OZ Deals In Arizona And Beyond, With Caliber Funds

In this webinar, Conor Donohue discusses Caliber’s blind pool Opportunity Zone funds that are invested in multiple asset classes across the Southwest United States.

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Webinar Highlights

  • Caliber’s geographic focus on Texas and the Southwest U.S., including a concentration in the Phoenix and Tucson areas.
  • The history of OZ Fund I, one of the first Qualified Opportunity Funds to launch in 2018.
  • Strategies for mitigating compliance risk that is unique to Opportunity Zone investments.
  • A review of fund assets, including a DoubleTree hotel in Tucson, high end student housing near Arizona State University, and a medical behavioral hospital in Phoenix.
  • A summary of downtown Mesa, where Caliber has acquired multiple properties.
  • A review of Caliber’s history, vision, and strategy.
  • Live Q&A with webinar attendees.

Industry Spotlight: Caliber Funds

Caliber Funds is the private equity arm of Caliber The Wealth Development Company, an Arizona-based corporation that services the capital of individual investors and disburses them into private real estate assets across the Southwest. Caliber offers a diversified portfolio of commercial real estate properties, real estate-related equity investments and other real estate-related assets, each of which Caliber Funds believes are compelling from a risk-return perspective.

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Webinar Transcript

Jimmy: Conor is gonna be presenting the “Caliber Tax Advantaged OZ Fund,” and he’s also gonna be touching very briefly on their plans for the launch of Fund II. Their Fund I here, which has been open for the past few years is closing at the end of the next quarter, I believe, and they’re gonna be opening Fund II very shortly.

Conor: Good afternoon, everybody. Thank you for joining me today. As Jimmy mentioned, if you’ve been on these panels before, you’ve probably heard from our founder and CEO, Chris Loeffler. And again, as Jimmy mentioned, Chris is on paternity leave at the moment. He and his wife are expecting their second daughter any day now. So, if you’re a current investor out there, I hope this is a nice refresher for you. If you are a prospective investor looking to place capital gain, I hope this is informative. And again, as Jimmy mentioned, any questions along the way, feel free to put them in the Q&A box. I’ll try to keep this to around 20 to maybe 25 minutes so we can do some Q&A here with Jimmy. And then again, I’ll be in a breakout room for about 20 minutes after where we will do some live Q&A.

So, I’m gonna go ahead and get started here. I’m going to touch briefly on the fund as a whole, and that’s also gonna tie into Caliber’s overall investment objective in our geographic region, our whole portfolio. I’ll then cover investment details of Opportunity Zone funds, just kind of the fundamentals of the program. I’m sure that’s redundant for a lot of you listening. However, if there are any people who are new to Opportunity Zones funds in the audience, I want to be cognizant of that and just give them a brief overview on how it works as far as the 180 days and placing the capital gains in a QOZ fund. From there, I’ll dive into the fund assets and then I’ll circle back at the end and just kind of give a brief overview of Caliber, the fund’s sponsor again. And then at the very end again, as Jimmy mentioned, I will touch just briefly on our OZ Fund II. The plan right now is to close the Caliber OZ Fund I, June 30th of ’22, and then launch OZ Fund II on the 1st of July. If those dates change between now and then and I’m in contact with you, I’ll be sure to let you know. Although they seem pretty firm at the moment.

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Okay. Again, the bulk of this conversation day is gonna be on the Caliber Tax Advantaged Opportunity Zone Fund I. Real briefly, and again, this is gonna toggle back and forth between the OZ fund and our overall portfolio. The states you see highlighted here on the right of my screen are the states that we do business in. We also have two resort hotels in Alaska. I think those are more one-offs. I don’t see us doing more business in there at this point. And Idaho is also highlighted. We do not have anything in the greater Boise area yet, although it’s certainly something that’s a target for us.

The OZ fund specifically is very Arizona-heavy at the moment with all the assets being either in Phoenix or Tucson aside from a multifamily deal we just broke ground on in Bryan, Texas, which for those of you who are not familiar, that’s next door to College Station where Texas A&M is. So, that was our first bit of geographical diversification in Fund I. I do think as we cycle assets in Find I and launch Fund II, there should be increased geographic diversification. I think we’ve been a little apprehensive to date as far as getting into these other markets just because we have the relationships in Arizona and Phoenix specifically to get access to quality off-market deals. Generally speaking, we’re looking at buying 20% or so below market. And we’re still developing those relationships in Vegas, in Salt Lake, in Denver, in Boise, and in the various markets throughout Texas that we want to invest in. Zooming out our portfolio as a whole, the assets are primarily in Arizona and Colorado at the moment. Nothing in the OZ fund in Colorado to this point.

