In this webinar, the team from Pinnacle Partners discusses their strategy for developing multifamily projects in promising U.S. markets.

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Webinar Highlights

• How Pinnacle Partners differentiates its fund, and its structure;
• Pinnacle’s history as an OZ fund manager, aggregating hundreds of millions of capital gains equity;
• Pinnacle’s status as a fully identified and “curated” OZ fund;
• Overview of Pinnacle’s LP and Advisory Boards, a unique feature among OZ funds;
• Comments from a member of Pinnacle’s LP Advisory Board, and why he invested in this fund;
• Input from Pinnacle’s GP Advisory Board representative, including Mollie’s thoughts on the case for multifamily;
• Review of the four multifamily assets in Pinnacle Partners Fund VIII;
• Live Q&A with webinar attendees.

Industry Spotlight: Pinnacle Partners

Pinnacle Partners is an early mover and leader in Opportunity Zone (OZ) real estate investing. The firm and its subsidiaries have invested more than $180 Million of equity across 12 projects that consist of approximately 2,000 multifamily units, and two historic adaptive re-use office buildings. Pinnacle seeks best-in-class development partners in target markets across the U.S. with track records of delivering and operating successful projects.

Learn More About Pinnacle Partners

• Visit PinnacleOZ.com

Webinar Transcript

Jimmy: Pinnacle, really excited to have them here. They presented with OpportunityDb a number of times before I’ve had Jeff and Jill on my podcast and we’ve done webinars together, but this is their first OZ Pitch Day that they are presenting on. And they’ve developed a curated Opportunity Zone fund of four multifamily deals. The last time that they presented to the OpportunityDb audience, they didn’t have all the deals identified yet, but now they do, all four deals have been identified. And Pinnacle Partners, Jeff told me yesterday, he believes that these deals are located in the top four Opportunity Zone markets in the country. Jeff Feinstein is the managing partner at Pinnacle Partners, and he’s gonna be leading the presentation today. You’re also gonna hear from Chris Cheng, Mollie Fadule, and Jill Homan. But, Jeff, it’s great to see you. I see your presentation on the screen, so please take it away.

Jeff: Well, thank you, Jimmy. We’re really excited to be here. We come full force here, four of us together. We are representing Pinnacle Partners. Some of our partners have joined us in a supportive way, and I’ll describe that in a moment. We’re hoping to be highly differentiated amongst your group of presenters today, one, with our fund, Pinnacle Partners Fund VIII, and we’ll describe that in detail. Two, we want to also introduce you to several of our key stakeholders and how they represent how uniquely structured we are as a fund, and then get into the project details with my partner Jill Homan near the conclusion of this presentation.

So very, very quickly, first of all, Pinnacle has been an early mover in the Opportunity Zone legislation capitalizing our first project in 2018, and thereafter 13 other projects representing close to a billion dollars of project costs, capitalize. And we’ve aggregated over $200 million of capital gains from a great many investors, and so we have a proven capability to source high-quality projects, execute on those projects. Our underwriting is generally quite conservative, in our opinion, and we think we have coming forward with Pinnacle Partners Fund VIII, the most competitive set of terms associated with an Opportunity Zone fund, a fully identified fund of four. So not 24 projects or 14 projects, but four projects we think we can execute and manage quite effectively.

And we use the term curated because we micro-focused to obtain access to critical markets we believe have significant secular trends in growth and economics. Those cities specifically are Denver, Austin, Nashville, and Phoenix. So, we have an identified fund, not a blind fund, and we have already deployed capital in multiple projects. And we believe that we’ve structured this fund uniquely. And that is, first, if I may, and it’s a segue to introduce our other presenters, the concept of an LP advisory board, so let me describe this, within the fund, and the terms are very competitive, the curated portfolio, which we’ll reveal here at the conclusion, we also have an LP advisory board. So, for large investors, they represent the body of investors, all investors as a proxy to make major decisions and have certain voting rights on investor-related items. So, although, you know, we’re advising as managers in certain circumstances out of our hands and into the hands of the investor. And Dr. Christopher Cheng, who I’ll introduce in a moment, represents one of the members of that LP advisory board.

