The Accidental OZ Fund, With Acquity Realty

In this webinar, Dennis discusses the Carlysle project being developed by Acquity Realty.

Webinar Highlights

  • Several elements of Acquity that make this project unique, including the fee structure.
  • The unique opportunity to invest in a project that is well underway.
  • A review of the project financials, including the total construction cost.
  • Q&A with webinar attendees.

Featured On This Webinar

Industry Spotlight: Acquity Realty

Acquity Realty

Acquity Realty was created with the goal of generating long-term wealth through a “build to core” investment strategy focusing exclusively on Northern California/Silicon Valley. The partners of Acquity have over 100 years of combined real estate experience with CBRE, Opus West, ES Ring Management, Prometheus Development, Avalon Bay, The Koll Company (CBRE), and Insight Realty. The firm has over 30 years of experience dedicated to the redevelopment of San Jose and Silicon Valley’s submarkets.

Learn More About Acquity Realty

Webinar Transcript

Jimmy: Okay, so our last presentation of the day today is going to be Acquity Realty. And I’ve got Dennis Randall. Dennis, there you are, how are you doing today?

Dennis: Good to see you. How are you doing?

Jimmy: Fantastic. I got the dog barking in the next room. You know it’s almost time for the happy hour mixer. But, really, really appreciate you being here. If you’re ready, go ahead and take it away.

Dennis: We’re ready. So we’re in Silicon Valley in San Jose. San Jose likes to think of itself as the capital of Silicon Valley, which it has quickly become with the developments that have occurred over the last couple of years in downtown San Jose. And our project looks to take advantage of those improvements in the investment atmosphere here in Silicon Valley.

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Hello, my name is Dennis Randall, I’m the president of Acquity Realty. We’re a real estate developer here in Silicon Valley based in downtown San Jose. And I’m here to talk about The Carlyle, a project in downtown San Jose, that we highlighted in our opportunity DB showcase the other day, and we’re following up today because we had a little bit of technical difficulty on that presentation. So hopefully this will answer any questions you may have had. We’re currently closing out our capital raise process, we’re looking to raise up to $37 million.

We are well above $27 million already, we’ll probably end up around $34 or $35 million, in total capitalization for our class A investors. We are an experienced developer, we’ve been in Silicon Valley, my partners and I for 30 years. We have a fairly strong track record with strong IRR and multiple results from our previous projects, and obviously we feel we’ll do well on this one as well. The other day, opportunity DB’s showcase pitch day, if you will, there were 17 funds that presented to you. Of the 17 funds, 10 were multi-asset funds where you could be doing office, hotel, retail, senior living, and there were seven funds that were single asset, so a pure play type project.

And of the 17, four were based in California, and of the four… Well, I should say before that California has seen significant increase in QOZ investment rising from $410 million in 2020 to $1.84 billion so far this year, a 350% increase. So California is definitely getting the lion’s share of QOZ investment. But going back to the funds that are active in California, two are multi-asset funds, and two are single asset funds. And of those two funds in Silicon Valley, we are the only one that is a single asset fund. Well, here’s the project, The Carlyle.

The best thing about The Carlyle is that it’s actually giving you exposure to two very strong niches in Silicon Valley, office and multifamily. And we’ve done so by combining these two uses in a single location, which gives us the benefit of being able to share infrastructure, like amenities and parking. Of course, the demand for those two uses are being driven by technology companies who are headquartered here in Silicon Valley. I’m sure you know a few of these names already if you’re not already a customer. My personal favorite, NASA, is just up the road and we have a plethora of high end innovative companies in and around downtown San Jose.

Downtown San Jose is unique. It’s the 10th largest city in the United States, and the third largest city in California. And maybe, I think probably the most important city for the next 20 years. You have Google here in this view, you have Google to the west, and you have San Jose State which produces more electrical engineers than Stanford and Cal combined to the east. And our project, The Carlyle is right there in the middle, poised to take advantage of both these core drivers in downtown San Jose. In and around downtown San Jose there are many high value companies, market cap of over $4 trillion. Over, well, almost $2 billion in VC funding in and around downtown San Jose, as you can see from this graphic.

