OZ Pitch Day - March 23rd
Residential Rental OZ Project In Austin, With Pintar Investment Company
In this webinar, Jeff Pintar and Mitch Huffman highlight a project in Austin, Texas that has been in the works for nearly two years.
- History of Pintar Investment Company, which was founded during the last recession;
- Overview of the dynamic Austin market;
- Review of Pintar’s previous OZ projects in Austin and elsewhere;
- Why Pintar remains bullish on residential as an asset class;
- The impact of COVID-19 on expectations for rental properties;
- Review of Pintar’s experience in Austin;
- Drivers of growth in the Austin market;
- Review of the timeline for the Howard Lane project;
- Live Q&A with webinar attendees.
Industry Spotlight: Pintar Investment Company
Pintar Investment Company features a proven and highly experienced team who have delivered consistent and predictable results for partner investors over the past decade. Headquartered in Southern California, Pintar was a first mover to structured investing in the area of single family residential homes at the end of the financial crisis.
Learn More About Pintar Investment Company
Jimmy: There’s Jeff. Hey, Jeff. How are you doing?
Jeff: I’m doing great, Jimmy. It’s great to be here. Thanks for having us.
Jimmy: Great to have you here. And Mitch, great to have you here with us as well.
Mitch: Hey, thanks, Jimmy.
Jimmy: Jeff, you were on the podcast with me way back when, I think it was ’19 or ’20, you were on the podcast with me going over your platform and some other opportunity zone topics, but this is your first time on OZ Pitch Day, so we’re really pleased to have you here with us today.
Jeff: All right. So, we’re here to talk specifically about a project that we are in escrow to acquire in Austin, Texas. This is a project that Mitch has been running and overseeing for us for the better part of two years now. And so we’re super excited because we’re now finally at a point where we’ve got a path to completion and entitlements which, if anybody’s ever developed anything in the city of Austin, Texas, you know it’s not as straightforward as you think it would be considering all the growth and demand that they’ve had there. But before we get into the project, I think maybe what I’ll just do is give everybody a little bit of an overview of Pintar Investment Company and who we are and what we’ve been doing.
So, I founded the company back in 2009 out of the Great Recession and after spending my first 20-plus years in real estate focusing on commercial development and investments. And what I really decided…what I thought the best opportunities from a risk-adjusted basis would be to invest in residential real estate. So, over the last, you know, 12-plus, 13 years or so, you know, we’ve built the vertically integrated company that has investment management, property management, and construction management. We invested in well over 20,000 different residential units around the country, you know, exceeding $3 billion in total investments. In that capital, you know, as a first mover, kind of, in the SFR and BTR space, you know, we’ve been highlighted in… We’ve had great opportunities from people like yourself, Jimmy, to come on board and talk about some of the different things we’ve been doing. We’ve been highlighted in “The Wall Street Journal,” in “Bloomberg,” and “CNBC.”
And being a first mover in the space with really, kind of, adopting residential, you know, single-family rentals and now build-to-rent as a true asset class, you know, got us in front of some of the world’s leading, you know, investment management firms. And here’s a list of just some of the groups that we’ve partnered with on various different strategies from scattered-site SFR development to build-to-rent communities to portfolio buys to build-to-rent to apartment communities, which is all combined in the project that we’re going to be talking about today. And in 2017, when the tax law came to be for opportunity zones…and I’m not going to really dive into opportunity zones and the pluses and minus of it in this presentation because I’m assuming all the audience here is already, you know, well aware of the benefits of it and the rules and regulations. We can talk about that at a separate time if you want.
But when the opportunity zone law came into effect in 2017, we felt like it was a great opportunity for investors to take advantage of it and do what we’re doing on the residential space in the residential front and find the most sought-after opportunity zones around the country and develop residential communities within those opportunity zones. And Austin being one of the most dynamic markets in the country over the last decade-plus has a lot of tailwinds to it. And so Mitch and I spent a lot of time literally just driving around the market getting to know brokers and landowners and, you know, understanding where the path of growth was going. And that’s how we came across the site that we’ve got now. This was going to be our fifth opportunity zone investment. We’ve got a community in Florida that we built and acquired 56 homes that we still own in, kind of, a specially purpose opportunity zone. We’ve raised two different funds that have seven different projects in between them of different opportunity zones. We raised a project-specific opportunity zone fund for an apartment building that we own in Austin. And then we’re rating this specific opportunity zone fund for this project in itself.
So, some of the things, if I step back a minute and tell you why we continue to be bullish on residential as an asset class and think it still provides the greatest, kind of, risk-reward opportunities for investors over the coming, you know, 10 years is, you know, number one on this list here is the U.S. continues to experience a housing shortage. We just don’t have enough houses being built or in existing inventory to satisfy the demand. The other thing, COVID-19 really, sort of, exasperated the importance of large open spaces and what we saw as a flight to the suburbs. And we’re seeing some of it back to the urban centers but, you know, really what people are placing a premium on is having that extra space, you know, being surrounded by parks, having a dog or a place for their pets and their animals, having attached garages where they can park their cars and vehicles. And the importance on that from a lifestyle standpoint is really exasperated itself since 2020 and continues to show strength today.
