In this webinar John Cerne discuses two OZ funds offered by CRE Development Capital, including a single asset QOF developing a five-star hotel in downtown Phoenix.
- Experience of the CRE team, including two OZ funds offered by CRE Development Capital.
- Overview of the OZ tax incentives, including an illustration of hypothetical savings.
- The state of the OZ program going forward, including some of the uncertainties that exist around tax rates and potential extension of the program.
- Assessment of the impact of raw material shortages on construction projects in the current environment.
- Highlights of the U.S. Opportunities Fund, which is developing 343 luxury apartments plus retail space in the Huntridge Arts District of Las Vegas.
- Highlights of the Phoenix Opportunity Fund, a single-asset fund developing “The Blue,” a 25-story mixed use building in Phoenix, Arizona.
- Review of the tremendous growth happening in Phoenix.
- Upcoming OZ deadlines.
- Live Q&A with webinar attendees.
Industry Spotlight: CRE Development Capital
CRE Development Capital a real estate development and investment firm focused on mixed use, multi-family, industrial, and storage unit development opportunities in the U.S., including opportunity zones. CRE’s most recent acquisition is a luxury hospitality and high-end residential tower in downtown Phoenix, Arizona.
Learn More About CRE Development Capital
Jimmy: Coming up next is CRE Development Capital, you’ve heard from this group in the past from Lawrence Jatsek. If you’ve attended any of my previous Pitch Days, Lawrence is out and about at some conferences in Florida this week. So, joining us today will be John Cerne, one of Lawrence’s partners. How are you doing John?
John: Doing great, Jimmy. Glad to see you.
Jimmy: Good. There you are. I can see you. I can hear you. So, the floor is yours. I’ll let you take it from here.
John: Okay. Good. So, CRE Development Capital, again, John Cerne, VP of Investor Relations. So, I’m gonna talk to you a little bit about CRE. It sounds like today I’ve been on the call most of the day. And a lot of stuff’s been touched on that I was gonna talk about. So, I feel like a little bit of my thunder’s been stolen a little, but that’s okay. I’ll be as quick as I can on some of the things that might be a little bit repetitive, but we’ll move on.
So, CRE is a real estate development investment firm focused on mixed-use multifamily, industrial, storage opportunities worldwide, including U.S. Opportunity Zones. So, we leverage about 30 years of experience in the industry to raise capital for ground-up development projects. Our funds do invest directly and indirectly into diversified portfolio of real estate properties. Our values align with our investor values, and our investor values align with ours.
So, just a little bit about us. It’s a little bit more 30 years of experience from each one of our team members. Jimmy mentioned Lawrence Jatsek, and I’ll also talk a little bit about Dwight Alexander, who’s the other managing partner. But, you know, for us, you know, real estate and project financing, real estate development and construction, capital relationships, partner relationships, project, and investment sourcing.
First one is one of our managing partners is Dwight, 22 years as senior vice president of wholesale banking institution with over $108 billion in assets. As an investment banker and financial advisor for professional sports teams, states, and local governments, Dwight specializes in the financing of stadium sports facilities, and large transportation infrastructure. In addition, he structured and manage the insurance over $10 billion in debt securities, and was the lead financial officer or lead banker on 13 stadium and arena projects that included the Tennessee Titans, Oakland, Camden Yards, and the new Boston Garden, and the Phoenix Suns.
Second managing partner, who’s usually on the phone, but I’m taking his place today is Lawrence Jatsek. He’s been in real estate investment in development for over 30 years. He was the CEO of a general contracting and development company, which included general contracting for complex projects, ground-up development, predominantly in the Bay Area.
Just kind of a little thing that we touched on today. You know, we talked about the step-up basis, but as far as these OZ tax incentives, you know, certainly, we talked about the deferral of recognized gains into eligible funds. The step-up basis, which Jimmy kind of touched on, isn’t there anymore, the 10%. And then three, the post-acquisition gain receives permanent exclusion on the investment in the OZ Fund, which have been talked about also today.
Another sort of an illustration here that we just talked about throughout the day today, if you were to invest your million-dollar capital gain into an OZ Fund and sort of the stages and steps that it would go through. So, if you did that now in ’22, the tax would be due in ’26. You’d have to pay that tax in ’27, but I think the bigger issue here and the bigger advantage is how we talked about what that tax savings is for the investment in the OZ when you get to the 10-year mark.
State of OZ programs going forward. So, certainly, there are a little bit of uncertainties, you know, what are some of the wild cards investors are, are facing when advertising considering investment in QOF or QOZB. What will the capital gains tax rate be in ’26? What’s being considered in terms of new investment? Will the current incentives be extended? Just talked a little bit about that. How long will the program be around? You know, kind of the bottom line. When you look at this, the 10-year zero tax benefit and the gain of an investment, just, you know, certainly outweighs any tax hikes and things that can happen in the near future. I guess when it comes down to it, you know, you could probably, you know, you say to yourself, what’s proper tax planning and proper tax management to mitigate those things.
