A Multi-Strategy Opportunity Zone Approach, With Chad Debolt

A diversified investment portfolio has the ability to weather volatility and improve profitability. Coupled with alternative investment opportunities (namely real estate acquisition), diversified portfolios can maximize investor chances of achieving their financial objectives. But to achieve true diversification, it’s important to first understand the challenges and complexities of these real estate opportunities.

Chad Debolt, Managing Director and Principal at Saxum Real Estate is an experienced investment professional with broad financial expertise from over a decade of experience in both the private equity real estate and fixed income trading markets.

Click the play button above to listen to our conversation with Chad.

Episode Highlights

  • How the Opportunity Zone program offers tax benefits to investors making qualified investment in a Qualified Opportunity Funds (QOF).
  • How to minimize uncertainty with an agnostic, multi-strategy approach to investing.
  • Different types of opportunity zone funds and a fund manager’s perspective on alternative investment options.
  • Why an alternative investment strategy relies on investment manager experience due to the wide scope of opportunities.
  • Challenges and complexities of opportunity zones investing.
  • Market trends and investor perception specific to opportunity zones in 2022 and beyond.
  • The types of opportunity zones capturing investors’ interest right now.

Featured On This Episode

Industry Spotlight: Saxum Real Estate

Saxum Real Estate is a privately held real estate investment and development company that specializes in identifying and acquiring assets in transit oriented markets. The firm includes real estate professionals with an investment portfolio exceeding 6 million square feet across 35 assets and totaling over $1 billion in investment capitalizations.

Learn More About Saxum Real Estate

About The Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to The Opportunity Zones podcast I’m your host, Jimmy Atkinson. Joining me on the program today is Chad DeBolt, managing director and principal at Saxum Real Estate. Chad joins us today from Austin, Texas. Chad, welcome to the show.

Chad: Thanks for having me, Jimmy. I appreciate it.

Jimmy: Yeah. Happy to have you on, Chad. I don’t know that I’ve ever had any conversation with anyone at Saxum, which seems surprising given that you were one of the very first Opportunity Zone Funds in the nation to launch way back in July of 2018. You’ve raised well over $100 million of Opportunity Zone equity through your platform across multiple fund offerings. So you’ve been there from the very get-go, Chad, you, and your company in Saxum. But to start us off, why Opportunity Zones? Take us back to the beginning, what did you first like about the program and how have you seen it evolve since?

Chad: Yeah. Well, when we first read about the program, as you mentioned, we were one of the first funds in the nation to really start aggressively entering the space. Once the initial zones were actually identified and released. And what was really unique to us was the fact that it was a true win-win program. It was win-win in that you could adequately affect in positive manner communities in need while at the same time adding value to the communities longer-term. So there’s an economic impact to get money in the communities while also adding value in building quality timeless real estate, which is what we do at Saxum. And it also was a fit to the general Saxum model because anyone involved in Opportunity Zones knows that there’s this substantial rehabilitation requirement. So you actually have to develop. You can’t buy triple-net Walgreens, arguably in Opportunity Zones

And that was unique to us because that’s exactly what we do. We’re a unique hybrid model, where we are vertically integrated. We have a full development construction team in-house leasing, acquisitions, you name it, legal, all the way to asset management and property management. So our company is built to be able to cradle the grave deals ourselves, and that’s allowed us to be able to again, do our own deals. So that’s been very helpful. And then also given that the Opportunity Zone program is as you know, there’s over 8,700 tracks. Nationally, it’s a national program. So create a definite first-mover advantage to grow companies that were looking to grow on a national scale. And that was very appealing to us. Because again, we wanted to be able to diversify across multiple different geographies as well as different asset classes, which is something that Saxum does.

So, for us, that was really unique where we could grow into different areas. For example, in Austin, Texas, we were the first developer in the nation in Austin, Texas. We’re really proud to say that because we actually ended up moving our headquarters down here as well into that same building. So to grow to other states, Saxum was founded in New Jersey. So get to grow to a state like Texas and to execute deals in other markets, that was very exciting to us. So again, I think everyone would argue in a day of this age we live in now where it’s challenging to get consensus, especially with the government, I’m very proud to say that this is one of the few bipartisan programs that the government has created. I think both sides agree on as being a positive.

Jimmy: Yeah, agreed there. It really is one of the very few truly bipartisan programs. I agree. So, you’re working with a lot of different property types. You’re working in a lot of different target markets. You moved your company into an Opportunity Zone, which we’ll talk about toward the end of the show and why that’s so important. But tell us a little more about your primary investment thesis. What is it that you’re trying to accomplish at Saxum for your investors and what goals are you trying to achieve?

