In this webinar, James Holleman highlights the Link Apartment Opportunity Zones REIT and its focus on providing “essential housing” to younger generations of Americans.

Webinar Highlights

• An overview of the Grubb portfolio, spread across 8 markets and 19 different properties;
• Grubb’s history as an early adopter of the OZ program;
• Reasons why Grubb chose to pursue the REIT structure for its OZ fund, including simplicity and flexibility for selling properties;
• Grubb’s focus on maximizing “back end” tax free growth;
• Grubb’s history as a vertically integrated real estate development company, differentiating them from allocators;
• The focus on multifamily housing at a moderate price point in urban locations;
• Overview of the “essential housing” strategy geared towards serving moderate income earners among millennials and Gen Z;
• Grubb’s innovative site acquisition strategies, including acquisition of properties with a significant office component and expertise in navigating the entitlement process;
• How demographics in the U.S. are driving demand for rental properties;
• A bifurcated strategy that focuses on properties in the Southeast U.S. as well as properties in Tier 1 markets acquired at attractive prices and with significant tax incentives;
• 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 Apartments brand. Since 2018, they have raised over $200 million for investment in Opportunity Zones.

Learn More About Grubb Properties

• Visit GrubbProperties.com

Webinar Transcript

Jimmy: Now, without further ado, I gotta bring James Holleman on stage here. I’m gonna promote James to panelist now. And he’s gonna be presenting the Grubb Properties Link Apartments OZ REIT. They have total assets under management exceeding $350 million now, I believe, and they have more than a dozen properties all over the nation. James is coming online now for our first presentation of the day from Grubb Properties.

James: Awesome to be the first presentation for your Pitch Day and to be back with you again. You know, it’s been, you know, maybe six months since we presented to the group, but some of you may be familiar with Grubb Properties and our Link Apartments Opportunity Zone REIT. You know, this is a very dynamic portfolio that I’m excited to introduce to you today.

So to get it flowing, you know, just as a highlight, our fund now has raised north of $400 million of equity inside the fund. It is a 19-property portfolio strategically placed, you know, across the nation in 8 diversified markets. And the portfolio value right now rests right at $1.7 billion of assets. And so we’re super excited that our Link Apartment strategy fit like a glove into the opportunity zones space. We’ll go more into that during the presentation, you know. But as a highlight, you know, we’ve been in opportunity zones since the program’s rollout. We’ve had 3 successful fund offerings in our 2019, 2020, and 2021 Qualified Opportunity Funds that we’ve now merged into our Link OZ REIT, which you see today, that we’ll stay in market until the end of 2023.

So we provide 100% capital calls, access to accredited investors at $100,000 minimums into this vehicle. And it’s a private REIT structure, you know, which we find to be a super efficient way to address this tax incentive. And we’ll talk about some of the reasons why. So, at a very high level, you know, the private REIT is a turnkey solution to addressing opportunity zone funds. Rather than generating multiple state-level K-1s, we generate a clean 1099-DIV only in years that taxable distributions are made from the fund. You know, this is super important when you consider state conformity within a commingled fund offering. Some states, you know, do not recognize the federal opportunity zone benefit, you know, but as a REIT structure, we can invest in those states. And the only state that you really have to be concerned about for a tax reporting standpoint is the one in which you reside.

The private REIT also allows us to remain very flexible within our investment approach. If we run into a scenario in which we want to sell an asset before the 10-year mark, we can do so, retain that transaction inside of our fund vehicle, and recycle proceeds back into the fund to amplify that back-end total return. For a very high level, what we’re focused on within our strategy is maximizing that back-end tax-free growth for you and reducing taxable income throughout the fund’s life. The private REIT allows us to do that. It also allows you a very efficient entry into the vehicle and tax management thereafter.

Let’s talk about Grubb Properties. We’re a 59-year-old vertically integrated real estate development company. Our current CEO took the reins in 2002 from his father, and since then, has deployed over $2 billion of real estate, and has produced a very robust track record. Our weighted average property-level internal rate of return gross to investors is 35% with a 2.5x multiple on invested capital. So we have a focus on multifamily housing, specifically at a moderate price point within, you know, urban environments nationally. And we’ll talk about that as we move forward. But very important to understand that we’re vertically integrated real estate developers that are also fund managers. And so unlike allocator funds who are investing in development deals, we control those deals, we actually do the property management after those deals, and you’re rewarded by not paying those middleman fees and investing directly with the real estate specialist.