Touch a little bit on supply chain, you know, what we’re facing now and what we’ll face going forward. I mean, everyone’s sort of probably somewhat familiar with a lot of the things that have been happening over the last 12 to 16 months, certainly, production stopped early with the pandemic. People stayed at home, decided to stay busy, do home improvements. Demand for lumber and other materials increased rather than decreased. Production stayed idle in an effort to protect workers. Interest rates lowered. Home buying skyrocketed.
Builders and developers ramped up production, thus increasing demand for building materials. Lumber output only rose by 3.3%, while residential construction rose by 12%, and renovations by 7%. Everybody, you know, still is kind of in a 1,000 board feet of lumber. You know, in April of ’20, it was 350 bucks. In May of ’21, it’s 1,500 bucks. So, definitely a big increase there. And other supplies sitting on ships, you know, looking to get unloaded and delivered.
Labor constraints. Everybody’s probably pretty familiar with these things. The shortage of skilled labor. Increased wages to keep current employees. Skilled labor is being replaced, poached, driving up wages even further. Estimated there’s gonna be about a million construction workers needed over the next two years. You know, construction companies may be limited on the number of projects they can take on. Time to completion can take longer than expected. So, lot kind of around labor constraints.
Interest rates. We all touched a little bit on that today. It’s been kind of a topic across the board. The Fed hiked rates in ’22. What will be the effect? Will growth slow? Will the economic recovery slow or stop? Possible recession? I guess, in our opinion, rates will remain low for now. It’d be sort of risky to raise rates too much, too fast while the country still recovers. Raising interest rates will not speed up unloading the material and supplies or reduce the price of fuel. Supply will increase as production facilities continue to open, hire labor, therefore stabilizing material prices.
Interest rates. How do we mitigate those challenges? You know, for us, we’re looking at seeking opportunities in markets that are growing, able to absorb cost increases. Paying close attention to net in mitigation, both businesses and population. Closely monitor the supply and demand and projected projects. You know, the pipeline, our pipeline with each asset class. Monitor payroll, income trends. Target and closely monitor cities that are going to attract new businesses and encourage expansion of existing businesses.
All right. So, now, I guess what we’ll do is I’ll jump into our funds. You know, our first one I’ll talk about is the U.S. Opportunities Fund. This first one is The Charleston. It is in a, you know, CRE tax advantage OZ Fund. Little bit about it. Multifamily, size of it it’s about 232,000 square feet, the program, 343 luxury apartments, about 300 designated parking space. Will, like most projects, have some retail about 8,000 square feet of retail space.
Project overview. It’s entitled, it’s in the Huntridge Arts District of Las Vegas, Nevada. I mentioned previously in the slide that it’s a ground-up mid-rise multi-family development with approximately 343 luxury apartments, and it is in an Opportunity Zone. So, investors can take advantage of that with qualified gains. Just some of the metrics around it. Equity requirement, $25 mill, financing, $75, IRR, 25%, multiplier, 2.53. As we mentioned before, tax advantages can be taken by investors because it’s is an Opportunity Zone. Hold period, 5-10. And the minimum investment on that is $250,000.
Just a little bit more about the fund. The fund is, you know, to acquire, develop, redevelop, or convert real estate opportunities in a manner consistent with OZ Provisions. These may include but aren’t limited to commercial, residential or hospitality real estate assets that may be operated by affiliates or GPs for the fund. The fund may also acquire equity interest in entities that have been developed or acquired and/or acquire commercial, but commercial, residential, or hospitality properties. It may be operated at the GP. Also, this is a multi-asset fund. So, the following pages include targeted projects that the fund has currently identified. So, we will have other ones that will be identified as we go through.
Next, I’ll talk a little bit about our second fund, which is the Phoenix Opportunity Zone Fund called The Blue. The Blue is a single asset fund in an Opportunity Zone formed to raise capital to invest, develop, and construct The Blue, which is a 25-story Mixed-Use project located in downtown Phoenix. Size of it is 705,000 square feet, 25 stories. This will also be sort of two different things. It’ll be 233 key five-star/category 7 luxury hotel. The downtown Phoenix area does not have a five-star hotel currently. So, this particular project will fulfill, I think, a huge need for the downtown Phoenix area. And then also approximately 160 residential condo units.
Just a quick map of it. You can see it’s at the bottom left near Talking Stick. That’s the location. And where the site is located, you can see what’s around it. I don’t know if you’re familiar with Phoenix, but they have this enormous convention center that I’ve gone to several conferences over the years and have either stayed at the Hyatt or the Renaissance, which are okay hotels. But I think this one, The Blue, will far outweigh what, you know, hotel living is like when you have to stay there for a week and go to a bunch of conventions. So all good for us on that side of it. So, pretty excited.
Just a quick look at downtown. You can see that what’s kind of mapped out red is the warehouse district, which is all part of the Phoenix Opportunity Zone. So, we sit in that Opportunity Zone area.
