OZ Pitch Day - March 7, 2024
In this webinar, James Holleman highlights the Link Apartment Opportunity Zones REIT, discussing this history and strategy of Grubb as well as the benefits of the REIT structure.
- How Grubb rolled multiple OZ funds into an Opportunity Zone REITs with 19 different projects scattered across the country.
- The unique aspects of the REIT structure, including a simplification of tax reporting without sacrificing tax advantages.
- The history of Grubb Properties as a vertically integrated real estate development.
- Grubb’s track record spanning multiple decades and several recessions.
- A unique strategy that focuses on “hitting doubles” and avoiding excess risk.
- How birth rates and other demographic trends point towards increased demand for multifamily housing.
- How the Link Apartments model is well suited to address the need for sustainable housing.
- A review of the assets in the Link Apartments REIT portfolio, including several transit-oriented assets and properties near medical centers.
- Live Q&A with webinar attendees.
Industry Spotlight: Grubb Properties
Founded in 1963, Grubb Properties is a vertically integrated real estate operating company and a leader in addressing the housing affordability crisis through its Link ApartmentsSM brand. Since 2018, they have raised over $200 million for Opportunity Zone investment.
Learn More About Grubb Properties
- Visit GrubbProperties.com
Jimmy: And Grubb Properties has recently rolled up their first three Opportunity Zone funds. They had vintage year funds, ’19, ’20 and ’21, rolled them all up into a new OZ REIT. Is that right, James? How are you doing this morning?
James: Hey, that’s right, Jimmy. I’m doing great, man. Thanks for having me. Awesome to join again for the OpportunityDb Pitch Day. Exciting to be here with you.
Jimmy: All right. The stage is yours. Take it away when you’re ready. Thank you, James.
James: Excellent. And Jimmy, thanks again for having us. We’ve participated with now the Opportunity pitch days, the Alt Expo, and the Multifamily Expo, and just love the education that you’re providing to high-net-worth investors and service providers across the industry. This really is a valuable service for everyone, and we enjoy participating. So, thank you.
James: Today I’m gonna be talking about our Link Apartments Opportunity Zone REIT. As Jimmy correctly stated, this is the outcome of the merger between our 2019, our 2020, and our 2021 Qualified Opportunity Funds. And we’re so excited to bring it to market. It’s really a dynamic fund vehicle that is an outlier in the OZ space, and I’ll give you some reasons why as we move forward in the presentation. So, I’ll flash our disclosure notes real quick for the recording, and we’ll go straight into the overview of our Link Apartments Opportunity Zone REIT, which, right now, as of December 31st, has a net asset value of $370-plus million dollars. It has 19 different projects that are scattered across select Tier 1 and Tier 2 markets nationally. And it represents a $1.6 billion portfolio. So, great diversification, an immediate turnkey solution, that you can apply whatever your capital need is up front, get it invested, put it to work, and start taking part in these benefits. So, the merger really allowed us a more efficient use of capital, and enabled us to put ourselves in a position to scale this platform even further, making it much more of a dynamic portfolio over the next two years.
But one really important aspect of this fund that I talk to investors about every day is the fact that it’s a private REIT. This private REIT vehicle is so easy to use for high-net-worth investors. For that investor that’s investing $100,000 to a million, this turnkey solution gets you instant access to that portfolio that I just highlighted, without taking on, in this example, eight different state-level K-1s each year. You only receive a 1099-DIV in years taxable distributions are made from this portfolio. And where some investors may want to externally capture depreciation that is passed through with a K-1, what we do with the depreciation internally through the 1099 REIT structure helps to maximize the tax incentives for the program. You’re not having to manage this externally. We do it internally for you. And I can talk about how as we move forward, but it’s important for you to know that the private REIT achieves everything that you’re looking for an Opportunity Zone investment to achieve, with much, much less burden for you when it comes tax time.
So, let’s talk about Grubb Properties, because Link Apartments is really just a strategy within Grubb Properties. But Grubb Properties is a 58-year-old vertically-integrated real estate developer. That’s a key point right there, vertical integration. We do everything from start to finish. That includes bird-dogging the assets, underwriting them, and then constructing them, post-construction, even doing property management services. The first development site that we ever approached for Link Apartments was in 2012. It sets in Richmond, Virginia. It’s called Link Manchester. And today, it sets inside of an Opportunity Zone. We recognized that when Opportunity Zone geographies were identified geographically that 40% of our prior Link Apartment portfolio was already in them. It took no deviation of strategy for us to approach Opportunity Zones as an asset class. And thus, we already had that track record, that proven success in the space. And really, it’s just a different way for us to raise capital.