The other board that we constructed when we sought to launch this fund is a GP advisory board. So we sought experts in a variety of categories from property management to development and construction to advise us on sourcing techniques and underwriting techniques and expand the ecosystem of potential partners. And Mollie represents one of our GP advisory board members. So I hope, Jimmy, we’re doing something differently that we’re bringing, one, an investor to this presentation, and, two, somebody quite expert in real estate as you will soon learn to comment and opine on both Pinnacle and the macro-environment, be it OZ, or more specifically multifamily investing.

So, first, I want to introduce Dr. Christopher Cheng, Ph.D. from Stanford in biomechanics, built a career in medical devices, also an entrepreneur in aerospace, but had a significant liquidity event, and then he went through the journey of evaluating alternative investments and chose Opportunity Zones as one of several investments he’s made. And then I’d like very shortly to introduce to you Mollie Fadule. Mollie has been party to over $10 billion of real estate transactions. She’s currently the chief investment officer and chief financial officer of JPI, a very large multifamily developer, I think it’s a gesture over 100,000 units. So, Mollie represents and can give us kind of spot analysis on the market real time as she’s in the market each and every day investing on behalf of institutions, and she provides us counsel on an ongoing basis. So, what we wanted to do today, again, we’ll get to the fund and describe it, but, first, Chris, if I may ask you to talk about your journey towards OZ investing, and then maybe your involvement with Pinnacle.

Chris: Yeah, thank you, Jeff. So yeah, thanks for giving us time here. So, I’m an outsider on this call here because I’m not a real estate expert at all, but I just wanted to say a couple words about why I think Pinnacle Partners was a good choice for me. So, we had a liquidity event a couple years ago and it made sense for my family to diversify in our assets. And so when I looked at things, you know, I remember, two years ago, it’s a long time ago, but, you know, there was nowhere near the market volatility there is right now. But even at the time, I thought that, you know, it was a good idea to get some real assets rather than things that are just based on, you know, equities of companies. And it turned out that that decision…I’m just so thankful for it because now with the market volatility, having real assets, having things that are shielded a little bit from recession, and also inflation are really, really important. And, you know, particularly for, you know, developing products for the rental market, I think, it’s really nice because that’s also shielded from the owned housing market.

And, you know, one other differentiator here, and I looked at a lot of different OZ funds from east coast to west coast, is that I do kind of echo what Jeff said. I believe that they are relatively conservative for their underwriting. I’ve seen a lot of OZ funds, and whether it’s single property or multiple properties, where they use much more leverage. And using much more leverage, and, you know, in a highly volatile and high-interest environment, you know, it starts to get sometimes a little scary. And they also differentiate that then they have this LP advisory board, so I get a chance to learn a little bit about real estate and OZ and learn from the experts, which has been really, really educational and fun for me. Should I add anything else, Jeff?

Jeff: No, I think it’s fantastic. Thank you, Chris.

Chris: Yeah.

Jeff: So, as a member of the advisory board, and, again, there’s an odd number of members, those that write substantially large investments, participate in the ongoing review of the portfolio, join together with the GP advisory board on quarterly meetings, and then will retain certain voting rights on major decisions as they’re brought to the board. And then the other board, as I mentioned, is the GP advisory board. So our partners, Jill Homan, and Leo Backer, we lean on this board each and every day to get guidance on the debt markets and underwriting and Mollie is a representative of that board. By the way, they join us and they’re compensated through carried interest just like we are, and so there’s alignment each step of the way. So, Mollie, maybe you could just take a moment and just introduce yourself and your background briefly. And then I think everyone’s kind of wondering, you know, why multifamily at this time in the economic cycle and maybe, you know, some of the work we’ve done together with Pinnacle Partners and you as our GP advisor.

