Jake Baum as well in the DC, Mid-Atlantic area. So a great team, great partnership, and we’re really excited to have this single asset opportunity zone fund developments for you.
Here is my context. I wanna bring up the construction camera. But, Jimmy, load that up as you give me a question. How’s that sound?
Jimmy: That sounds great. Yeah, we’ve got time for, I don’t know, maybe one, two, three questions here. Get that construction camera up. I wanna see what that looks like.
James: Excellent. All of our projects we have listed right here, this is our first one. We’re taking tenants, and they’re moving in December 1st. We broke ground in July of last year. One of the only projects breaking ground, opportunity zone projects breaking ground during COVID. Our second, our third, and our fifth fund, we partnered with a very large firm, Greystar. Any of our information available on that website. So what kind of questions have you got?
Jimmy: Terrific. Well, Rich asked early on, you mentioned a white paper. Where can we go to read that white paper?
James: Absolutely. Feel free, contact me directly. I will have a team member follow up, get that white paper on multifamily, “The Golden Age of Multifamily Investing” written by Dr. Peter Lindemann, an excellent piece to tell you why multifamily is gonna do pretty well for the next 10 years.
Jimmy: Good. And that’s [email protected] I’m just posting your email address in the chat right now so people can copy and paste it more easily. It’s also on the screen there. Do you have that construction camera? I can’t see it. I’m still just on your PDF.
James: Oh, I’m sorry. Let me do the new…
Jimmy: You shared the wrong one.
James: …share. I forgot to do the new share. There we go. Here’s Fund I, Fund II,…
Jimmy: There you go.
James: …Fund III, Fund V. All of these are multifamily projects located in our neighborhood, our city, Richmond, Virginia. Again, state capital, secondary non-gateway city, really what we focus on. These are great projects that we’re really thrilled to have out as well.
Jimmy: Fantastic. A couple more questions here real quick. What’s the total size of the Raleigh project, including debt?
James: Excellent. So we’re looking at hard cost construction, GMP is about $101 million, including all costs, we’re about $126 million.
Jimmy: Okay. And final question, and then I’ll cut you loose James. The Charleston project, is it a hotel, is it an apartment, or is it a hybrid of the two? We had somebody ask that question.
James: Really a hybrid of the two. It’s interesting, with Airbnb moratorium, it’s still a massive demand. Families, such as myself, when I travel, love the extra room of the apartment. That’s where it fits well, works inside of the municipality and their regulations associated with being registered as a hotel, also much-extended stay when you have various business travelers and people who are relocating. I’ve seen it a lot from baby boomers who wanna stay put four, five, six months. So it really is apartments that rent out like a hotel.
Jimmy: Fantastic. Well, James Brunger, Capital Square, phenomenal team you have there as you pointed out, and deep experience. You guys have been doing this for a very long time, well before opportunity zones. I believe you’re one of the top DST sponsors in the DST industry as well. So what a great experience developing the types of properties that you are.
James: Yeah. Excellent. Well, thank you again, Jimmy. Appreciate anybody who’s already participated. Thank you. Really appreciate it.
Jimmy: All right. Thank you, James.