Again, a little more about the fund. You can see some pictures of the assets on the right here. I’m gonna go through these more specifically in the coming slides. OZ Fund I was launched in October of 2018. We were one of the first funds in the country that was launched. We started taking in capital right away. To date, we’ve raised about $150 million and I think we have right around 180 or so limited partners. It’s a multi-asset fund. Again, very Arizona-heavy right now with the one deal in Texas. It was always planned to be a multi-asset fund. But for those familiar with the regulation updates in April of 2019, it came out that a multi-asset fund like Caliber’s could actually sell assets within the 10 years, and then we’d have 12 months to then redeploy into another QOZ-type deal. So, that was a big win for multi-asset funds, in my opinion. Generally speaking, any deal that is held for 10 years, you’re gonna see a depressed IRR over time. Usually, after about five or six years, most of that value is extracted. So, if we can cycle deals on a five-year timeline, that should enhance returns over time.

Real quick on the fee structure. So, the maximum offering was $500 million, that was always really aggressive. Again, we’re at about $150 million in equity. My guess is we’d close at probably close to the $200 million mark in June here. And the assets under management fee, 1.5% over a 6% preferred rate of return to the limited partners. And then the Class A units are a 75/25 split, 75 to the LPs, 25 to Caliber. The class B units are 80/20, 80% to the LP, 20% to Caliber. The Class A unit minimum is $250,000, the Class B minimum is $1 million. Our attorney is Snell & Wilmer, our tax counsel Mark Schultz, and then our fund auditor is Deloitte. I’m encouraged by the third parties we’ve chosen to partner with on this offering because I think our investor base are pretty sophisticated. I think they understand a lot of the risks of investing. And with development, there’s always execution risk. I do think the one risk with regards to Opportunity Zones is compliance risk, it’s a complex legislation. There was moving parts in the beginning. No one…it took a couple rounds of regs until everything was finalized. So, I’m glad we decided to partner with quality external parties to help us remain compliant and help the clients and keep their tax situation intact, because I do think that’s…again, I think it’s one of the risks with OZs that a lot of investors don’t see right off the bat.

Again, the fundamentals of investing in an Opportunity Zone Fund. I’m sure this is redundant for a lot of people listening. I’m sure people have heard this a lot over the last four years, but I just wanna touch on it briefly. Any capital gain that occurred within the last 180 days is eligible to be placed in a Qualified Opportunity Zone Fund. At that point, you pay no tax, and that deferral goes to December 31, 2026. So, when you’re filing in 2027, the tax is due on your original gain. Through the last two years, one would get a 10% reduction on that amount. So, if there was a million-dollar gain, you’d only pay tax on $900,000. And anyone who invested 2019 or earlier got a 15% reduction, so a million in, they would only pay tax on $850,000. To this point, it’s called a step-up in basis. I like to refer to it more as a reduction in capital gain tax liability. Regardless, that fell off at the end of last year. But I think the main selling point of this fund is the 10 years of tax-free growth that one achieves should they hold in the fund for 10 years. So, that will remain as long as through the end of 2026 or I guess through June 30, ’27 when the last dollars can be taken in.

There have been some rumblings about potential legislation extension that would extend that 2026 date out to maybe 2028, or even as far as 2030. Whether or not that would retroact the 10% back, I’m not sure. A lot of people think it would. A lot of people think if it was 2030, that they would maybe leave the 15% alone to reward those who got in pre-2019. I’ve also heard some people that think it could get retroacted back. But that’s all speculation to this point. Let’s focus on the way the legislation is written to this point. And should there be any changes, I do think it would be a positive both for the limited partners and for Caliber because now we can take in capital for a longer period of time. Your deferral potentially gets pushed out to 2028 or even as far as 2030, and then we have maybe two or four more years to refinance the assets and make a return of capital, which we intend to do at about 30% so the limited partners can service the tax that’s due right now in 2026. And again, could potentially get extended. So, if that does get pushed down, I think it’s a win for all parties involved. We’ll have to wait on that to this point.