Mollie: Yeah, great, I’d be happy to share. So, a little bit of background on me, I spent all of my career in real estate, I started out in investment banking in New York, and then switched over to the private equity side. So I’ve been opportunistically investing in real estate most of my entire career. I’m currently the CFO and CIO, so chief investment officer of JPI. We are a multifamily developer based in Dallas, Texas, about a 32-year-old company.

Through the life of the company, we’ve developed, as Jeff mentioned, over 100,000 units in the multifamily space, which is probably over 15 trillion of real estate. We’ve got 7,000 units under construction currently, so I have a really good pulse on what’s going on in the capital markets, what’s happening on the demand and supply side in a number of markets, you know, as well as what is the latest in terms of structuring construction agreements or development agreements, and so I have insight in that space.

I also serve on the board of a public homebuilder, which allows me to understand the dynamics of what’s going on in the overall housing space. You know, there’s a dynamic of shifting between single family homeowners and renters, and it’s really interesting to have the perspective of a public homebuilder to apply to the knowledge that I’m building on the multifamily side as we continue to expand our business.

I focus on all income levels of housing from actually as far down as homelessness sheltering, I’m on the board of a company that manufactures homeless shelters, all the way through to affordable housing, workforce housing, and then traditional market rate housing. So that’s kind of the background and expertise that I bring to the Pinnacle team. You know, for me, joining the team has been valuable, because I’m able to bring the skill set and knowledge that I have to a high caliber team that has knowledge that I don’t have about Opportunity Zones and tax structuring.

The board is composed of a very diverse group of individuals with different skill sets, and so we all bring something different to the table. And for me, it allows me to be strategically thinking about the fund and the opportunities that the fund is seeing and bringing the skill set that I have, but also hearing from other professionals about the specific skill sets that they have. So I think it creates a really unique and fun dynamic, and it’s been great to be a part of.

In terms of the involvement that we have as members of the GP advisory board, it’s really related to strategic input around, you know, market targeting or specific partners or structures around deals with development partners, even down to a project level and underwriting assumptions. And so, you know, we discuss where are our cap rates? Where are our interest rates? What do we think’s still happening with rent growth in certain markets? And so we spend a lot of time really digging into the details on all of the deals and bringing all the views and skill sets that we all have to really ensure that the team is underwriting with rigorous standards and, as Jeff mentioned, conservative assumptions to provide for long-term risk adjusted returns that are attractive for the investors. I know, Jeff, you asked me to share a little bit about the market. I’m happy to do that.

Jeff: Yeah, I think that’s the capstone, if you would, please.

Mollie: Yeah, sure. So, being multifamily developer, you know, we take a long-term view on the sector and what’s happening, I think you’ve seen significant growth in investor interest and multifamily in this cycle, and we still think that the long-term view on multifamily is very attractive. If you look at the supply, demand dynamics of housing in our country, there’s a housing shortfall as we hear on top of most political agendas is housing and housing issues. We do have that shortage of housing, and that’s being exacerbated currently by the capital markets environment.

We’ve seen a slowdown in multifamily development starts due to the cost of capital, and we’ve seen a significant drop off on single-family home stars due to the cost of mortgages. Now, we believe that that’s a short-term impact, but it creates better long-term fundamentals for the space. So, when we look at our horizon of investment is really between four and six years, we feel very strongly that this is a sector that we’re very excited to be a leader in. And we think that there’s still significant renter demand across a number of the markets. We’ve seen unprecedented rent growth coming out of COVID and the highest occupancies we’ve seen.

Now, we’re coming off of that a little bit with what’s going on in the economy, but we still see very strong growth, and we expect to continue to be developing at the volume that we are. We started about a billion and a half of multifamily this year, and we don’t expect to be much off of that next year. And so our view is that the long-term fundamentals of this business are very good.

There is some capital on the sidelines, kind of waiting to see what happens with the capital markets environment. But if you look at the forward curve and where rates are projected to go, we expect that rates will start to come down by the end of this year, and we think buyer activity will resume from where it is today. It slowed down from kind of all time peak pricing and activity earlier in the cycle.