Number three, you know, after the Great Recession, you know, we saw a significant fall off in home ownership. That’s now ticked up quite a bit since then. And, you know, it was really helped by lower interest rates the last few years. Now that game is over, as we’re all witnessing with the Fed tightening and doing what they can to tamp inflation. And so we’re starting to see, you know, people who otherwise would’ve been moving out of rentals and into home ownership clearly are planted in the home rentership, you know, space for the time being. And that just, kind of, goes into, you know, item number four there. And then number five, you know, it’s interesting, residential rental assets, be it apartments or single-family homes or build-to-rent communities, you know, in an inflationary period, being able to reset your rents on an annual basis to keep up with inflation is extremely important when compared to other asset types where you might not be able to reset your rent 3, 5, 10-plus years at a time.
So, those are some of the demand drivers as we talk about the shift from home ownership, which traditionally has been, you know, the American dream where we had a peak homeownership rate right before the Great Recession, then it dropped almost to a 50-50 level, then it moved back up, but then with the rising of interest rates where home affordability is really trending in the wrong way if you’re interested in owning a home. A year ago, you can get a mortgage rate, you know, in the threes, maybe even in the low threes, and I think, at the best, it was probably in the high twos, whereas now, you know, it’s seven-plus and it’s trending even higher. So, home affordability, even though we are seeing a pullback in home values with the increase in the rates, it’s really basically doubling home ownership costs. And so it’s making renting a much more attractive opportunity or a solution for people that are occupying homes.
I talk about Austin a little bit, about the housing crisis. Austin has been a darling in the country in terms of job growth. It’s in the state of Texas, so there’s no income taxes. It’s an extremely business-friendly state despite the challenges to get projects approved there, which I think helps sustain the valuations of all the demand and the growth that’s happening there. It’s experiencing extreme significant shortage in housing. Some of the other key demographics that make housing attractive…and we talked about this, but if you look at the demographic cohorts, you know, on the left side of this, basically half the population is at an age where they’re in a home ownership or a home formation stage. And we talked a little bit earlier about historical new home starts. Prior to the Great Recession, you know, the U.S. was averaging around 4.8 million residential unit starts. Right around the Great Recession or during the Great Recession, that got decreased to 1.7 million and bumped up to 2.0 million. I’m really curious to see what 2023 is going to show on that post-recession, if we’re talking now home starts, because the home builders have all but said they’re shelving all new home starts if it’s not already under construction, which is only going to exasperate the shortage of housing.
If we talk about Austin for a minute, you know, it’s highly documented as being one of the hottest job markets in the U.S. It’s the best market for commercial real estate investing by a lot of different, you know, syndications. The types of jobs being created in this market are all across the board, but predominantly very, you know, well-heeled jobs. Overall, it’s been ranked, you know, one of the best performing cities in the U.S., you know, as notified here by the Milken Institute. There’s just a number of positives that Austin continues to experience and share from, you know, technology growth, job growth. It’s one of the top university and educational metro districts in the U.S. Great lifestyle center, great affordability in comparison to other, you know, communities that it’s, you know, the job centers. If you compare Austin from an affordability standpoint to, say, Silicon Valley, you know, it’s a third of the cost to live in Austin than it is in, say, San Jose or Sunnyvale or, you know, if you look at any of the other markets that have major tech hubs that’s been driving so much of this boom.
So, our experience in Austin, I’d like to talk a little bit about that because I think that’s really important. If you’re going to invest with anybody you want to know, you know, what’s their experience in that local community. And I’d mentioned, you know, in 2017 when the opportunity zones laws came into place, Mitch and I, you know, started studying all these different markets around the country. And Austin traditionally, you know, had all of this boom and then a lot of excitement around it. And so we got really familiar and got presented a pretty unique opportunity at Arise Riverside where we were able to acquire a 275-unit Class A apartment project that was currently under construction. And we were able to close on it prior to the completion of construction so we can get all the benefits of the opportunity zone. We oversaw the final stages of that construction and the lease-up of that property. And we continue to own it and manage it today, and it’s been performing extremely well. That project cost at the time was about $63 million. And that sits in the South Riverside Corridor of just South of Downtown.
Another project that Mitch has been running point on for us in Austin is Stone Crest at Whisper Valley. And Whisper Valley is a master planned community of about 2,500 acres just off of State Route 130 north of the new Tesla plant. It’s got plans of about 7,000 residential units. Our project is… We’re scheduled to close on this land in December of ’22. We’re going to build, you know, 19 individual buildings, which are known as a Humphrey’s Big House, which we’re going to replicate on, you know, the project that we’re talking about today, The Lane. This project, we’ve been in entitlements for, you know, a better part of a year and a half, and it’ll be shovel-ready for us in February/March of ’23. So, that’s an exciting deal that we’re going to be working on.