Right now I’m gonna dive briefly into the fund assets. The first is DoubleTree by Hilton connected to the Tucson Convention Center in Tucson, Arizona right off the I-10. It’s 175 rooms opened in March of 2021. We acquired the land for this project from Rio Nuevo. They’re kind of a pseudo governmental group down in Tucson. The land lease was $1,000 a year, so we were thankfully granted the land thus making our basis in the project, only the construction costs of the hotel. We were lucky that the hotel was still under development, very kind of the heart of the pandemic 2020. As you can see here, again, it opened just about this time last year. So, the pro forma in ’21 may have lagged a little bit, but certainly better to be under development of a hotel during 2020 rather than operating a hotel. Q4 and Q1 numbers of this past year were really from north of 75% occupancy the entire time. And I think there’s about 600 DoubleTrees nationwide. This right now is a top-five performer and I think will be the main business hotel in Tucson.

This along with the Mesa portfolio that I’m gonna touch on later in the presentation was an example of a deal that was already in our pipeline. Since it was acquired in 2018, we were allowed to then roll it into our Opportunity Zone Fund. And I think that was acquired before that, even if what our plan was for. The project qualified for an OZ fund and it was in an OZ, it was acquired before 2018, we couldn’t have done that. So, this and then the Mesa portfolio that’ll come up in a few slides, these are two deals that we were going to do anyway. It just so happened that they were in an Opportunity Zone and what our plans were for them qualified. Roosevelt Townhomes, this is in Tempe, Arizona. Thirty-nine units. It’s walkable from Arizona State University and Mill Avenue, which is the main strip of restaurants and bars there at Arizona State for those familiar. The first 14 units are leased and cash flowing. We’re finishing phases two and three simultaneously right now. These should be done, it says here, January 2022. They were a little bit delayed by COVID. I think we’re done with these in the next month or two, and they’re fully leased for the 2022. I’ve taken quite a few clients past this property. It’s high-end student housing, two and three-bedroom units, two-car garages.

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At the time the pro forma was written, the rents were between $2,500 and $3,200. My guess is those have probably increased at this point. Again, luxury student housing. Had we done this as a few 100 units, I might have confirmed that we couldn’t fill it. But the fact that it’s only 39 units, I think these will remain basically 100% occupied until we go ahead and sell. We have the option to sell one by one or sell the whole portfolio as a whole. This, again, for anyone familiar with the valley is at 14th Street and McDowell down the street from Banner Health in downtown Phoenix. This is an example of a current standing asset that we bought. We went and did a gut job renovation. It was a senior living facility prior to that, and we turned it into a 96-bed behavioral health medical hospital. Truth be told, I wasn’t all that well-read on this kind of sub-asset class prior to us acquiring this asset. However, being a private equity firm, we have a lot of clients who are in medicine and a lot of them were very, very excited about a deal like this, I guess. There’s a vast undersupply of these complexes, really nationwide, but very specifically in our geographic region, a vast undersupply of these complexes.

And I think you know this asset really gets at the heart of the legislation where it’s, for starters, a really quality investment for investors but also providing a good service to the community and providing jobs as well. I think the concern from our current investor base was just if the doctor group we were working with here had done these types of assets in the past, they would have basically told me that if they have this deal could likely be a home run. And this doctor group has done about a half dozen or so across the greater Indianapolis area as well as a few throughout Texas, and then there’s another one in Prescott, Arizona. And they do want to do more of these. Any future one would likely be ground up. This one was obviously adaptive reuse, but the markets they want to build these in fall right in line with Caliber’s investment objective. They wanna do maybe one of these in Boise, one in Reno, one in Salt Lake. Probably do a few more in Texas as well, which works perfect for us. So, I would anticipate to see more deals like this probably in Fund II or on the second cycle of assets in Fund I.