But we we feel really strongly that we’ve got great opportunities in the multifamily space. We’re underwriting too about historical margins on returns, whereas we were at outsized margins over the last few years. But we think returns are very strong, and we’re seeing a significant amount of opportunity. And we’re also now able to be a little bit more opportunistic and looking at opportunities as capital markets have gotten more expensive, some smaller developers have not been able to secure capital and land sellers have come down off some pretty high expectations. So we’re really excited about the coming year and years ahead for the multifamily sector.

Jeff: Fantastic. Thank you, Mollie. And we’re really grateful to be partners with you and partners with Chris, and we have access to this expertise each and every day. And I think once again, we are uniquely positioned with one of the most competitive Opportunity Zone funds. And again, it was intended to be quite boutique, curated portfolio that we could execute against maybe over-perform and access some of the most attractive markets in the United States. So, again, thank you to you Mollie and Chris.

And what we want to do now is move on to Pinnacle Partners Fund VIII and project review. Jill Homan works closely with Mollie and the rest of the team each and every day to source these projects. Her and the team have accomplished that, and we’re revealing I think broadly for the first time each of the four projects.

Jimmy: And, Jeff, I just want to break in for a moment just to kind of commend you on this format. I love hearing the different perspectives from your different investors here. Mollie, Chris, thanks for being with us here today, and looking forward to hearing from Jill. Jill is the managing director of Pinnacle Partners OZ Fund VIII, and she co-heads developer partnerships, leads real estate due diligence and serves on the investment committee.

Jill, I’m gonna turn it over to you in a second. But I just wanna tell everybody I met you way back in 2019, which was really early days for Opportunity Zones, and you were one of my first podcast guests on the “Opportunity Zones Podcast.” You have tremendous amount of expertise and experience in real estate investing in the Opportunity Zone structure. So just wanted to chime in there with that. We’ve got about 10 or 15 minutes left, maybe we can save some time for some Q&A. But, Jill, please take it away. Let’s dive into these four projects.

Jill: Great. And thanks, Jimmy, and good to see you again, and it’s wonderful to see you grow your platform as well. So, excited to be here to talk about our four projects. And the project that we’re looking at here is our project in Denver. We have a rendering hot off the presses, so we just are, you know, right now, rendering some exterior, we’re finishing up some interior design. But just to cover high level, and before I even get to that, just wanted to mention that, you know, as we think about investments, really what we focused on, I would say is really three characteristics, the first of which is the location, and not only the location in terms of Denver, job growth in Denver, but also the particular sub-market and the particular location within the sub-market.

And so on that point is this multifamily project, it’s 200 units, it actually sits right on the river path that runs along the river in Denver, and it’s proximate to the tens of thousands of students that go to the universities in Denver. So it’s walkable to all of those university campuses. It’s less than two miles to downtown and it’s in the stadium district. And so this is, you know, just a couple minute walk to the stadium. So, you know, to give you a vibe of what’s in the neighborhood, you have people that are riding their bikes right along the path, people can walk to breweries, there’s a co-working space nearby. So we’re really excited about this project.

Our developer partner on this project is a group called Mortenson Development. So they are a national development and a national construction company, highly, highly capable firm. This project is actually a podium project, so we have seven stories sitting on top of about a story and a half of parking. And so with each of our projects, we are solving for net returns to our investors over 10% on IRR basis and a 2x equity multiple. Our leverage is between 55% and 60%. And so with this project, we’re working on closing a construction loan as we speak with 60% leverage, and we’re really thrilled about this opportunity. And so any other comments you think, Jeff, or should we skip over to the…

Jeff: We’ll save that for the Q&A.

Jill: Okay, perfect. So, let’s go over… So, this project, Nashville is actually a wrap product, and it also sits in the stadium district in Nashville. And so this project is less than a 10-minute walk to Oracle’s new campus. So they have a new 65-acre campus with over 10,000 jobs and so completely walkable to that location. And this is also proximate to the brand new Titan Stadium that you all may have read about. So there’ll be a new billion-dollar-plus…not sure what stadiums cost these days, but plus, plus new Titan Stadium. And so this project will be walkable to the Titan Stadium as well.

