The Opportunity Zones Podcast is now on YouTube!
In this webinar, David Scherer discusses Origin’s evolution into one of the leading Opportunity Zone funds investing in multifamily developments across the U.S.
- A review of Origin’s first fund, which raised approximately $270 million in equity and had $600 million in total assets;
- Differentiators of Origin’s OZ operations, including focuses on specific markets and asset classes;
- How Origin implements “a development strategy followed by an operations strategy” and the importance of assessing business infrastructure with a long term investment;
- Why Origin has invested in machine learning, and how this technology is integrated into its real estate business;
- Typical cash flow timing for Origin’s ground up construction projects;
- A review of the types of deals that Origin is evaluating for their QOZ fund II;
- Origin’s conservative approach to underwriting;
- Live Q&A with webinar attendees.
Industry Spotlight: Origin Investments
Founded in 2007, Origin Investments is a private equity real estate firm based in Chicago. Designed for the needs of high net worth individuals, family offices and wealth management firms, Origin Investments provides the same level of service, terms, and results that larger institutions have enjoyed for decades.
Learn More About Origin Investments
- Visit OriginInvestments.com
Jimmy: Then we’re gonna bring David Scherer on stage from Origin Investments. Origin’s been a longtime partner of OpportunityDb. They closed their OZ Fund I a while back, and they’re onto QOZ Fund II investing in luxury multifamily real estate in growth markets all over the United States, but predominantly centered in the Southern section of the United States. There’s David. Great to see you, you can dive in as soon as you’re ready.
David: Okay, I appreciate that. I’m gonna jump right in. Yes, Origin Investments, we do three things and you’re right, Jimmy, it’s all in the Southeast, Texas, and Southwest. We’ve been around for 15 years. What I’m most proud of, and I’m just gonna jump right in, I’m most proud of our performance. I think that my partner and I founded the firm in 2007. My partner’s name is Michael Episcope. He’s been on this in the past. He’s actually traveling, so I’m filling in. So, you get the other partner today.
We have generated 24% returns on all of our investments since inception, the 2.1 equity multiple. I think a lot of people are drawn to our co-investment. We’re very aligned as a company. As we sit today, we’ve raised and deployed a billion in equity, and $75 million of that is my partner and my capital, and increasingly, the capital of our team. And then in terms of investment partners, we have 2,900 investment partners, and we value those relationships quite a bit.
In terms of where we are as a company, and we wanna talk about QOZ at this point, QOZ is an extension of our development vertical. And so, we have offices throughout all of the areas that we invest. So, Nashville, we have an office where people live and work, Atlanta, Dallas, Denver, these are all offices that we have. So, the QOZ development strategy is an extension of our development strategy in these markets. The first fund was $270 million of equity. We generally use about 60% debt-to-equity levels. And so, the asset level was about $700 million in Fund I.
Fund II will be roughly the same size. It’s a $300 million target raise. We’re just over $180 million raises to date. We started raising, I believe in November of last year. We anticipate that that raise will complete in the next six months. One of the differentiators at Origin in our Opportunity Zone investing is we’re only investing in multifamily. We’re only investing in these cities that we live and cover. And so, if you want a diversified QOZ Fund that invests in multiple asset classes, that wouldn’t be our fund. If you believe that multifamily is an outperforming asset class, which it has been, this is the highest performing asset class in real estate for the past 30 years, also the lowest standard deviation, and that’s why we’re here. We’re very data-driven. It’s also my belief that it’ll continue, and I don’t have enough time to get into the whys, but we have lots of material on this on the site, origininvestments.com. We do 40 to 50 webinars a year for our various funds. And so, please use this as a resource just broadly. We believe in educating all investors on what we’re doing.
So the benefits of QOZ, if you think about our investment strategy, it’s a development strategy followed by an operational strategy. And so, regardless of who you invest with in a QOZ Fund, you need to be very certain about the depth of their operations expertise, and their business infrastructure. And so, we’ve been around 15 years. We have 45 professionals at Origin throughout the country. Our returns have been exemplary. We’re a top SL manager. I think we check a lot of those boxes, but just understand whoever you’re investing with, it’s a long-term investment, and you need to be very confident in the management team, both to build, manage risk, and then operate the asset.
