OZ Opportunities In Southern California, With StarPoint Properties

In this webinar, Neil Sherlock discusses StarPoint Properties, which is investing in high growth markets in the western U.S.

Webinar Highlights

  • An overview of StarPoint Properties, which started as a family office and has grown to do $1.5 billion in transaction volume.
  • StarPoint’s OZ strategy of launching single asset vehicles focused on multifamily and industrial assets.
  • An overview of StarPoint’s first two OZ projects (closed deals) and the current Locust OZ Fund, a 7-story, 108-unit multifamily development in Long Beach, CA.
  • The appeal of Long Beach as an investment target in the current environment.
  • An overview of the 108 units and amenities that will be constructed in the Locust development.
  • Renderings of the Locust development.
  • Review of market trends, including the ongoing housing shortage and rent increases.
  • Overview of some of the appealing aspects of life in Long Beach, including ease of transportation and location near the waterfront.
  • Other investment highlights related to local industry and entertainment as well as investments being made ahead of the 2028 Olympics.
  • A review of preferred returns, target equity multiple, and IRR.
  • Q&A with webinar attendees.

Featured On This Webinar

Industry Spotlight: StarPoint Properties

StarPoint Properties is a real estate investment and operating company with a 25 year track record of delivering outstanding and above market returns to its investors by focusing on the acquisition, development and redevelopment of under-valued multifamily and commercial properties. The primary goal of the firm is to deliver asymmetrical returns vs risk and to outperform most other alternative investment vehicles, which the firm has done during its entire history.

Learn More About StarPoint

Webinar Transcript

Jimmy: Starpoint Properties develops real estate nationwide. They’re headquartered in Beverly Hills, California. They’re going to be focused primarily today, for today’s presentation, on one of their newest multifamily developments in an Opportunity Zone in Long Beach, California. There’s Neil. Neil, how are you doing?

Neil: Hey, Jimmy, thanks for having me. Doing great this morning.

Jimmy: Absolutely. I know we’re running a little late here, but that’s okay. We got a little bit of a buffer built-in to the schedule. So, I won’t hold it against you, I know you’ve got a 10-minute segment here. So, I’ll start the timer now, and please take it away.

Neil: Perfect. Thanks, Jimmy. Thanks, everyone, for attending. It’s a pleasure to be able to present to you today. My name is Neil Sherlock. I’m the VP of capital markets for Starpoint Properties based in Beverly Hills, California. I have two primary objectives for this presentation. First, I want to introduce you all the Starpoint, our history, track record, and what makes us a great partner. And second, I want to discuss our current QOZ offering that we just launched at the end of September and we’re currently raising capital for.

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So, Starpoint, we were originally founded 25 years ago, we have completed over a $1.5 billion with the transaction volume during that timeframe. We’ve been very successful with our investing, delivering weighted average returns to investors of approximately 25% per annum during that time. And not surprisingly, having an extremely high rate of reinvestment from our LPs as well. We’ve done deals with institutional investors, including Goldman Sachs, Key Bank, but we also have our retail base that we’ve done, you know, dozens of deals with over the years as well. From start as a small family office, and it’s grown significantly over the years. We’re now vertically integrated with acquisition development, property management, and investment management capabilities and expertise.

And our current portfolio consists of 30 properties, primarily multifamily and other commercial, and is worth slightly north of a billion dollars in total market value. And operationally, we employ over 60 real estate professionals. We’re led by senior management team that has decades of combined experience, and many have come from other large, recognizable, and reputable real estate firms. And our offering investors, I think, is pretty unique because we are a fully integrated real estate acquisition management development platform. So, we offer that institutional discipline, but at the same time, we also have an entrepreneurial vision. We are an established machine in sourcing, closing and managing assets, and consistently delivering above-market returns to investors. And I think that’s a function of a few different variables. You know, first, we’re incredibly disciplined with our acquisition strategy, we take a very long-term perspective, and evaluate the individual merits of each asset, sector trends, market dynamics, and the broader macroeconomic environment.