Pima Center. This is a charter school that we’re building. This is only probably half a mile from our office. Basically, Rancho Solano, the school has a K-12 campus right next door to where we’re building. They’re expanding, so they’re separating the 9-12 from the K-8, the elementary and middle school then be separated from the high school. We’re developing the high school right now. We just broke ground on this about a month ago. It says asset class here, educational. It’s actually for those keeping track, if you’re keeping a pie chart of what we’re investing in, it’s actually categorized as light industrial if the asset were to ever be repurposed and not be a school anymore. What we did on this deal was the school basically leveraged us to raise the money and do the development. We are all in at about $11 million, and we’re gonna sell it back to them somewhere between I think $13.8 million and $14.5 million depending on when they buy it back. They could buy it back one month after the certificate of occupancy, 13 or 25. So, the return is already fixed and built in there. The construction costs were kept on the project as well. The development on this plans to be done later on this year.

The Downtown Mesa portfolio. This is kind of an atypical play. Few moving parts here. The picture on the right here is 305 East Main. This is the one commercial office building that we’ve purchased in Mesa. And then we also have 144 units of workforce housing that’s about two blocks off Main Street. And then the other nine buildings are old retail buildings that we’re working with the local government to repurpose and kind of just revitalize the entire downtown area. For those not familiar, Mesa is the third biggest city in Arizona after Phoenix and Tucson. And Arizona State University is gonna move probably around 15,000 students over there. In the coming year, they’re gonna move their fine arts campus over there. And Mesa also benefits from having the only public transportation in the valley, the light rail that runs right through the downtown area. If you look at some of these towns that border Mesa, Chandler and Gilbert, they’ve built these walkable downtowns with restaurants and shops. And quite frankly, Mesa’s downtown has been left behind. So, I think the thinking from our executive team is if towns like Chandler and Gilbert can do this without the public transportation and without the students, Mesa should be able to do this only on a greater scale.

We’re into these buildings at very cheap, it’s more than 50% below replacement costs. All the historic buildings I discussed have otherwise leases signed to this point. It’s a lot of wine bars, breweries. I think one is gonna be a market grocery store. The 305 building again, pictured here, we’re talking with SLAM charter schools. This would not be their permanent campus, this would just be a starter and then they’ll likely build somewhere in Mesa. But that is the entertainer Pitbull’s charter school that he funds. I know there’s one in Vegas, I know there’s one in Miami, but I do think there’s about a dozen of those nationwide to this point. So, this is an example of the local market knowledge where, when we first purchased these assets to the naked eye, they weren’t pretty by any stretch of the imagination. But having that local knowledge, knowing Arizona State was gonna move this campus there really before anyone else and getting on the forefront of this opportunity, I think makes for a lot of upside in this whole portfolio.

So briefly, I’m going to circle back and go over just Caliber as a whole, the fund sponsor. So, we were founded in the ashes of the Great Recession, late 2009, by our co-founders, Chris Loeffler and Jennifer Schrader, they actually met each other on the courthouse steps here in Phoenix fixing and flipping single-family rental properties. We had one investor to start, and have grown it to about 1,200 individual accredited investors to this point. We did our first multifamily deal in 2012, our first hospitality deal in 2014, our first consolidated fund in 2015. To this point, we’ve done seven funds, five closed, two still open, and dozens of single asset syndications. Again, about 1,200 individual accredited investors, about half a billion in capital managed, about a billion in assets under management, and about 2 billion to 3 billion in what we would call assets under development where it’s raw land that we own that has yet to go vertical.

As we’ve grown, we’ve picked up various institutional-type clients, smaller family offices, registered investment advisors. That deal I touched on in Bryan, Texas, we’re partnering with a community bank who’s providing both equity and debt. That being said, I think the vision that Chris specifically had when he started Caliber was that the high net worth and ultra-high net worth individual investor is really who was being shut out of these types of deals, and they were looking to diversify into the world of private equity real estate and didn’t really know where to go. Prior to 2013 before firms like Caliber could publicly broadcast, a lot of these deals were done in Starbucks coffee shops, country clubs. You had to know someone to invest in private placements as an individual investor. Legislation in 2013 changed all that. Now, firms like Caliber and myself can do stuff like this and market directly to individual accredited investors. So again, we’ll continue to pick up more institutional-type partners, but we’ll always have an avenue where individual accredited investors can invest.