Chad: Sure. Over time we’ve definitely been focused on being agnostic on vertical and being opportunistic, to find great opportunities, great deals, and be able to execute again across our vertical integrated platform. Over time, we’ve definitely become more focused on industrial and multifamily. Those have arguably been the two darling performers, especially during the pandemic. We had collections in class multifamily above 95% and industrial has been by far the best performer in real estate, above any vertical in real estate over the last couple of years. I believe the numbers are about a 58% total return in the next closest multifamily, like 26% total return when you really look at those numbers. So those have been our main focus for a number of reasons. Obviously, people need to live somewhere and in industrial that’s all been logistics, supply chain base, which that market has had a huge flashlight shined on it, given the challenges at play.

And there’s a huge supply-demand imbalance that needs to be filled over the next 20 years. So we’ve definitely focused on that, and that’s where, when you look at Saxum, we have about 7 million square feet in control or in development, which represents about $1.7 billion in exit value when you look at what we’re actually executing on. But those are our main focuses. Early on, as I mentioned though, we do have a very strong background in office, which involves, you know, some retail components in both multifamily and office, but we also are involved in student housing as well. So, I would say kind of 80/20 role, our main focus is multifamily industrial, but we do have capabilities to execute in a meaningful way in a seamless way in those other verticals. So, what it really does from a high level though, in terms of when we look at is it really is based on urbanization.

So again, think of Texas Triangle, it’s really unique. You know, 80% of the GDP of Texas is in this Texas Triangle from Dallas Town through Austin, to San Antonio and East to Houston, which would represent the 13th largest country in the world on a GDP basis, just in that triangle. Texas by itself as a state would be the ninth largest country in the world. So we try to focus on these areas where there’s growth, where people want urban-centric lifestyles, that even if they’re not right in the direct Dallas Town, they want a 24/7 lifetime feel to where they live, where they can live, work and play. So that basically bodes to markets that see growth, see population in flow. So think of smile markets and these smile states, obviously, Texas is part of that. And then we still will do deals where, of course, where we founded the company because the Tri-State in the Northeast is still a powerhouse. And there’s still a lot of growth in terms of, there’s been a lot of growth there over time. There’s still a lot of population that’s there, will be there for years to come. So we do have a number of deals up there as well, but typically, it’s urban-centric. We do have your value ideals, but I’d say over time, the company is focused more on opportunistic development opportunities.

Jimmy: Okay. I think I gotcha. I think I got a handle on this, why you’re property type agnostic and you’re in a lot of different target markets, the common thread running through all of the real estate development that you’re doing is that focus on urbanization and growth markets, the smile states, as you mentioned. A lot of people moving to the south, moving to red states in particular, I think that the pandemics accelerated that trend that was already going pretty strongly pre-2020. What about challenges that you faced? Chad, you’ve been around since the very get-go, as I mentioned, you know, July 2018 was just about as early as anybody could have possibly launched an OZ fund. And what are some challenges that you faced over the course of the last…what’s it been now, I guess about three and a half years or so?

Chad: Sure. Early on in the program, it was hard to find challenges outside of structuring. You know, we were so early, we were basically learning with the accountants and the attorneys that drafted our docs at the same time, which is that’s usually not how it works. But we were made much better because of that. We had to roll up our sleeves and really learn about the program that did make docs, you know, investment docs, offer agreements, PPMS, what have you, take longer than usual. So there is some time lag there. But that I’d say was one of the initial challenges. I mean, finding deals, we were so early, you know, we had developers calling us in other markets, you know, brokers that people didn’t fully understand the program yet. So there’s a wealth of opportunity there.

And not to make a segue, by the way, but I would tell you, I still think the program, I still am having conversations out three and a half years later where very financial-driven people that understand markets that do not know about Opportunity Zones. So I would say this program is still in the early innings in general by far. I think it’s second, third inning here. We’re not towards the end. These assets have not been priced. And that would be again, when you talk about challenges, I get to rebuttal a lot that well, doesn’t everyone know about this in the market’s been priced? The prices on land basis and what have you has been adjusted to account for the tax incentives. And I’d tell you, that’s not true. Maybe in some markets there’s been some uptick, but in general, we’re still seeing great opportunities to get good land basis and find quality development opportunities. And we think we will continue to. In terms of other challenges, though, I would say, and this has been more of a direct response to the crisis, it has been managing…again, these are development deals is managing budgets, construction costs, labor costs.