We have a primary fund vehicle called Fund VII that has the exact same investment strategy. It’s investing in Link Apartments, with the same teams identifying assets and underwriting them in property management services. At the end of the day, if a property falls within an Opportunity Zone, the Opportunity funds get first right of refusal at that asset. And if it should pass for any reason, it could go in our flagship funds. And as you look at our 19-property portfolio, you can easily see that these are trophy assets, many of them of which would go straight into Fund VII if the Opportunity funds didn’t eat them up.
So, Grubb Properties, our track record. We’ve deployed $1.67 billion of equity across 90 different investments, through 15 different fund vehicles since 2002, when our current CEO, Clay Grubb, took the reins. Our track record since then on realized investments, amazing. We’ve had a 39.6% weighted average property-level gross internal rate of return since 2002, with a 2.4x equity multiple. That’s fantastic considering our risk-return dynamics. On those investments, on our realized transactions, you’re looking at an average leverage ratio of less than 60%. Right? We’re looking to hit doubles, we’re looking to protect capital. In our 58-year history, we’ve never had a property-level deed in lieu, foreclosure, or bankruptcy. Protect capital first, then grow capital. That’s our mission. And we’ve been very successful at it for decades, through several recessions. Here’s a look at our geographic presence. You can see our headquarters here in Charlotte, North Carolina, but you can also see that we have corporate offices scattered across the country, and Link Apartment development markets across the country as well, in scattered select Tier 1 and Tier 2 marketplaces.
What’s the market opportunity, though, for Link Apartments? What’s the strategy here? We really see the strategy for Link Apartments and the market opportunity unfold when we take a look at America’s housing affordability crisis, that’s being met with just absurd prices for single-family home, and then also apartment rentals all across the nation. And we’re seeing the supply really not match the demand in any of these housing assets. We saw peak births happen in the United States in 2007. That essentially means that there will be new young workers entering the workforce on into the 2030s, and that pipeline is just gonna continue to grow. This comes at a time in which the average monthly rent for an apartment in the United States, it’s almost 1,600 bucks a month. When 80% of millennials and Gen Z workers make less than $50,000 a year, there’s a problem there, right? That $50,000 earner is being squeezed, because they’re not qualifying for affordable housing, but they’re sure not qualifying for this double Class A amenity award-driven multifamily that you’re seeing built in most of the live-work-play environments across the nation. So, how do we combat that? Link Apartments.
There’s more of a problem, though. We’re really not seeing wage growth keep up with inflation and housing cost, right? We’re not seeing supply keep up with demand. And we haven’t for a long time. This problem is not getting any better. You really, in some of these areas, can’t build enough, but the problem is what we’ve seen built is catering towards those that represent a top-earning class. A hundred and forty percent area median income or above is the target resident for most of the multifamily you’re seeing built in select Tier 1 and Tier 2 markets across the country. It’s that simple. It’s not cheap anywhere. And so, if we can, through creativity and through efficiency, reduce our monthly cost for tenants by just a little, you know, $200 to $500 a month on average, it’s so meaningful. You know, to that nurse making $50,000 to $70,000 a year based off whatever market they’re working in, that’s extremely meaningful savings. That’s a car payment. And for a millennial, for a Gen Z’er, that’s looking to grow their career while living, working, and playing in the environment that their job center is in, there’s gotta be more options.
So, the investment strategy in Link Apartments is to provide that option, to provide what we frame as essential housing. It’s not affordable housing, it’s not luxury housing, it’s right in the middle. It’s really the portion of folks that have been squeezed over the past few years, where you’ve seen non-creative managers come in, develop double Class A multifamily units, that are catered towards the doctor, not the nurse. We’re looking to build something for the nurse. And when you look at that pool of potential tenants, it dwarfs those above it. There’s so many more people in the United States that represent the 60% to 140% area median income class, rather than that above it. You can combine the two-income class, 140% to 210%, and 210% or above, and they make up the 60% to 140% in regards to their sheer volume. And so, if we can create a product, which we have, in Link Apartments, and we can fit that middle, we can fit their need, it comes with an absolutely insatiable demand.