And again, briefly, I wanna touch on the fund closing of Fund I and Fund II. That’s it for the presentation part. But again, our fund that started in 2018, and if the portfolio is something you like, June 30th of this year is the last day to invest. We chose that date because, and I heard in the last presentation as well, the limited partner deadline for anyone who has partnership gains that was taken at the entity level and actually they get 180 days from the end of their taxable year. So, that was why we chose the 6/30 date. So, about three months here of raising capital into Fund I before we go ahead and launch Fund II. Just a couple things on Fund II briefly, we plan two deals that will be in there. One will be Sierra Bloom Medical Campus. And that is less than a half-mile from our office. It’s 900,000 square foot of medical, it’ll be done in tranches, probably slugs of $5 million of equity or so. I think the first thing we’re building there is a long-term care facility. There will likely maybe be another behavioral health on that campus as well as probably a hotel and various other assets as well.

And then secondly, on the Scottsdale Riverwalk here on the 101, we’re planning a kind of entertainment district development. So, both of these developments are a lot bigger than all the assets I just went over in Fund I. Here at Bloom, the medical campus will likely be split between Fund I and Fund II. Riverwalk will probably be exclusively available in Fund II. I think it’s really important to have deals like this that are gonna be $20 million, $25 million plus for both of these, but they’re gonna take in capital, again, $5 million or so at a time because we will always have a place to place capital, whether it be new capital coming in or whether it’s recycled capital from the sale in Fund 1.

I think this is gonna happen more often, but I just had my first client who came on board at Caliber who actually had a sale in a different Opportunity Zone Fund. And for whatever reason, the sponsor decided to not build out the internal infrastructure to then have deals in place where they could recycle this capital and continue to keep it under their umbrella and do more deals. Instead, they just returned the capital to the limited partners. And I suppose it’s first-world problems, but they’re triggering an interim tax liability in a fund that you expected to be invested with for 10 years and not have any tax liability on the backend, and you only have to pay your original capital gain less than 10% or 15%. So, having deals like Sierra Bloom, like Riverwalk that are always gonna need large tranches of capital should help us negate the risk of ever being in a position that even if we were to sell an asset, which we plan to sell some of these within the 10 years, we would have a place to go ahead and redeploy that capital.

And even beyond those deals, we have the internal infrastructure in place. We keep a pipeline of about $100 million or so in assets across that whole geographic region I showed everyone in the beginning. So, I don’t see that being a problem in the future with regards to either Fund I or Fund II. And again, one more time, June 30th, last day to invest in Fund I. If you’re more interested in getting in on the ground level, for Fund II, that’ll be open on July 1st. We’re doing all the back-office work at the moment with the attorneys. So, right as we close Fund 1, we’ll go ahead and launch Fund II from there.

This is my email right here. I’ll drop it in the chatbox or maybe wait till Jimmy moved me over here to the breakout session. This is our office’s direct line. I’ll also provide my cell phone as well, my direct line so you can call me directly if you have any questions. And then this deck is available for distribution. If you want me to send this, be sure to let me know.

Jimmy: Terrific. Well, thank you, Conor. Yeah. We are gonna be putting you over to your fund breakout session in probably another five minutes here. I’m gonna post the link for that breakout session right now, and we’ll get that opened up for you Conor, and for anybody who wants to follow up with Conor one on one in a more intimate VIP room style in about four or five more minutes. But we do have a few questions in the Q&A section that we can get to right now. Rick asks, “When does cash flow start for Fund I?”

Conor: Good question. Since the fund closes in June 30th, the plan is probably sometime early next year. So, early 2023 is the target right now. I would hope that most of that cash flow would be negated by the losses on the K-1. I think it likely will be. I don’t wanna promise that. But more than likely, I think… And given that the pref is 6%, I would anticipate it to maybe start in that range. But for right now, early 2023. And my guess is it would be on a either semi-annual or annual basis. Some of our other funds and promissory notes will pay on a monthly or quarterly basis. My guess is this one would be semi-annual if not annual.

Jimmy: Very good. A question here asks, “If Fund I sells an asset, are the proceeds to be invested in a Fund II asset?”

Conor: I think we could do either. We could re… My guess is we would probably keep them segregated, but I think if there was a sale in Fund I and we had no choice like we could in Fund II. But my guess is we probably wanna keep the two separate.

Jimmy: All right. Right on. Are there any ramifications or stipulations on the long-term land lease for the downtown Tucson Hilton project that you will have to deal with up and until the exit?