You have a lot of cost that push inflation going on as well as demand-pull. They’re both happening at the same time. And that’s why we’re seeing these double-digit inflation numbers that’s going on. And you have to be a very…we feel fortunate, we built the company this way, it to be a very in tune again, vertically integrated company to manage those storms. Because you have to be very good on VE, you have to be very good at managing subs, and managing your GCs to get quality projects done. You know, and I would tell any investor looking at Opportunity Zones remember, these are development deals, so make sure you’re partnering with people that understand development. And that’s why I brought the point we’re vertically integrated. There’s a lot of funds out there on Opportunity Zones that are capital allocated or aggregators. They’re aggregating raising money, and they’re finding developers, which is what we are as well to partner with. We raise our own money and we are the developers. So we do both, and we have both of those interests of our investors as fiduciaries of their capital in mind.

So that’s key to just think of when investors are trying to manage risk, but again, to bring it together, the speed in terms of, you know, legal know-how understand the program was a main challenge to start. And then more recently managing these budgets with really easily double-digit construction costs, growth year over year is also been a challenge. But something we’ve been able to navigate, you know, and the last point I’ll make it to that is the building I mentioned that we’re gonna talk about later that we moved into in Austin. We delivered that building on budget on time during the pandemic, which is not easy given that it’s made out of steel. We also delivered two of our industrial buildings, which are, again, unique industrial OZ deals that we’ve done. We delivered two of those buildings. We built the buildings in nine months, again on budget, on time during a pandemic, which is not easy. So I think that’s a testament to the way we’ve built the company and our ability to execute given our development construction teams.

Jimmy: Oh, that’s great, Chad. A lot to think about there. You’re right, that’s it’s an important distinction that investors should consider when they’re looking at different qualified opportunity funds. There are some funds that are just the capital allocator and they partner with developers, there’s pros and cons to that method, but you guys are vertically integrated. You’re not just the capital allocator. I mean, not just the investment firm acting as fiduciary to your investors, but you’re also the development firm as well. And I’ve seen both be successful, but you certainly have a good argument for why vertically integrated can help manage a lot of the challenges and complexities of Opportunity Zone investing. I wanna talk about your investor base for a moment here. Your platform overall is really diversified across multiple markets and multiple property types, but the way that you guys structure your funds is you have different single asset funds for each one of your development projects. What do you see from your investors typically? Do they just like one or two of your deals at a time, or do you see them allocate their capital across multiple funds or what’s been typical that you found in your experience, Chad?

Chad: Yeah, it’s a good point. And this goes back to when these funds are first being created, the final regs, again, we said we launched our first one in July of 18 and fund is sometimes a misnomer because you think fund, you think multi-asset funds, that’s what funds typically are, even though that was not the case here. But it wasn’t fully clear of how a multi-asset fund would work until the final regs came out, which is at the end of 2019.

Jimmy: And by that point, you guys were already going for a full year and a half.

Chad: Yes, you bring up a really good point. So what keeps us up at night is obviously, taking great care of our team in that we’ve assembled and taken great care of our investors and our tenants as well, obviously, but as being fiduciaries of investors’ money, that’s critical. And if you’re selling someone on the proposition that you’re gonna retain and preserve their tax benefits, and you’re not operating into that manner, then you’re doing them a disservice and that’s a serious problem. So for us, what allowed us to move early, again, because we weren’t a huge company was that there wasn’t a lot of red tape internally. It’s just do the right thing, which is not difficult, make sure you’re educated so you know what the rules are, and then do the right thing. So for us, we figured out what the rules were and what the government basically said was as long as you’re acting in the spirit of the current guideline, then they assured us that that would be okay.

So in other words, not assuming more than they were giving us, assuming what was given and basically feeling, you know, which is tough sometimes trusting that the government would not go back on that in arrears and change all the rules. So there was some trust there as well, but that would create legal issues if they just completely took everything away and changed the rules when they said it was okay to do that. So we basically operated as conservative as possible in the rules to execute. And that’s what allowed us almost an 18-month runway earlier than most other funds in the nation, which is our first huge first-mover advantage in terms of how we executed the program. But what that meant was to bring this together was we did single-asset deals. So all these deals were single-asset deals. It actually allows without going down another rabbit hole, it’s much more cleaner for recycling of capital which was uncertain at the time when we were issuing our first funds.