When you look at Grubb Properties, you know, our first project that we built through our current strategy called Link Apartments, goes back to 2012. This is when we really started focusing on that moderately priced approach, serving the missing middle for much-needed rental supply. And I think it’s really important to note that the project that we developed in 2012, we still own today. And today, it sits in an opportunity zone in the Manchester neighborhood of Richmond, Virginia. Why that’s important is because we had no deviation of strategy to approach opportunity zones. It fit very naturally from a geographic standpoint, navigating in that path of growth environment that you find many opportunity zones located in urban areas. But also from a hold perspective, we were long-term holders of our assets and not merchant traders prior to the legislation, and even within our flagship fund offerings that we’re in market with today. Right?

So, we’re not looking to acquire, you know, an existing asset, cut cost, and then flip it a couple years down the road. We’re looking to develop new supply of much-needed moderately priced multifamily housing and drive top-line revenue growth into those projects over time for an extended duration. And when you look at our year-over-year NOI growth, as compared to the basic private real estate, our public real estate benchmark, the NAREIT, we crush it. Our NOI growth is 44.1% better than the NAREIT’s going back to 2013. And that’s a reflection of our vertical integration and our ability to drive value into our projects long term creating alpha in this asset class. So, this is not a beta play. We really value creators with our product and you can expect alpha as an outcome.

And you can see a quick map here of where we’re strategically located across the United States in regards to our headquarters in Charlotte, North Carolina, but offices and gateway markets across the nation, and then investments, you know, across the nation as well.

So our investment strategy is focused on essential housing. What is essential housing? It’s not necessarily workforce housing, but rather housing geared towards serving millennials and Gen Zers who have not quite graduated to forming a family and to homeownership. These are moderate-income earners that we focus on that are renters by necessity, not by choice, right? And so our target is to focus our rents on an affordable level to those that represent the 60% to 140% area median income. And we place this project in urban transit-oriented environments that are close to major job centers like universities, medical centers, and other urban district job centers.

And with Link Apartments, this graph, kind of, helps display the potential tenant base that we address through this moderately priced lens. So with Link Apartments, again, we’re focused on 60% to 140% AMI, right? And just a region like Charlotte is gonna represent households that make right above $40,000 to just under $100,000. This is a giant pool of potential tenants that we approach with this product, dwarfing the AMI ranges above that represent more luxury product. And unfortunately, over the past 10 to 20 years, most new development in urban environments have been geared towards serving those that represent the 140% AMI or above.

I like to say Link Apartments is a fit for the nurse, not the doctor. And there are a lot more nurses in these markets than there are doctors. And when you can create a Class A amenitized product in that live-work-play environment at a price point that undercuts our luxury competition sometimes by hundreds of dollars a month, we create insatiable demand with our product. And so it’s a value-oriented strategy. You’ve heard me reiterate that. We’re really focused on lowering upfront capital cost, creating non-tenant revenue streams, and reducing tenant operating expenses.

And we do that through a variety of creative methods that we’ve learned over the years, but a few of those methods are things like innovative site acquisition. And you’ll see this within our 19 property portfolio. We’ll at times acquire a value-add office that is positioned on a large surface parking lot with an infill opportunity in mind. We’ll uplift that office, we’ll lease it out. We’ll make sure it’s a good investment in itself. But as we’re doing that, get the entitlement rights to rezone the property, destroy the large surface parking lot, build a parking deck, shared parking element, and wrap that with our Link Apartment units. And when we can get our site acquisition through that strategy, we essentially are paying no land costs for the multifamily development because we win it through the entitlement process, instantly creating value for our investors and undercutting our competition sometimes building right across the street.

So the product strategy with Link Apartments is centered around creativity and efficiency, right? Intelligent design is all about maximizing space. I like to say this is a lean type of methodology. We’re the Toyota of multifamily housing. And where most multifamily houses will have upwards of 30 to 40 different unit floor types, we have 6. And these six-unit floor plans are replicated with efficiency and used like Lego blocks as we develop a site. We maximize our space, drive up what we can take in per square foot, but reduce what we’re charging our tenants per month, right? And so these are well-amenitized units. They’re Class A buildings. But we’re not trying to win the amenity race, we’re really just trying to serve those base core amenities that 90% of our tenants are gonna use and enjoy. So good pools, good cycle centers, dog centers, gyms, things of that nature. Not golf simulators, and theater rooms, and things of that nature that maybe 5% to 10% of the units use, but everyone pays for. It’s all about finding those special ways to maximize space, cut unneeded cost, and deliver a moderately priced product that has that luxury value.

And so this is just a quick snip of our Link Apartment portfolio. You can just see completed, you know, buildings across the southeastern United States, you know, but now also bridging into gateway Tier 1 markets such as the Bay Area, Los Angeles, New York, and D.C. And so the market opportunity for multifamily housing has never been more present. You know, we see peak births in the United States happening in 2007, which essentially gives us more 15-year-olds today than 30-year-olds. And so the need for housing, especially in these urban transit-oriented environments, is not gonna slow down. You know, these kids that were born in 2007 are gonna graduate from college and continue entering the workforce into the mid-2030s, creating a rising demand at a time in which we’re not keeping pace with the demand and supply.