We have our proprietary systems and underwriting processes that we’ve developed to minimize risk and identify only top-tier investment opportunities. And then we also have a deep network for sourcing deals, you know, both on and off-market, we get first looks, last looks. And in fact, to illustrate that point, we’ve evaluated over $3 billion worth of QOZ opportunities alone over the course of the last 18 months. So, you know, everything we do here is designed to just acquire great real estate that we believe in. And we prove that as well by investing alongside our investors in each deal, and that’s something that we continue to do with our QOZ opportunities as well.

I won’t spend too much time on these slides, as everybody in attendance is probably very familiar with the program at this point. But I have spoken to a number of financial advisors and IRAs that have told me that this is the most impactful slide that they’ve seen since it illustrates just how attractive QOZ investments can be. It’s a simple projection based on a 15% annualized return for the 10-year hold period, which happens to be the level that we target for our funds, and any increases to long-term capital gains, as you can see, greatly amplify the benefits of the program.

So, Starpoint are Qualified Opportunity Zone Funds, we launched all these funds as single asset vehicles. And we launched these series of vehicles to grant investors an opportunity to, A, take advantage of the tax benefits of the program, and B, to do so with a highly experienced, fully integrated firm that has a terrific track record. Our typical deal size is about $25 million to $75 million in total capitalization. And the cornerstone of our investment philosophy is to acquire attractive real estate assets that exhibit a compelling risk-return profile in markets that we are intimately familiar with. Every asset must meet our underwriting standards if it happens to be located in a QOZ, even better.

For us, the designation, as a QOZ, is really just a kicker, but first and foremost, we do focus on the merits of the real estate. We primarily utilize the built core strategy with a focus on developing multifamily and certain types of industrial properties, which are or have been some of the best performing real estate segments for the past few years and are expected to continue to perform or outperform the broader market in the coming years. And we do so in some of the most attractive and sought-after markets in the United States.

We look for markets that exhibit strong fundamentals, that have high barriers to entry, and we look for infill locations near major populations, and anchor businesses, and transportation infrastructure. In addition to that, we also look for other potential value drivers, whether that’s tax abatements, grants, or other subsidies. We launched our first two QOFs earlier this year, and we are now on our third offering, which is our Long Beach project. That said, we do have a very large pipeline so we’ll continue to deliver more opportunities to the marketplace over the coming quarters.

Which brings us to our existing or our current deal that we’re raising capital for, which is the Locust OZ Fund. We launched this in late September after receiving site plan approval from the city of Long Beach. It’s projected to be a 7-story,108-unit multifamily development project with approximately 1,200 square feet of retail space on the ground floor. As you can imagine, it meets the criteria we’re looking for, it’s an attractive infill location and a high barrier to entry sub-market that has extremely strong fundamentals. In fact, Smart Growth America, which is a 20 plus-year-old 501(c)(3) that provides data on urban planning, ranked downtown Long Beach as the top free-market for multifamily rent growth.

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This asset happens to be one block east of Pine Avenue, which is the main corridor of retail and it has vibrant hospitality and restaurants in as well as, as well as other residential amenities. Total project size is approximately $48 million total capitalization, that’s expected to be about 35% equity or about $18 million total for the capital raise, and 65% leverage on the project. And as of right now, the project level returns are penciling out to about 18% IRR and just under a 4X on the equity multiple. So, the project is located at Seventh and Locust Avenue, hence the name Locust, on slightly over half an acre in the North Pine neighborhood of Long Beach, which is just west of the Arts District and it has a, as I already mentioned, a significant amount of retail and restaurant activity in the area.

Once it’s completed, it will be 7-story Class A building, with 108-units, 1,200 square feet of retail, 135 parking stalls split between 2 subterranean and 2 above-grade levels. And some of the amenities include a fitness center, a clubhouse with a pool constructed on a podium deck, along with barbecue grills and seating areas. And most importantly, this asset is six blocks off the water. So, we have a rooftop deck that will offer unparalleled views of the ocean and the skyline. And then I think it’s important to note too, that none of our units are actually deed restricted. These are all market-rate units and not subject to any AAHI. And I actually threw this one image in here as well. We have obviously much more robust design plans, but I think this kind of illustrates what the vibe of the building is expected to be, more on that for any follow-up.