And then we continue to do single asset deals because I think most fund managers would tell you if you’re raising on an average, you know, $10, $15, $20 million in equity on a deal, so you’re talking $50 to $60 million total capitalization deals, those are big enough where you could just raise one at a time. If you’re raising $1 million to $2 million equity checks that becomes operationally challenging to do a bunch of different deals, it just doesn’t give you the scale. So our deals are large enough where it makes most sense to do that. And we think that structure get the most flexibility to take advantage of all the different incentives in the program.

Jimmy: And how many deals have you done so far to date and are your investors typically investing in multiple deals at a time?

Chad: Yes, we’re on our 10th deal to date. Again, we’re really happy to say that. I don’t know many developers that have done 10 OZ deals. We haven’t raised the most OZ equity, you know, over $100 million as you mentioned, but we definitely take pride in the number of deals we’ve done, which is obviously partially correlated being one of the first. But we’re definitely focused. We’re big buyers of the program. We continue to be fans of the program and we’ll be for years to come. But yes, I mean, typically investors for us will invest across multiple deals. So that’s a way to, in other words, synthetically create a multi-asset fund. You just pick three different investments, one industrial, one multi, one office you’ve kind of created your own fund in that regard. So that’s what a lot of our investors do. You know, and a typical investor for us, we have about 250, I’d say High Net Worth all credited investors that’s all our money is in accredited investors.

And we investors ranging from I’d say $10 million net worth up to a billion. And I’d also know as our company’s grown, I mentioned our 8 million square feet and we have a large industrial business, we actually raise institutional capital as well. And that’s a big part of the business. So a lot of our deals in the future focus more on, you know, typically institutional capital, but our Opportunity Zone business will continue to grow for years to come because we believe in the program, we have a number of investors that get to benefit from those incentives.

Jimmy: Let’s talk about years to come. We use the baseball analogy again. I think you’re right. We’re we’re in the early innings still. We still have our starting pitching, I guess you could say, but, you know, eventually, this program is gonna wind to a conclusion in 2026, 2027-ish. What do you see looking ahead now, Chad, some trends to keep an eye on Opportunity Zone specific for the rest of the year here? We’re recording this in early 2022, so for this year and beyond, what do you think we will see with Opportunity Zones?

Chad: Well, I hope we continue to get the word out there. I think that we’re starting to become a more of a hybrid focus on Opportunity Zones when given the political changes, there might be much more restrictive taxes in terms of tax brackets. I think some of that got pulled back in terms of gains. I think if, you know, if rates on gains went to income type levels, there would’ve been, I think you would’ve saw $100 billion would’ve came into the program in 2022 easily. And to give everyone some perspective and there’s different ways to look at this, but I know Novogradac at it this way. There’s been about $20 billion raises now their tally of Opportunities Zone since inception in the program. The government’s released the numbers, which are about double to triple of that. So about $60 billion into…to quantify that, and this number’s higher now because the market’s higher. But a couple of years ago, the number quoted for unrealized gains domestically in our country was $7 trillion, right?

So if you’re talking about 1% of that number comes in, we’re getting to about $70 billion of the program. That’s about where we’re arguably at if you’re using the government numbers, in my regards. That’s pretty low. In my view, that’s low. I was hoping the home to this, but my hope was, you know, you get about half a trillion dollars would arguably potentially come into this program, which sounds like a big number, but again, that’s over eight years, right? ’18 to the end of ’26. So that was really the goal I thought. But if you’re getting 5% of that $7 trillion, that’s about $350 billion. And again, I think we’re around 70 now. So, I think things will pick up. I think it’s still early. I think if things pick up, they will pick up in terms of speed and there will be a lot more money that will come into the programs.

So the other point I would make outside of hopefully increased capital coming into the Opportunity Zone program is I hope the government relook at the program as we continue along. Recognizes the positive forces that are around the program that are affecting municipalities. Again, we’re creating rateables that didn’t exist, which benefits municipalities for years to come, which is a critical impact, and that money, those rateables, those tax revenues flow down to investors. And I always try really explain that point because it’s so important. If you buy a piece of dirt, that was arguably worthless, if you build a $50 million building and you’re talking a 2% tax rate, in general, that’s a million dollars in…you know, it’s $50 million rateables, that’s a million of revenue for those municipality for the perpetuity. So I think is the government really understands this, it remains bipartisan support, which I believe it will, I hope the government will continue potentially extending even this final December 31st, 2026 cutoff to invest in gain. I think it’s unlikely they’ll probably bring back this discount incentive, which did the final 10% just go away at the end of ’21. But again, most of the return alpha for opportunities on tax incentives is really back and loaded on the tax-free growth of future gain. So I hope the government will look at that because I think there’s a lot more, again, money that could come into this program at the time.