We believe the areas we’ve selected are in the path of growth. A lot of the assets in Fund II have been sourced over the last year to 18 months, and I’ll get into that in a moment. This is the depiction of where our offices are. Recently, over the last two years, we’ve invested a lot of money into machine learning. We call it Origin Multiytics. We have two of our in-house data scientists, and it really has just corroborated what we knew, which is we’re in the right places. And it’s 0.4 predicting, it processes about 2.7 billion pieces of data a month to create predictive analytics on future rent growth. And what we’re seeing is these markets will continue to outperform in the next one, two, three, five years.
This is a really important slide. I get this question a lot on all of our development funds. We don’t just develop in QOZ Funds. We develop in Market Rate, non-QOZ Math Funds as well, and it’s always a question about cash flow, “When can I expect to get cash flow?” And typically, in a development, you’re gonna have anywhere from 24 to 30 months of building, and you’re not getting cash flow when you’re constructing it. And then there’s 12, 15 months of lease-up. And so, the first 36 to 40 months of a construction deal, you’re not getting cash flow, but you’re building a tremendous amount of balance sheet value, and, you know, this is the area where we believe we develop to a 40% margin on average. And so, this is, you know, simply put, if you’re building for a $300,000 door, you’re creating $400,000 to $420,000 of value.
And that margin is both profit margin, and it’s also safety in the event that there’s a correction, and you’re not losing money, you’re losing profit. I actually view development when executed well as incredibly defensive because you can control, and this margin protects you. This will be the fifth fund that Origin develops into. QOZ I obviously is one that Jimmy mentioned, but our second fund, Origin Fund II, Origin Fund III, IncomePlus Fund, Market Rate Fund, Growth Fund IV, we’re very active. I would say we’re one of the most active multi-family developers in the country, and certainly in these regions at this point. We have over 7,000 units in development.
The cash flow will start in year four. That’ll come through refinance, and then after that…and that’s the 20%, 25% seed. And then after that, that’s the 6% to 7%, and that’s from cash flow from operations. Of course, you have to hold for 10 years to get the full benefit. I can tell you in our funds, the investors have the option to either get out after 10 years or stay in. I’m a big investor in both QOZ I and QOZ II. I will be staying in because the money continues to accumulate for 15 more years tax-free. So, you can actually hold until 2046, and it still accumulates tax-free, which I believe is just an enormous benefit. I view it as you’re creating an IRA and letting it run.
This is an example of the deal, and Jimmy, let me know if I’m low on time here. I don’t typically do 15-minute things, but AVA Gainesville, it’s very indicative of the types of deals that we’re looking at. I can tell you in QOZ Fund II, I believe we have the best development site in the entire Southeast, which is our Nashville site. It’s the old Beaman Auto Dealership site in The Gulch. It’s a great example of how much these neighborhoods have changed since the census of 2010. And The Gulch is just a very, very different place. It’s not gentrifying, it’s one of the best areas in Nashville. AVA Gainesville is one of our build-to-rent deals. We’re doing many of these deals both in QOZ, but also in our Market Rate Funds Development Funds.
Build-for-rent, we love the demographics of this. Actually, I like them even better now because with the cost of housing going up through appreciation in the last two years, and now the mortgage rates have gone from three to five-and-a-half, it’s just not viable and affordable for people to buy. And so, this build-for-rent product gives people that experience without having to buy. And we believe this demand segment is gonna be growing quite rapidly.
These types of deals, if you really wanna get the highest returns, which you need to find, there are large land sites, because this is horizontal development, and you can’t build up, and so you’re not gonna get the same density. So you have to get large land sites at the right basis that importantly, are also close to downtowns. And so, you don’t wanna be in the middle of nowhere, and that’s what’s so interesting here. So, if you’re in East Atlanta, Origin is incredibly experienced in Atlanta. We’ve done over 2,500 units in Atlanta, not just development, but also value-add for…we recently sold a deal for Fund III that we built Phase 2 on in Virginia Highlands. This is just an extension of an awful lot of activity over the last 10 years, and we’re quite active, but this particular site is less than, you know, a two-minute drive from the downtown totally in the density, access to the retail that you want. We love the price. We’ve been working on this deal of the land, we’ve been working on it for over nine months. Importantly, the returns here are so high relative to the risk because we’re also close to securing $10 million of tax credits.