Just to give a quick highlight, throughout COVID, since COVID began, since March 2020, our entire Link Apartment portfolio has had 98% rent collection every month since COVID began, and we’ve brought two new projects online during COVID, both of which set lease-up velocity records for our Link Apartment portfolio sites. Again, we’ve been developing this product since 2012. There’s never been a more pressing time for moderate-priced housing options. And that’s what we’re delivering with Link Apartments. Where are we delivering it? Where it’s needed most. There’s really two opportunities that we’re addressing right now. The first, we’ve been addressing for quite some time. It’s high-growth secondary exposure, in markets like Charlotte, Atlanta, Raleigh, Nashville. Frame it as the southeast, with pockets outside of that, where demographically we’re seeing floods of people come into these markets. Even in COVID, these markets experienced just a slight dip before they continued to just take off in regards to their rent rates. But there’s also another opportunity that COVID inspired, which is highly resilient Tier 1 markets. Places like Los Angeles, New York and the surrounding boroughs, Washington D.C., The Bay. These areas experienced distress during COVID, to really a tune they’ve never experienced.
We saw an extreme, extreme decline in areas like Los Angeles, New York, and The Bay, but also since then, just as rapid of a recovery. And as we monitored that decline, we got greedy while others were being fearful, and we put some tremendous assets under contract during the COVID drop. So, assets that we frame as having COVID discounts, are in some cases having extreme tax incentives tied to them. And I’ll give a couple of instances as we move forward with the discussion.
But this helps frame the market opportunity. I mentioned the southeast. You can see here at the beginning of 2020, we had a small blip in Atlanta, Georgia, but ever since, an extreme rise. But if you look in a Tier 1 market like New York, also a more extreme dip, followed by an even greater rise. Washington D.C., more extreme, more of a rise. The Bay, extremely extreme, and then an ever-present rise. The theme here is that in each of these declines, we put assets under contract, and were negotiating the whole way down. And there are tremendous value plays already present within our Opportunity Fund portfolio, that you can get turnkey access to immediately.
And the beauty here is that the first deal in our 19-property portfolio to stabilize will happen later this year. We’re gonna start bringing units online for our first Link Apartment development site in our 2019 Qualified Opportunity Fund later this year. And while properties are in construction and development, we hold them at cost, for the exception of land value. That essentially means that you still have the opportunity to come into our fund by just acknowledging the land value on these investments, along with an 8% accumulated preferred return. Once we start bringing these units online, you’re gonna start seeing valuation pops along the way. And there’s still time to get in, really all this year, into this well-primed, young portfolio, that has a proven strategy in its sister fund, going back to 2012.
So, what is the portfolio? What’s it look like? I’ll highlight one asset here, and I won’t go across all 19 assets, but I think H Street is a great example. It’s in Washington, D.C. It was really our first Tier 1 market high-rise opportunity, and it really just highlights some of the opportunity that we’re seeing in Tier 1 markets like Washington, D.C. It’s a transit-oriented site, which we’re always focused on. In some cases, we’re even getting creative and trying to eliminate parking at our site, by focusing on transit-oriented positioning.
But this is typically a very high-barrier-to-entry market, in which we were able to enter through Opportunity Zones with a little bit of a discount. We have no required parking on-site, and we’ve actually been able to add 10 units through just bonus density that we’ve achieved with the local municipalities. This unit is in an area to where there’s a very pressing need for a more moderate-priced housing solution. And this H Street location is really the tip of the spear in downtown D.C. for where you’re seeing the development really take off in the D.C. proper area. It’s got a 12-year fixed-rate construction to permanent loan tied to it, at 4.5%. So when we’re seeing inflation now at above 5%, that’s a really valuable loan, when you start looking at the real rate to borrow. It’s actually a negative rate at that fixed rate when we’re experiencing inflation above it. So, that’s a very valuable asset to hold in the portfolio, one of which that takes us out past the 10-year hold for Opportunity Zones.
We also have Link Apartments Denver. This is in Fitzsimons, or across the street from Fitzsimons Medical Center. One of the things that we like to target when we focus on geographies is a hospital presence. That proves to be a defensive market environment. When we experience a downturn, nurses are gonna keep their jobs. And Fitzsimons Medical Center may be the largest hospital system that I’ve ever visited. It currently hosts about 25,000 jobs. When it’s fully built out, could host as many as 50,000. We positioned ourselves adjacent from the entrance of this medical center. It’s also right down the street from a light rail station that takes you into downtown Denver, and sets right on Colfax, which runs into downtown Denver as well, which has public transit. This is an absolutely fantastic position for us to be in, considering our target tenant. And we’re really excited about the opportunity and building ourselves out in the Denver market, starting with this asset.