Just a quick overview of the project. It’s entitled by Thunderbird. The address, downtown Phoenix. Ground-up development of 25-story Mixed-Use. And it is, again, smack into the Opportunity Zone.
Some metrics around it, $115 million equity, 180 millon financing, projected, IRR, 26%, project multiplier, 2.5, and certainly Opportunity Zone investment with qualified gains. Exit cap is 7.5%. And the minimum required investment on this one now is around a million dollars.
Just Phoenix, in general, 5.1 million in population in the Phoenix Metro area in 2018, 14%, you know, population growth rate. One of the fastest-growing metros of the top 10 metros. So, certainly, growth and advancement, 2.68% forecasted average annual median income rate, which is well above the national average. You know, growth in business, professional services, education, healthcare, all way above normal national averages for metropolitans.
Just on the employment side, you know, huge. If you’re familiar with Phoenix, you see lots of buildings with these names on them. Arizona State’s been migrating more and more down into the Phoenix area with growth. And for the fifth year in row, Phoenix is considered one of the fastest-growing cities in the U.S. So, definitely an area that potential growth is large.
Just a couple other companies, TSMC and Intel, you know, approximately $32 billion of microchip manufacturing, you know, development and expansion. So, two big opportunities, again, for tech movement in the area and growth.
Last couple of slides for me are really kind of dates and deadlines, which we’ve talked about, you know, throughout the day, you know, with Jimmy and other participants. Certainly, everyone’s kind of familiar with these by now as far as when they need to get money in, when they need to pay tax, when they need to make different assessments around things. So, I’ll have these slides available. So, certainly, anyone who wants to see these at the end, no problems. And kind of wraps it up for me.
Jimmy: All right. Well, fantastic, John, thank you for being here today. Let me take a quick peek at the clock here, see what we’re doing on time. It looks like we’ve got about three or four more minutes to answer some questions. And we have a couple of questions in the Q&A tool right now. If you have questions for John, feel free to submit them in the Q&A tool. First question is, what brand is the Phoenix hotel? Are you able to announce that?
John: The Fairmont. So, yeah.
Jimmy: The Fairmont. Okay.
John: The Fairmont will be the flag in Phoenix.
Jimmy: Very good. That answers that question. And then this next attendee asks, there’s another anonymous question asks, I may have missed it, but are these both single-asset funds, or are there other assets in the pipeline?
John: Other assets in the pipeline for the U.S Opportunities Fund. The Phoenix Fund is a single asset fund.
Jimmy: Good. And do you have any other assets in the pipeline, any other plans for expanding beyond the footprints that you’re already in, in Phoenix and in Las Vegas? What other markets do you like, potentially?
John: Yeah, I mean, we really like the… for sure, Phoenix, Vegas, I think both those areas are really good for us, and where we wanna be. You know, we could probably get a little deeper dive into that with Lawrence. He’s usually in the know as far as other projects that he has in the pipeline. So, we can always come back to that question, or I can fill anybody in who shoots me an email or wants to know further.
Jimmy: Gotcha. A question just came in, says, I’m not familiar with the Huntridge District in Vegas. Where is that relative to other landmarks? Where is it relative to downtown? Where is it relative the airport or the strip? Yeah.
John: So, south of downtown Vegas, and then a little bit northeast of the strip. So, it’s about a mile in between, you know, each one of them.
Jimmy: Okay. Yeah. Right, right. Kind of in-between there. It sounds like good. Downtown Vegas being couple miles north of the strip itself. Brian asks, John, you listed a 5 to 10-year hold time, but the tax benefits don’t come until after 10-plus years. What guarantee is there that you won’t exit and create a taxable event for investors?
John: Yeah, I mean, more than likely. I mean, that’s probably in there just because if it was a non-capital gain, if somebody put it in there and it wasn’t a capital gain, they just put it in as an investment. But I think our intent is to hold for the 10-year, you know, to get the full tax benefit.
Jimmy: Yeah, that’s always ideal if you can reach that 10-year mark, for sure. LC is asking, would you mind sharing your screen again? He wanted to see that deadline slide one more time. So, we’ll give John a minute to pull that up. Thanks, John.
John: So, I have two slides. So, if you wanna just snap a picture of just the first one, and then there’s the second one.
Jimmy: Yep. Yeah, I think that’s right. I might also say actually one more deadline that you guys don’t have listed there. And this one is a bit esoteric, but I’ll mention it anyways. September 11th, 2027 is the last date to invest 2026 capital gains that were triggered on a partnership schedule K-1. So, not everybody has partnership schedule K-1 gains, but the IRS regulations give you a little bit more of a buffer. They actually consider the March 15th partnership due date, partnership return due date as the start date for that 180-day clock, which actually takes you out to September 11th. But for most investors, that June 28th, 2027 date is correct. LC says, thank you. So, I think we got him what he needed there. John, great presentation today. Thanks for getting us up-to-date on CRE Development Capital. And we’ll cut you loose there. Appreciate your time today, John.
Jimmy: Yeah, I really appreciate the opportunity. Thank you very much.