So, now, and we do this a lot, another example would be in Colorado Springs. We have deals in our first QOZ Fund and second QOZ Fund where we’re layering on the QOZ benefit with tax incentives from the city. And these are the types of unique opportunities that we try really hard to provide our investors, and an 18.9% base case IRR. But in our world, the way we underwrite, just to get in the weeds a little bit, we don’t trend rents during development. We drift our cap rates higher at 2% a year. We’re incredibly conservative. And so, for us to show you a 19%, I would tell you that that’s, in other firms’ underwriting, so much higher. And it’s just something to keep in mind when you’re looking at any fund’s projected returns, you need to get into the weeds of how they’re coming into their models, and now how they’re looking at the world. We tend to overdeliver, I would tell you.
This is our full QOZ II Fund pipeline. And what you’ll notice is I would focus mostly on the second estimated QOZ Fund II equity need. It mirrors the size of the fund. And what I’m trying to convey here is this fund is fully sourced. The deal that I told you about in Nashville that I think is the best deal in the Southeast, when I say that, I mean Market Rate or QOZ, just based on its location, demand drivers, rent growth, that’s a Fund II deal. That’s Edgehill Commons.
But I could go on and on, the point is we’re in equilibrium. We’ve been working on the sourcing for this fund for over, you know, 12, 18 months. These deals are all ready to start. We’re very close to ready to start. And so, there’s not gonna be a lag, and you’re benefiting from all that work. We’re not trying to grow, and put out money that isn’t the highest margin money because that’s how we stay top SL is we keep capital raising and deal sourcing at equilibrium. I think Origin provides a really good balance of we’re big enough, 45 people, 15 years of operating history, plenty of data for you to decide if you think we’re a good manager, but we’re not so big that we have to put out huge amounts of money. And I actually believe as funds grow, their returns come down because they actually become too big, and they’re not able to choose, and pick the best deals.
So, next steps then I’ll answer questions, please [email protected] If you like, I’ll give you my email, [email protected] I know it’s not customary for a co-CEO to do that, but the reality is, even though we have close to 3,000 investors, I wanna make myself accessible. And if I can’t answer the question, I will absolutely send you the team member who can. So, both of those are vital options, or wherever you are, I’ll go there as well. So, Jimmy, thank you. I’m open to any questions at this point. I see that there’s been a few. Jeff…
Jimmy: Well, thank you, David. Yeah, we do have a few questions, and we’ll see if we can get to a handful of those. Let’s do Jeff’s question first. That one came in first. By the way, if you do have any questions throughout the course of today’s event, you can use the Q&A tool in your Zoom toolbar to get those questions in front of us. Jeff asks, “Can you provide a real-world numbers example of what it looks like for my money as the investor? If I put $500k in and wanna cash out year 10 using your cash flow chart medians, and 18% IRR estimate, how much am I receiving along the way and lump sum on year 10?” So, I don’t know if you have an abacus that you need to pull out right now, David, to get that…
David: No, I can answer that question.
Jimmy: Do your best. Go ahead.
David: Yeah. Thank you, Jeff, for your question. I get these questions a lot, and it’s easy to answer. So, in terms of your $500,000 investment, I’m gonna answer it in terms of multiple. It’s much easier than IRR. So, if you invest $500,000, at the end of 10 years, our target multiple ranges anywhere from 2.2 to 2.8. We tend to outperform, but let’s just take the midpoint and say 2.5, your $500,000 will have grown to $1.25 million. And of course, $500,000 of that is return of capital. So, your profit will be $750,000 at that point. The nice part is you don’t pay taxes on that, so there’s the added benefit of that. But that’s true of any QOZ Deal or Fund.