This project is more than 300 units with parking. And our partner there is Stillwater Capital. Stillwater is based out of Dallas, and they’re a regional development company, and we’ve actually been looking at and talking with for some time, and so I’m really excited with them as our partner for this project.

Okay, our project in Austin, we have…this project is located in McKinney Falls, so it is less than 15 minutes also to Oracle’s campus, and it’s also proximate to the Austin airport. And so I’m not sure if you all have heard, but Austin is undergoing another major expansion of the airport because of all the tremendous job growth. So this is near the Tesla expansion and it’s near the Oracle campus. And so it’s just really benefiting from all of the expansion.

It has great ingress and egress in terms of access to Highway 35. And then also, this project, I would consider it maybe affordable luxury, affordable with a lowercase A in that this is really a walkup garden style product. So it’ll fully amenitized, but we’re really looking at rents that are, you know, $2 or in that range. So, you know, it’s at a different price point but it really benefits from all of the job growth in this awesome market. And so this property is 342 units, surface park. We’ll have some detached garages for folks to rent as well. And our partner on this is also a Texas-based development company and a regional development company as well.

And we’ll get into our Phoenix. And so as you may have heard, or some of you all may have heard about the build-to-rent segment. And so this is a build-to-rent project, 144 units of duplex and single-family homes. Our partner there is a group called Trilogy. So they are based out of Atlanta, and they’re a national development company and they’ve been growing their built-to-rent platform as well.

And so with this project, interestingly, it’s an infill project and part of a masterplan community that is starting construction as well. And so we’re very proximate to retail amenities, in fact, walkable to retail amenities. And so it’s in a corridor called Avondale, which is actually a suburb of Phoenix, and it has high barriers to entry. So we’re excited about, you know, those high barriers to entry, making it more difficult for developers to get approvals. And so that’s the project in Phoenix.

I think it’s worthwhile to note that our two projects that we’ve formalized all of our documents and gone through diligence, those are projects in Denver and in Nashville. We’re working our way through diligence in our projects in Phoenix and in Austin. And so, you know, we’re optimistic on getting through that process. We do diligence on all of our projects from looking at the developers environmental reports, we run our own real estate tax analysis, so we contract with third party firm to do real estate tax analysis through the course of, you know, the whole period and the development period.

And then we also contract with an expert construction manager to review the work that our development partner has done to date. And then our construction manager serves as our owner rep on the project throughout the life of the project. So, that’s really the process that we run with each of our projects and could mention that we did have a project in Atlanta that did not make it through our diligence, and that was fine. You know, it ended up working out in terms of, you know, the seller decided to sell to an institution, but that project did not make it through.

So, you know, once we do enter, there’s a high degree of likelihood of coming out the other end, but, really, the diligence process for us is not box-checking. We’re really reviewing and analyzing both from an OZ perspective, from a real estate perspective, and making sure that these projects are our, you know, underwriting and to, you know, our projected returns.

And then with that, you know, while we have our fund four of four, we continue to have a pipeline of projects, you know, if there’s ever an opportunity…if the project were to fall out or something, we do have a pipeline of projects. And those projects, we have another project in Austin, one in Raleigh, and one in Charlotte that, you know, again, we’re expecting all of our projects to work through, but we do have a robust pipeline of other projects that we’re excited about as well. So just wanted to make sure I mentioned that as well. So, with that, I’ll hand it over to Jeff to add any other color.

Jeff: Great. Thank you, Jill. And I think, Jimmy, we can move to Q&A if you wish. I’ve asked, you know, Mollie and Chris to join us. So, again, you know, we’ve got an investor, an LP investor, and GP advisory board member with us. So happy to answer any questions that the audience may have. Hopefully, this has been a unique approach to the format, and it was illuminating in the macro, and then more specifically about Pinnacle Partners funding.