So, moving forward, these are just a few renderings. I’ll flip through these pretty quickly. But, you know, we really liked this market, I think there is a lot to like. California is constantly faced with an ongoing housing shortage, and on top of that, you talk about the year-over-year increases in home prices to the tune of about 18.7%. Needless to say, this lack of supply and these expensive home prices push a lot of residents to rent, and not surprisingly, across L.A. our vacancy rates are approximately 4.3%. And that vacancy rate in Long Beach is even lower, it’s about 3.5%. That said, year over year rents in Long Beach have increased about 5.5%, just shy of 5.5% as of July 2021. And as of right now, their rental prices are actually still at a 15% discount to L.A. averages. So, we anticipate there being additional room for growth as investments continue to pour into the city.

A few other notable statistics about Long Beach. There continues to be positive net absorption for multifamily quarter after quarter in the area. You’re seeing historically low cap rates on sales comps, we’re talking 4% cap rates or less. And then we have a really attractive demographic population, it’s relatively young and wealthy with the average age of slightly under 35 years old, and the average household income approximately $89,000 per year, which is about 20% above the median household income in the state of California.

The location is very attractive for a number of reasons. It’s an urban setting in coastal California. It’s centrally located between L.A. and Orange County, so it’s highly desirable and primed for growth. This area, Long Beach, has actually been a focus of investment for a lot of other major developers. Some of that stems from the preparation for the Olympics in 2028. I was actually out there a week ago, and there were multiple cranes across the skyline, which is always a good sign that you’re in the right area. And speaking of, that skyline also includes the recently completed 35-story shoreline gateway building, which is now the tallest building in Long Beach.

And although our project offers parking, a car is not really required as this is easily walkable with a Walk Score of 96. It’s a short walk to the Promenade, the City Place, which has 450,000 square feet of retail, the convention center, the aquarium, and a ton of other sites and attractions that are in the immediate vicinity. That said, transportation infrastructure. If you do drive a car, you know, Seventh Street, which is one of the cross streets of our asset, it’s actually a one-way feeder into the 710 freeway. So, it’s really easy to access to the 710 as well as the 110, the 405, the 605, which makes commuting to downtown, to the Westside, or to Orange County incredibly easy. And if you aren’t a driver, there’s actually really convenient public transportation as well, very easily accessible, the Metro Blue Line is only two blocks away or about a four-minute walk.

The other thing that we talked about in addition to, you know, transportation infrastructure is what are the employment anchors. Obviously, Greater L.A. is the second largest metropolitan area and economy in the country with an extremely diverse employment base. So, there are, you know, logistics companies, aerospace, government, tech, media, all easily within reach, you know, to these job centers. And speaking of the specific employment hubs here in Long Beach, just to name a few, we’ve got the ports, Port of L.A. and Port of Long Beach are both about five miles away from the asset. These employ approximately 316,000 people and contribute about $200 billion of trade annually. In addition to ports, we’ve got the second-largest university in the Cal State system, which supports 40,000 students and faculty, that’s only 5 miles away. We’ve got the 400,000 square-foot convention center, which generates another billion dollars to the local economy, drawing in hundreds of thousands of visitors to the city each year, who eat, sleep, and shop at the local establishments.

And then also, I think it’s important to note that Long Beach is really reemerging as an aerospace hub, with the likes of SpaceX, Virgin Orbit, Relativity Space having invested materially in the area. SpaceX is actually earlier this year on Pier T. And then lastly, as I mentioned earlier, a lot of investments being made in advance the 2028 Olympics. This includes, you know, new hotels, retail, and entertainment. So, I know we’re tight on time, so I will flip through the floor plans here pretty quickly. Again, I can follow up after the call, people are more than welcome to reach out to me and I can share the more robust deck.

But, you know, we talked earlier about a built-to-core strategy, and this slide really just illustrates how that’s expected to play out. We received site plan approval on the 16th of September and expect to start construction in early Q2 of 2022. We expect to wrap up construction by August 2024, at which point, we will place the asset into service and start generating cash flow to investors. In early 2025, after we stabilized the asset, we expect to refinance it, pay off the construction loan and distribute out the residual proceeds to fund investors and do so in a tax-efficient manner. And the following years you expect to receive strong and escalating current income and tax advantage current income, given our structure from a stabilized Class A core asset. And then finally, upon final disposition, after the 10-year hold period to ensure that investors get the maximum benefits of the program.