Conor: Not that I’m aware of. No. I haven’t been overly involved with that. But as far as I know, no.

Jimmy: Very good. Let’s see. What about the school? You touched on the school a little bit and we had a question here. What’s the exit strategy for the school? I think that question came in before you touched on. Maybe you can just clarify that a little bit more. What are your plans there? Who wants to buy a school exactly?

Conor: The school is gonna purchase it back from us. And the dates and sales prices at which they’re buying it have already been fixed in the pro forma. So, we have…again, as we finish construction, they could purchase it either one month after their certificate of occupancy, 13 months so we would operate it for a year, or 25 months where we would operate it for two years. Obviously, the longer we wait, the higher the price that they would buy it back from us. That continues to go up. Again, I think we’re all in it about $10.8 million. I think one month after certificate of occupancy, they would purchase it at $13.8 million. If it was 13 months after the certificate of occupancy, it would be $14.2 million. And if it was 25 months, it would be $14.5 million. So, in that way, they return to already built in there. They basically just leveraged us again to do the development and raise the money for the deal. And again, in the slide, it was categorized as educational. That’s not really an asset class in real estate. On our books, it’s actually a light industrial asset where if for whatever reason, the school didn’t want to buy the building back or move in, it would be repurposed as an industrial asset.

Jimmy: Very good. Joseph has a really good question here, and I’ll get to his question in a minute. I don’t know, maybe 20 or 30 minutes ago, I was having a private conversation with an individual who has a seven-figure gain and he had created his own QOF but now he wants to find some projects he has to invest into. So, I suggested, well, you could reach out to some of these funds because oftentimes they allow you to invest. You can’t invest fund into another fund, but sometimes they allow you to invest alongside. Joseph’s question is along that same line. He says, “I have my own QOF, is there a mechanism for me to invest in your Fund II? I would have to invest directly into the QOZB rather than the fund which is not allowed.”

Conor: That’s a great question, and that’s something we didn’t do until the Pima Center, Rancho Solano School, and then we’ve since done it on Mesa Commons. I kind of breezed past that, but that was the 144 units in Mesa, that’s separate from the original downtown Mesa. And that’s still open right now. So, what we did both with the school with this multifamily deal in Mesa and we’ll continue to do is open it up for three avenues of capital where the fund will come in and take its portion, we’ll have another avenue for people who just want to invest cash. And then the third will be for people in Joseph’s situation who have their own qualified Opportunity Zone Fund and want to come in and invest at the deal level. Now, the risk there is that we sell something like Commons prior to the 10 years. Now, if we sell something in our fund, the onus is on us, the GP to then redeploy that capital. For someone starting their own fund, we sell that asset. That risk goes back to you the investor, as to find a place to place that capital. Again, should we more than likely have a deal that these people could then roll into and continue to defer their game? Most likely yes. Again, I just don’t wanna make any promises there.

And I always outline to anyone thinking of going down that avenue that the main risk there is if there’s a sale within 10 years, the onus is on you, the investor, not us to find those new deals. But yes. Right now Mesa Commons would be open for an investment like that. Sierra Bloom will… I have probably a half dozen clients that invest this way. And Sierra Bloom is one of the medical office that a lot of people have interest in through their own OZ fund as well. So, right now Mesa Commons would be the only deal. But the first few deals we did in the fund, we didn’t structure it that way. The fund just…we had a lot of capital coming in to start and the fund just came in and took all the equity because we had to get that money deployed. But now we’ve structured it, so every deal will have the option to do something like that, unless if it’s a really small deal, maybe not. But anything that’s north of a $10 million raise, my guess is we would open it to people with their own QOF who wanna then come and invest at the QOZB level.

Jimmy: Right. Great answer there, Conor. I think it’s a really good option for some investors with a significant amount of capital gains in their own QOF, gives you a great place to deploy your capital and you get to piggyback off of the due diligence that a larger fund is performing. So, a good option there, I think. Well, Conor, I’m gonna cut you loose here and I’m gonna demote you back to attendee. But please do hop into your breakout session. Now, I’ve just posted the link in the chat. Thank you, Conor. Appreciate it.

Conor: Jimmy, thank you. You have a good week.

Jimmy: You too.