Since pandemic has occurred, Silicon Valley has shown itself to be back on fire. We have many transactions that have occurred already. I’ll mention those in a moment. CBRE has already defined San Jose, Silicon Valley as the number one office market in the United States. And I think principally, that attention is based upon Google’s commitment to downtown San Jose. They’ve already purchased over half a billion dollars in land downtown. They’ve invested millions, if not hundreds of millions more in the pre-development design of the project. And they’ve received a full approval from the City of San Jose for the project as well, which will eventually have over 6.5 million square feet of office and over 3000 apartment units.

There’s The Carlyle there underneath those little badges. Colliers, another major brokerage firm has put out reports most recently in Q2, again, showing the strength of Silicon Valley office. We had Apple lease 700,000 feet. Google just sold one of their buildings for over $1,200 a foot. So we’re well within the metrics of Silicon Valley. Yeah, even though COVID has impacted leasing to some extent, we’re seeing very strong renewal and lease activity in Silicon Valley. What I can tell you is, living here in Silicon Valley, the traffic is back. This time last year, people were talking about working from home, and I can tell you right now everybody can’t wait to go back to the office. So Silicon Valley is getting back to work in a big way here.

Again, our project is a mixed use tower, 158,000 feet of Class A technology office space, combined with 290 Class A rental units, 100% valet parked, I mean, this is a luxury top end facility in one of the best locations in Downtown. The project is not proposed, it is entitled. In fact, we’ve already closed on the land. We’ve already demolished the building, we’ve done some pre-construction work, and archaeological review we have to do, and utility confirmations that we have to do as well. So we’re getting ready to go for vertical construction, and we plan to do that with the funding of our bond financing, which is teed up for December.

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Our capital has a very unique profile in terms of investment and return. We do plan to return a significant amount of capital in year four or five upon a refinance, and then of course, upon sale. And we’re just about done. We’re looking for about $100,000 in our minimum investment. For a project like this, that’s pretty competitive. One of the things that’s very unique is our financing. We have a partnership with a REIT, it’s putting in $90 million. We’re obviously raising $27 to $37 million right now with our equity, what we call our GP equity. And then we have 10-year bond financing, which is going to be quite a bit better than the 4% that we show here. Right now, it looks like our interest rates, the way we’re going to hedge that out, it’s going to be closer to 1%, when all is said and done.

Another exciting thing that I love about what we’ve done here is that we have a very unique waterfall for our investors, typically in a 16 of the 17 funds that you reviewed the other day had a waterfall, pretty much similar to what you see here, that the developer sponsor gets a greater share with the more that the project produces in revenue. And that’s fine, there’s nothing wrong with that. But it does create some unique outcomes. Our waterfall is very unique. We are basically diluting ourselves by 48% or so, so we can promote our investors 225% So you’re getting a greater share of revenues, you have a priority return on capital from any refinance or sale event, you get your money back before we get any money out of the deal.

And that promote stays in place until you get 2X, a total 2X return on your money, and then it reverts back to a pari-passu distribution ad infinitum. The one thing I also want to mention is that we have no management fees in terms of our fund management fees. All the fees that we charge are real estate based. Some questions we hear, is how the California economy is doing, and what’s the return of office? As I mentioned earlier, the freeways are getting full again. People here in Silicon Valley want to get back to work in a big way, and you can see it already happening. And the lease velocity that we’ve already seen is proving that out. The cost of the project is $360 million and it’s ready to go.

We have our project contractor, Webcor-Obayashi is the 15th largest contractor in the world, and we’re very happy to have them to be a partner in this project. And are there any barriers to this project? Well, we have a significant competitive advantage to our competition. We entitled this to gain advantages for a fee perspective. We have a high rise housing fee that we have an advantage that saves us, and then also a 50% reduction in construction taxes. And then that, then we also bought the land right.

So when you add in the fee advantages and the fact that we bought the land right, we have about $30 million of a competitive advantage that our project has compared to other projects in the future. That’s my presentation and review of this opportunity. Obviously, this being such a short presentation, I’m sure you’re going to have questions and I ask you to reach out and we’d be happy to review anything or answer any questions you may have. Thank you very much.

Jimmy: Dennis, thank you for joining. I appreciate it.

Dennis: Thank you.