Jimmy: This was very helpful, Jeff, I love the format. I don’t know if we’ve had any presenter on any of our… This is our seventh OZ Pitch Day. I think this is the first time we’ve had a panel involved on a pitch like this one, so well done Jeff and your team. We do have a few questions we’ll try to get to. And in about three minutes, we’ll kind of come up on the 30 minute mark for this segment, and we’ll kick you guys over to your breakout session.

And if you wanna interact more personally, one on one with Jeff and his team, I’m gonna post the link to that breakout session. It’s a separate Zoom meeting that you’ll hop into and come on back when that’s over. I’ll pop that into the chat in just a minute. But first question is, can you elaborate on the barriers to entry for this project? How do you avoid these obstacles that prevent others from entering the market?

Jill: I guess, were they speaking about a particular project, or I can just talk generally about barriers to entry?

Jimmy: I think generally about your strategy.

Jill: Sure, yeah. So, first, one of the major barriers to entry right now is bases. And so, you know, for example, our project in Denver, I started looking at the project back in the spring of 2021. We had an incredible land bases with the development company, our partners, a construction company. And so we’re really, really excited about the bases that we’re in at. And then fast forward through all of this inflation and just also testament to the fact we’re getting 60% loan to value or loan to cost with this project is I think a testament to the strength of our partner as well.

So that’s one of them is just, you know, we’re not paying developers on these land lifts, where they type a site and then wanna just flip it for a higher price. You know, we’re really trying to squeeze out and ensure that the economic value is created through the development process. So that’s one of them. The second of which is these jurisdictions are not easy to build an entitle in. So, for example, in Austin, you have to go through a process where you receive this site development permit, similarly in Denver. And these processes can be about a year, the process in Denver, as well as a site development process. And so it’s not for the faint of heart. And so our development partners are embarking in this process and moving it through and getting all these approvals. And that’s, you know, a barrier to entry. It takes money, it takes time and expertise to work their way through these approvals.

And similarly in Avondale, Avondale is actually a harder to build in market and that creates various entry for that market as well. And so I guess that would be at a high level, but I would summarize, it’s just, you know, the basis, the local approvals that are required, and then also, you know, getting a team with expertise as your partner to, you know, work through this whole approval process I think was also a barrier to entry.

Jimmy: We’ll do one more question, and then we’ll get going with the breakout session. What are the sorts of issues that the LP advisory board rep votes on?

Jill: Jeff, do you wanna…I can…

Chris: Yes.

Jill: Go ahead.

Chris: So, you guys can fill in, but I remember one in particular. So, for example, if there is a potential exit where you don’t have the time hold that’s required for OZ requirements, and so you no longer have the cap gains benefits, but the exit is potentially so good that you wanna consider it, then the LPs would would have a say in that. And I think that’s very reasonable because you’re changing the whole tax dynamics of the investment.

Jill: And at a high level, we’re seeking guidance from both boards. And so while, you know, it could be just in a discussion of markets or cap rates or underwriting, you know, we’re having these conversations and, you know, we do really listen to our boards because they’re bringing, you know, all their expertise to bear.

Jeff: Yeah, and, you know, other decisions could include, you know, if we enlarge the fund beyond four, we wanted to extend the capital raising period, these decisions would be taken by the board. And then, you know, in regular consultation with Chris and others, we’re talking about how we create this durable relationship with our investors over a 10-year period. This is a long-term relationship. So how can we have a robust investor relations program? We have an investor portal, what is our reporting cadence like? How do you, the LP, you know, get the best optics on your investment on a routine basis? So we’re consistently consulting with Chris and others to ensure there’s a very, very positive experience, you know, post-investment.

Jimmy: Great answer. Great question, do thank you for that question. We did have a few more questions, but we’re at time. So I’m gonna move along to the next presentation in the main session here. Jeff, Mollie, Jill, Chris, thank you so much for joining us today.

Jeff: Thank you, Jimmy.

Jimmy: You should hit that link in the chat right now to take you over to your breakout session. Jeff, Jill, Mollie, Chris, again, thank you so much and hop on over there now please.

Jeff: Thank you, Jimmy. Thanks, everyone.