Currently, it comes out to an 18% IRR. This includes our 3% construction management fee and is based on construction hard costs. And I think it was mentioned a few times yesterday, but we are also developer, and therefore, there’s no double promote. And we believe there’s some upside to these projections as well, based off of where our construction loans and market rent and sales comps are coming in at. On the construction loans alone, that’s about 100 basis points tighter than what we project out. And then, lastly, you know, we think our terms are very competitive compared to other OZ deals, we offer an 8% preferred to investors. Our asset management fee is fairly modest at 1.5% of equity annually paid by the fund. And we are highly incentivized to outperform based on our waterfall structure.

And then last couple things. All right. So, we align ourselves with investors, we co-invest between 5% and 10% of the total fund equity. We launch our vehicles after projects are fully entitled, this project is fully entitled and ready to go to construction. We actively manage all of our assets to identify additional value enhancement opportunities. And then we also partner with Juniper Square for investor portal to make the investment process easy, efficient and all paperwork is completed and submitted electronically. And we accept capital on a rolling basis to accommodate each investor’s 180-day deadline to allocating their gains. All right, Jimmy, I went a little bit over, but I think I’ve got it all out there. So, if anybody has… Go ahead. Sorry.

Jimmy: Yeah, that was great, Neil. We do have a couple of questions, and then we’ll…we got a couple minutes here of buffer built in. So, that’s okay. First question is, how have your first two Opportunity Zone projects performed, and has construction started on those?

Neil: So, we’ve been rolling these out about, call it three months, four months in advance of when we anticipate starting construction. So, the first one is actually breaking ground in December, and that was industrial deal out of San Bernardino, California, about $30 million total capitalization. The second one was a Mesa, Arizona multifamily deal, and that one is expected to break ground in early Q1 of 2022. So, we haven’t broken ground on either project yet, but you know, we’re fully set up to do so here imminently. And Locust is really right behind that, as I mentioned with April 2022 projected start date of construction.

Jimmy: Kim asks, could you tell us about how you’re building, how’s it gonna be green carbon reduction way? Is that a feature of your construction?

Neil: You know, we’ve evaluated it, you know, we have looked at the potential for certain aspects of the project to qualify for PACE, which is, you know, building efficiency. So, those are built into the plans. You know, happy to take that one offline if we want to dig into a little bit more detail. And I think I would want to loop in our head of development, Sandy Schmid, who had actually presented with us previously as well in on those conversations.

Jimmy: And finally, we’ll wrap up with his last question here. If we didn’t get to answer your question, or if you have more questions for Neil, his email address is on the screen there, [email protected] I’ll type it in the chat in a moment, too, if you want to just copy and paste it. But last question here for you, Neil, before we move along with programming today, what do you consider the benefits to the community, specifically, the low-income residents in the Opportunity Zones projects where your fund is investing in? Do you have a benefit statement and/or have you entered into a community benefits agreement with local nonprofits? What are your thoughts there on the local community impact that you’re having?

Neil: Yep. So, we have the full support, which is actually pretty rare from the city of Long Beach and from the neighborhood groups. You know, we do, obviously, focus on our ESG and what the impact is to the surrounding area. You know, that said, I think that support, and, you know, what we’re offering to this community as it continues to develop, you know, we’re essentially investing alongside a number of different other developers and other groups that hopefully just contribute to the continued growth of Long Beach that benefit the existing residents and all the future residents as well, that are pouring into the city too, as it continues to grow with a lot of the other companies and groups that have made investments in Long Beach. So, happy to talk further about our ESG, happy to talk further about the project specifically. But I think that’s essentially what the answer is at this time.

Jimmy: Fantastic. Well, Neil, I’ll cut you loose there. Thanks for participating today on OZ Pitch Day Fall 2021. For those of you with additional questions, please do, feel free to reach out to Neil. I put his email address in the chat, you can copy and paste it. Neil, thanks again. Appreciate it.

Neil: Thanks, Jimmy. Appreciate it.