In terms of when, because that’s your second question, that was the chart that I showed you and everyone else. In the sort of month-40-to-48 period, you’re gonna get 20% to 25% of your $500,000 back from refinance. And so, that’s, you know, roughly $100,000 at that point. Every year thereafter, you’re gonna get 6% to 7% on your money from cash flow from operations. And that equates on a $500,000 investment to $30,000 to $35,000. So, if you’re looking at year 6, 7, 8, 9, 10, you know, there’s an additional, I’ll just make it very simple, five years at $30,000…$150,000 return there. And then the rest, So, the bulk of what you’re gonna get back is obviously at the end when we sell the assets. And that should make sense because, you know, generally, you know, we’re keeping this at about 60 to 40 debt-to-equity. So, when you sell, you’re unlocking that equity and returning it to the investor. I hope that’s helpful. If it didn’t answer your question completely email me, [email protected], and we can absolutely go over this offline. Thank you.
Jimmy: Great. Great answer there. Jeff, hopefully, that answers your question. Otherwise, yeah, please do feel free to reach out to David or his team directly. David, we did get a request for you to turn your camera back on if you’re able to, but if not, we can hear you just fine. So, not totally urgent, but the next question here, we’ve got time for, I think, two or three more questions here before we close things up with this segment, this one comes from an anonymous attendee. He or she wants to know, “What is the status of the Seed Deals? Are they closed? Are they in diligence?”
David: I think my camera’s on.
Jimmy: It is, yes.
David: Yeah. So, the answer is it depends. So, there’s deals that we have under control, meaning we have the land site up, and have for over a year. That’s something I didn’t really mention, but you know, we have land site up and prices from, you know, mid-2020, early 2021, they’re deeply, deeply in the money. And this is another thing that you should ask any manager. So, if I bought a piece of land for $40 million and today it’s worth $80, am I marking it up? Because a lot of fund managers do, and we don’t. Everyone who enters this fund is getting an enormous edge on the land purchases because we’ve been working on these deals and tying them up so long ago. And so, that’s one benefit, but in terms of pre-development, we have certain deals that are breaking ground, AVA Gainesville, for example, that breaks ground next month horizontally, and a month after, vertically. So, that would be a deal that’s far along in pre-development.
But then, there’s other deals like Edgehill, Nashville, that’ll be like a Q1 or Q2 in 2023 groundbreaking. It’s a much more complicated deal because it’s urban infill and you’re having to deal with, you know, the city traffic patterns. It’s multiphase structured parking. So, that would be a deal that we’ve been in pre-development for, you know, well over a year. We tied up the land, you know, 12, 18 months ago. It’s up in value significantly, but it’s a complicated deal.
So, again, this is a great question, but I don’t have time to answer it, deal by deal. If you’re interested, email me at [email protected], and I’ll probably put you in touch with the regional action position and investment management teams who can take you through it.
Jimmy: Excellent. well, let’s move on to the next question here. Jerry asks, “On your build-to-rent projects, do the renters have a purchase option after 10 years? And if so, does any of their rent apply against such a purchase?”
David: Oh, thanks for the question. Good question. The short answer is no, we don’t do that. It’s a fine strategy, but remember, we don’t know how many of our investors are going to decide to stay in the fund, and have it grow over time tax-free. So, you wouldn’t wanna do things like that because it would actually impair your flexibility on the other side. So, that wouldn’t be something we would do.
Jimmy: Yeah, good point there. We got time for one more question, and then we’ll move along to the next segment. Final question coming in is, “How does Origin decide which deals go into your Growth Fund versus your Qualified Opportunity Zone Fund?”
David: Yeah, that’s a good question too. Any deal that falls within the QOZ maps goes into the QOZ Fund. The opportunity set in QOZ in my opinion, is quite small, the way we view the world, right? So, when we’re looking at the cities we’re in, we’re in 11 cities, and we’re only in approved submarkets within those cities, and then you have to overlay the QOZ map within those approved submarkets, it gets pretty small. And so, then on top of that, we have to buy at the same price that’s economically viable. So, anything that’s in QOZ maps that meets our criteria, goes into our QOZ Funds, full stop.
Jimmy: Perfect. It’s as easy as that. Well, thank you, David, for appearing here with us today, and presenting Origin Investments QOZ Fund II. I’ll have to let Michael know you did a great job. It’s always great to meet more of the Origin Investments team. Thank you so much for your time today, David. Appreciate it.
David: Well, thanks for the invite, Jimmy. I appreciate it, and have a good day.
Jimmy: All right, thank you, you too.