Jimmy: Yeah, absolutely. I share your optimism, Chad and I share your hopes that the government can extend it a little bit. The one thing that I’d like to see is, and I think you’re on the same page as I am is just more education. I mean, you mentioned you were three and a half years into the program. We’re still talking to financially sophisticated investors and advisors and they don’t really get Opportunity Zones yet. So I think as each day that goes by the program becomes less and less valuable in a certain way because you’re getting closer to that deferment date. But hopefully, also, just absorption of knowledge about the Opportunity Zone space within the larger investment community continues to grow. So I’m optimistic. Let’s get back to a point that we touched upon a few minutes ago about office and businesses and Opportunity Zones. Saxum recently moved one of their offices into an Opportunity Zone building. Why was that important for you and what do you think is the best way to entice more businesses to relocate or to form in Opportunity Zones?

Chad: Yeah, at Saxum we really believe in putting our money where our mouth is. We do it on all of our deals. We put our own capital on our own deals and take it to the next level. We think we build timeless quality buildings and we think they’re well located. So when you start connecting all those dots, we did wanna have a presence down in the Texas Triangle area specifically again, we had this opportunity in Austin. So we built just an amazing structure again, on budget, on time, 64,000 square feet of creative office space in East Austin, which is one of the fastest-growing submarkets of Austin. And we decided to move a handful of our employees down here and actually move in into our own space that we build ourselves. So, we’re definitely excited to make that known that, we not only believe in Opportunity Zone to build quality real estate, to create rateables, and all those different things I talked about, but we also believe that investors in terms of businesses, forward-thinking businesses, growing businesses, to really consider for a number of reasons, moving their headquarters to these Opportunity Zones because based on the numbers that are coming in of that again, from Novogradac, from that $20 billion or so that’s been raised only 1% has been for Opportunity Zone businesses, the true operating companies outside of real estate.

So we think there’s a whole story that’s not to say it’s arguably being missed there, I think it’s not being told as effectively as it needs to be because the upside for businesses that could trade at multiple, you know, hundred-time multiples for some of these tech companies, what have you these different creative type companies, there’s massive incentives for them to think about Opportunity Zones. So, again, this partially fits our strategies as well, because again, not many of these deals are being done in office they’re mostly multifamily deals in the Opportunity Zone space. So, we know office, we could build it. So, hopefully, is there’s more supply of office in Opportunity Zone that will create some more opportunities there as well. But yes, it’s something we’re definitely excited about. Again, we wouldn’t tell anyone to do anything that we wouldn’t do with our own money. So we’re doing it ourselves and we hope we get the word out there for any entrepreneur. Our company was founded in the creative entrepreneurial spirit and we hope that other companies doing the same wIll keep the Opportunity Zone program in mind when they think of location.

Jimmy: Yeah, I think that’s great. Chad, I like that. You’re putting your money where your mouth is. And I agree. I think if you build that office space, you build some of that infrastructure around it and the businesses will come. I mean, if you can only imagine what if the next Google or the next Apple or the next Facebook is formed as an Opportunity Zone business, the incredible profits and impact that they can make in some of these communities. So, Chad, it’s been a pleasure speaking with you today and learning more about Saxum Real Estate. Before we go, where can our listeners go to learn more about you and Saxum?

Chad: Thanks, Jimmy for your time. We really appreciate the opportunity to be here. We appreciate all the information and that you put out as well, all first-class. So thank you for that as well. To learn more about Saxum, you can go to our website, it’s www.saxumre.com. You could also follow us on LinkedIn. So, yeah, we look forward to, you know, we have all of our emails of all our team members are on there as well. And if anyone has, of course, investors we are always happy to reach out. And, of course, if there’s any brokers that maybe listen to this or other developers that have Opportunity Zone sites that they’re looking to capitalize, we’re always looking for great Opportunity Zone deal to participate in. So please keep us in mind.

Jimmy: Perfect. That’s saxumre.com. Please do go visit their website if you’d like to learn more. And also for our listeners out there today, I will, as always, have show notes for today’s episode on the Opportunity Zones’ database website. You can find those show notes at opportunitydb.com/podcast, and there you’ll find links to all of the resources that Chad and I discussed on today’s show. Chad, again, thanks for taking some time today to speak with me and my listeners, appreciate it.

Chad: Thank you, Jimmy. Appreciate it.