Another asset in the portfolio is right here in our backyard. It’s really a growth opportunity here in Charlotte’s NoDa market, which is one of Charlotte’s hottest markets. I describe it as millennial Mecca. It’s home to a recent light rail stop, which connected our downtown Charlotte market to UNC Charlotte, which is North Carolina’s largest public university. And NoDa is just that hip, really artsy, music scene, it’s got some great restaurants, got some cool breweries, you’re starting to see offices pop up to inspire that live-work-play environment, and we’re positioned right on the light rail station, in the center of this community. It’s one of those sites to where you kind of scratch your head and wonder how it’s in an Opportunity Zone, because the location is just tremendous. And so, we’re super excited about this site, and we’ve actually even secured some discounts through COVID, as we continue to negotiate it. So, great cost basis play, and we just couldn’t be higher on the market.
The last site that I’ll highlight is actually… it sits on top of the Queens Plaza train station in Long Island City, New York. This is a great example of extreme tax incentive. We’re doing this deal through a limited opportunity. It’s called the 421a Affordable New York program. It’s a 35-year partial property tax abatement that we’ve done a net present value calculation on, that’s more lucrative than the land cost. Another way of saying we’re getting free land in New York, really, one stop outside the island. So, it’s extremely exciting. We’re so happy to be positioned here. We’re doing another deal in FiDi through the same program in our flagship fund, just to highlight the example of same strategy for Grubb Properties, just if it falls in an Opportunity Zone, it’s in the Opportunity Fund. The chance to come in and add these units to this area, to where it’s so desperately needed, and doing it through such an extreme tax incentive, we’re very excited about the opportunity.
And one more, we do have an asset in Jack London Square, in Oakland, California. This site is right there in trendy Jack London Square. We’re doing the property with Swenson Builders, and really stepping into a site that was already prepared for development. So, it’s a shovel-ready project that’s ready to begin within three months. We’re so excited about adding the Link Apartments product to The Bay. The need for a more moderate-priced housing solution could never be more present than it is there. And for us to partner with a group like Swenson, come in to some sites that are in an incredibly trendy area, and address Opportunity Zones is just fantastic. And our Fund VII is actually addressing some opportunities in The Bay as well. We have a site that we recently put under contract just outside Palo Alto.
And then, also, this is a site that is really a special site. We, in the spirit of doing good while doing well, which Jimmy highlighted in his prior discussion, along with the team, that did a great job of talking about that, we do do good while doing well. Our strategy in itself is impactful, by adding moderate-priced housing solutions, but we’ve taken it a step further with CYKEL apartments. This is in Charlotte, North Carolina. It’s in our historic West End community. It’s in walking distance to our major CBD within Charlotte. And what we’re looking to do here is get creative and really eliminate certain things like parking, to try and reduce our per-month rent for our tenants. And so, this unit actually has tenants sign a leasing agreement saying that they will not own a car if they stay with us. And so what that’s allowing us to do is not pay for parking, which allows us to drop our per-unit cost per unit, and actually have added 54 affordable units in this mix, which is over 50% of the units in the entire building. So, this is great. It’s taking things in the efficiencies that we’ve learned through Link Apartments, the six-unit four plans that are Link Apartments, the efficiency behind that, and stripping out even more amenities and even more parking, to lower our cost per entry, and that per-monthly cost for our clients. And we’re super excited about delivering this asset to the Charlotte community.
You can get a quick snapshot here of the 19 assets that are within the Qualified Opportunity Fund portfolio. You’ll notice down at the bottom, there are a couple of commercial assets. Commercial assets are not really our strategy. Link Apartments and the development of that moderate-priced housing is our strategy. But sometimes we will use other property types to either get to a cheaper cost basis for a multifamily development opportunity, or complement a multifamily development opportunity. I’ll give two examples. To get to a cheaper cost basis for multifamily development, we may address a mid-rise office building, which we’ve done in Chapel Hill, North Carolina. It sits on Franklin Street. This shares a street with the quad at UNC. We approached a value-add office play that was in desperate need of rehab, and did so while coordinating with the local municipality and UNC and their hospital system, to basically uplift the building and turn it into a healthcare services biotech type of office setting in which we’ll be adding wet lab space, and hosting startups that are launching out of the university and really treating it as an incubator hub. You talk about office that still has a need, ever-pressing need.