And this also comes at a time to where the average cost of a rental home right now, an apartment, in the United States is over $1,700 a month, right? And this comes at a time where 67% of millennials and Gen-Zers make less than 65 grand a year. So what’s their solution? They can’t afford the luxury product. they surely can’t afford to buy a single-family home which now averages at $467,000 nationally, right? This moderate-income product, that renter by necessity, you know, demographic is underserved greatly. It’s referred to as the missing middle, right? But that creates insatiable demand for developers that can get creative and add product that fits their economic needs.

And we see here, you know, just taking a range, we haven’t kept up with the supply needs for housing in the United States since 2006, right? It’s been 50-plus years since we’ve built enough housing to account for the needed supply in these marketplaces. And what that has produced is an almost 4 million units shortfall in the United States today. And most of these urban markets, you can’t build enough of this product, right? But it’s all about cost. And, you know, costs are, you know, increasing. Inflation in our environment has tamed somewhat, but rates are going up, right? So in relation to that, you see rents increasing and luxury product getting ever more expensive, which honestly just creates more opportunity for us as people are looking to save cost and move down market.

And so our portfolio has a bifurcated strategy that focuses on the growth opportunity that we’ve seen in the southeast, but also tier one market dislocation that was produced by COVID, right? And so our 2019 portfolio is full of southeastern opportunities that have done exceptionally well. Some of those are starting to come online now and deliver units to where our 2020 and 2021 vintage projects are mostly centered in gateway Tier 1 markets due to the price discount and tax incentives that we were able to obtain by getting greedy when others were fearful.

So in March 2020, not only did you see people start to migrate out of markets like the Bay, New York, L.A., you saw capital leave those markets. And that really drove down the, you know, per square foot unit cost of multifamily housing to a point in which we tied up tremendous opportunities in these markets. And I’ll go over a few with you here. But these charts basically just outline some of the market activity that we saw in Tier 1 markets and southeastern growth markets over the past, you know, two, three years, right? And so just a tremendous buying opportunity in Tier 1 markets that did not last long at all. All of those markets have now risen past their pre-pandemic rent rates, but we were tying up assets all the way down into the tranche of the downturn that these markets experienced.

And so let’s take a look at the portfolio. Again, this is a 19-property portfolio. 16 of our 19 assets are Link Apartment development sites all through that one internal brand. And three of the assets are commercial office deals of which we acquired with the intent of building multifamily on-site. And so the first project that we executed was in Winston-Salem, North Carolina. I’ll highlight it because I think that it really displays how we look at debt. And that’s a topic of concern today in a rising rate environment. This apartment in Winston-Salem, North Carolina, has secured a HUD 221(d)(4) loan at 3.99% that’s fixed for 42 years. This is also a fully assumable loan product that accretes value into the portfolio as interest rates increase.

And so when we look to disposition this asset down the road, the acquirer of the asset will pay a sum arbitrage in assuming our interest rate at 3.99% compared to what they can get in the open market at that time. Who knows what it will be? And so this is an asset that, you know, is in a growth market in Winston-Salem, that’s very well supported by Wake Forest University and their medical campus. There’s a large healthcare innovation park that’s located near this site. And we’re very bullish on our lease-up activity as we start to lease out units in this building.

Our next site’s on H Street in Washington, D.C., a great gateway opportunity. I won’t spend too much time on all these assets but do wanna give you a brief look. We also have Solana, our Los Angeles property in the East Hollywood market. This is another interesting site called Link Rosemary. It’s in Chapel Hill, North Carolina, and was actually…it sits adjacent from the University of North Carolina at Chapel Hill. It actually shares a street with the Quad at UNC. So, you know, very fortunate to have this in our portfolio. But we acquired the ability to build this multifamily site through an office acquisition that we’re turning into essentially wet lab space for, you know, businesses, healthcare service, and biotech businesses launching out of the local university. So great cost basis at zero for the land and serving a community that historically has an extremely high barrier to entry to build new multifamily housing. And so this should have insatiable demand. It’s a pitching wedge into UNC.

Right here, we’ve got another asset, Link Apartments NoHo, which is actually near the Netflix headquarters and Kaiser Permanente’s hospital system in the North Hollywood market of Los Angeles. This is Link Apartments Fitz, which is adjacent from Fitzsimmons Medical Center located in Aurora, Colorado, just down the street from Denver. This is a site in which…you know, Fitzsimons Medical Center is four hospital systems in an innovation campus on one site that once it’s fully built out, will host, you know, 50,000 jobs. We’re positioned adjacent from the entrance and building over 400 units on this site. Very bullish on our list of activity, and we’ll start to deliver units here next year.

Link Apartments NoDa is in a booming area of Charlotte, North Carolina, that just received a light rail expansion leading from our major CBD, our downtown market, to the University of North Carolina at Charlotte, North Carolina’s largest public university. NoDa is millennial Mecca. And this site is right on the train stop, good transit-oriented environment, good job center. A lot of fun to be had in that area, you know, for Gen-Zers and millennials, again, our target resident. So very excited for what we’re doing there in the NoDa market within Charlotte, North Carolina.

This is a really interesting asset, it sits in Long Island City on the Queens Plaza train station. This is one of those assets that we really put together in the teeth of COVID which came with great, you know, discounts to pre-pandemic pricing. But also, we were able to secure the 421-a Affordable New York Tax Incentive on this asset, which is a 35-year partial property tax abatement, and which if you do a net present value on that, equates to about $66 million or more than the land cost. And so, basically, you’re getting free land in New York over time to build this asset and putting new product in an area which won’t be delivering a lot of new product over the next three or four years. So, very excited about this. We’re actually putting a handicap-accessible elevator entrance into the Queens Plaza train station, which is allowing us to actually add extra density. So, excited here. A certain, you know, tick of our units actually qualify for affordable housing thresholds in this market as well.

Like Apartments Kora and Korella is a multi-phased project in Koreatown, Los Angeles. I am very happy to say that we just secured Target as a ground floor tenant with a 49.5000 square foot retail lease. And so this is an area which is, you know, center of Koreatown a very happening market in Los Angeles, but historically has been very fragmented in regards to its retail and grocer options. This will be an amazing ground-floor amenity for our tenants living above it. Link Apartments Hempstead is another project that we’ve tied up in New York. We have a project in Jack London Square in Oakland. Got another Link Apartments Vine in the Hollywood market. And then another project in Charlotte, North Carolina. And then, of course, our commercial assets.

Just real quick, the terms on the fund. Very reasonable. We charge a 1.2% asset management fee that actually gets cut in half to 0.6 when your deferred tax obligations come due. We have an 18% carried interest over an 8% preferred return. And you’re welcome to invest into our product at $100,000 minimums. I know it says $250,000 here. For OppDb participants, you’re welcome to invest at $100,000. Jimmy, am I running out of time?

Jimmy: We are out of time, unfortunately. But I wanted to get to a couple of questions for you and then Chris Loeffler is waiting in the wings. He’ll be presenting Caliber in just a moment here. Chris, we’re gonna get to you in just a minute. James got started a little bit late so we’re a couple minutes behind, but that’s all right. James, how do folks get in touch with you if they wanna learn more, request subscription docs,
and maybe write you guys a check?

James: Yeah. Please feel free to reach out to me directly. You can see our information here on the final page. You’re welcome to email. Our information is also on our website, grubbproperties.com. We host monthly closings for our offering calling in 100% of capital into each close. And again, we’re open through the end of next year. So if you have future gains in mind, you know, we’re positioning ourselves well to take advantage of the passing of the OZ Reform Act. So extremely excited about that. You know, and this $400 billion portfolio, we’ll take to the moon after that passes. I think that we’ll finish up around $750 million and put a couple of more great projects in this fund before it’s over.

Jimmy: Yeah. Fingers crossed that that legislation goes through. Just a couple of questions real quick here. Scott asks, “Do you only work with OZ clients, James, or do you also work with those wanting to do a 1031 exchange?”

James: Yeah, we opportunistically work with partners in a variety of ways. You know, we’re not marketing, you know, 1031 exchange opportunities, but are happy to talk to you about that. If it works out with us, we’d love to work with you, but we’re happy to refer you to other partners as well if it’s more fitting.

Jimmy: And then a couple questions about the asset management fee. Why are you dropping that to 60 basis points in, what was it, 27?

James: Yeah, the hard work is done at that point, you know.

Jimmy: And is it for all years after 27, was one question.

James: Yeah. We’re very reasonable with our fee for the OZ fund because it’s a private REIT. And we essentially on the top give all investors a break point compared to our normal fee schedule which is 1.5. The hard work is over once we stabilize as a developer. You know, if you’re working with a fund manager whose fees go up after stabilization, I would question that, you know. I think that that’s something to definitely poke a hole in. You know, for us, we’re just looking to be as fee-friendly as possible and have that alignment with our investors.

Jimmy: Fantastic. Well, James, appreciate you being here with us today. We didn’t get to all of the questions. But if you do have questions for James, please reach out. His phone number is on the screen there. His email address, [email protected]. I’ll post both of those in the chat here in just a moment. James, thank you so much. Appreciate your time today.

James: Always a pleasure, sir. Thank you for having us.