But, while uplifting this office and working with a local municipality, we worked with them to do some rezoning that would allow us to build multifamily on an adjacent parcel that’s connected to this office building. And by winning the ability to build multifamily on-site, we’re essentially getting the land for free to build multifamily on. And when we do this type of play, we’re essentially saving a ton on the cost basis, just from the land cost. If we don’t have to pay for the dirt to build multifamily on, I mean, in a place like Charlotte, you’re eliminating $40,000 per unit in cost, on average. And it just goes up in other markets. So, you can see a little bit of that scattered in the portfolio, to where we’ve approached office with the intent of getting creative and building multifamily on-site, or to where we’ll complement a multifamily development site with some retail, as an example.
And you can see that in our Koreatown asset, which, essentially, we have secured a 48,000 square foot-plus retail tenant in Target to be our Koreatown base for anchor tenant. You talk about an amenity for those that live above that, you know, Koreatown, historically, although extremely trendy today, has been fragmented in regards to its grocery and retail options. It’s been mom-and-pop type options. To have Target come in at the heart corner of Olympic and Vermont, and reshape that community, and for our tenants to have that amenity as basically its base floor tenant? Huge. We’ll take that kind of retail all day. We’re typically retail averse, but with that type of retail, it complements our multifamily site, we’ll take it.
Jimmy: Hey, James. Sorry to break in, but you are over time. We gotta move along, unfortunately. I don’t know how many more slides you had left. And we had a couple questions for you, also, I wanted to see if we get to if you don’t mind.
James: I love that. My final terms, or my final comments were around our impact, and I’ve already spoken on that, and our terms. I’ll just say, everybody that is a member or participates with OpportunityDb is more than welcome to invest in our product at $100,000 a commitment.
Jimmy: That’s fantastic. Thank you, James. Thank you for offering that. We had several questions about the structure of your fund, a REIT structure. I don’t know if you saw, but one of the previous presentations today said REIT was a big no-no for him. So, could you kind of combat that point that that earlier presenter made? Why did you choose to be a REIT? Is it less tax-friendly? What are your thoughts there?
James: Yeah, I think it’s more tax-friendly and less arduous. If you’re a high-net-worth investor investing anywhere from $100,000 to $500,000, just the K-1 tax prep over 10 years is probably gonna be more than the asset management fee you’re paying your manager. So, think about it big picture. With a private REIT, it’s a turnkey solution. We only generate a 1099-DIV in years taxable distributions are made. But those are some of the highlights to the investor. Highlights for the asset manager are there as well. The private REIT really allows us flexibility. It allows us, if we have a disposition before the 10th year, which we likely will with some of our commercial assets, to have options. We don’t have to look for a 1031 exchange to avoid a taxable event and busting the Qualified Opportunity Fund status. That’s risky and clunky. And we don’t want to hold on to an asset just because it’s in an OZ. If there’s an opportune time to sell, sell it. The private REIT allows us to do that. It allows us to pay the taxes on any transaction before the 10th year internally, at the operating business level, and then recycle the proceeds back into the fund, to continue amplifying the total return that one can achieve after the 10th year.
The Qualified Opportunity Fund in a private REIT also allows us to internalize depreciation. And sure, I get it. Some people wanna capture depreciation externally and manage that across their entire financial plan. Sure. But look, what we’re doing internally is maximizing the tax-incentivized value of the fund. And how we do that is essentially by offsetting net income distributions while they’re taxable, with the intent of back-ending as many distributions as we can, treating them as a cumulative preferred return, that comes out on the back end after year 10 as a form of tax-free growth. The private REIT presents flexibilities in that regard.
So, yes. I understand that there’s an investor for every structure. If you’re investing $10 million, sure, maybe a standard LP model fund is the right option for you and you capture that depreciation externally and continue on with your real estate investing journey. But if you really want this to be a passive investment, if you want us to manage everything for you, and maximize these tax incentives, the private REIT is the choice for you.
Jimmy: All right. Well, thanks for your insights there. Appreciate all your time today, James. We didn’t get to all the questions, but I’ll try to pass those questioners along to y’all. I’ll be sure to loop them in on some emails with you, and we’ll see if we can follow up and get some of those questions answered. James, I gotta move the program along, but thanks again for being here today. Really appreciate it.
James: It’s always a pleasure. Please feel free to reach out if there’s additional questions. I’m always happy to help.