Now, let’s get to The Lane and what we’re excited about. So, The Lane is a 800-plus residential unit development that we’re going to be building over 3 phases. And it sits strategically in northeast Austin right in the major path of growth. It sits just off the State Route 130 and just a quick few minutes’ drive to I-135. So, the accessibility in and out of this area is tremendous. We’re within a half an hour drive from all of these major either employment hubs or job, you know, demand centers, the nearest of which is Samsung’s existing semiconductor facility literally five minutes from us. The most recent one or one that’s, kind of, garnered a lot of the headlines is Tesla’s Gigafactory that they built just 20 minutes south of us off of the State Route 130. And then Samsung is investing another $17 billion, you know, 25 minutes north of us in a new semiconductor development facilities that they’re doing as well.
Now, as you can appreciate, all of this growth…all the commercial growth has taken place in advance of residential growth. And so now residential is playing catch up. And this bodes really well for rental products. The for-sale products have been performing extremely well in Austin with home values, you know, getting 20%, 30% annual increases. Well, with the rise in interest rates, the for-sale product housing in Austin, even despite the increases of values, is going to be slowing down quite, you know, substantially, yet the demand is still there. And so new rental products, especially those products that are designed carefully with sustainability in mind, first-class amenity centers, those assets are going to outperform the others. And this slide is one just of our little area here. You can see on the lower, left the existing semiconductor facility of Samsung. Just, kind of, north of that is, you know, a huge master planned development called East Village, which is currently under construction. They’re adding more office and some residential. But what’s really interesting is some of the land comps, you know. And what makes The Lane really attractive is our basis.
So, we’re in contract to buy this for just over $10 million, you know, 51 acres for about $10.1 million. Recent comp is the Trammel Crow Development that they partnered with CBRE Global Investors, you know, within a mile of us on Howard Lane, and they paid $56 million for that land. And at the time they closed on that land earlier of 2022, their level of entitlements won’t be at the same level of entitlements we have when we close on our land. Meaning we’ll be shovel-ready, permit-ready, no more entitlement risk, whereas they still had a substantial amount of entitlement risk that they had to work through. The other existing comp in this trade area that we want to point out is the Taylor Morrison Development, which is under construction building these 94 homes right now, is their land value is about a 30% increase to our purchase price.
And so one of the things that, you know, we do our best to crystal ball at, and with this development being multi-faced and what we’re offering investors in this offering, is to come in at our land basis at $10.1 million. That’s going to be used to acquire the land, pay for the pre-development costs, entitlement costs that we have to cover to, you know, get it to a development piece of property. Yet, then, given the size of this deal being $250-plus or minus million in total project cost, we’re going to have to bring in an additional partner. And so we’re, kind of, calling in a Series A investor who this offering is being, you know, pitched to and being offered to, they’ll be able to come in at our basis. And then we’re going to be bringing in an institutional investor, you know, called a Series B investor, at a marked-up land value. And given the fact that, you know, we got into this deal two years ago, Austin has seen incredible land appreciation. And so that’s one of the great opportunities of this offering that we have.
As we’re designing this community, you know, it’s 51 acres, 800-plus units, 3 phases, what we’ve learned from operating, you know, residential real estate for rent is it’s an evolving space, right? Technology and sustainability is becoming more and more important to tenants. Lowering their occupancy costs, creating an environment of which they have a lifestyle that they’re going to want to be a part of for multiple years, things that we can do to lower their electricity bill like solar, creating EV stations, grading, you know, walking trails and bike paths and organic gardens, all of these things create, you know, a sense of place that our residents really enjoy and pay a premium at for, but not only that, they refer to their friends and they want to stay longer.
And so we’ve put a tremendous amount of thought and effort into the design and the features within The Lane. One of the aspects that we have found to be really prominent in all of these types of communities is having the best-of-class amenity center, you know, with state-of-the-art fitness, swimming pool, open shared space, organic gardens that we’ve been talking about are really popular in the Austin marketplace, and doing it in a way where it’s not that urban, you know, feel where you’re not over-densifying a piece of property just to max out the density because it looks great on a proforma, but measuring up with what was actually going to be functionable, how you can control that demand, and deliver an environment that’s going to want people to stay there for years and years and years.
And so we’ve spent a lot of time, and we continue to spend a lot of time, you know, exploring what are these best offerings within the communities. And so these are some representative photos of what our project is going to look like. And Mitch, maybe what I’ll do is I’ll hand it over to you now where you can walk us through the phasing aspect of the project.
Mitch: Yeah, of course. And I see there were some questions that popped up too asking about the status and timeline. Those should both be covered here. So, in December, we expect to finalize our Series A raise, which will fund the acquisition costs of the land, as well as all of our entitlement and diligence costs, as well as our offsite expenses as well such as construction of a wastewater line. And then throughout all of 2023, we’ll be working through the city and the county to acquire or, I guess, receive all of our entitlements. And then we are projected to receive our site development permit in January, 2024, which is also when we’ll be closing on all 51 acres at our basis. And then at this point, simultaneously, we will be contributing the land for phase one into a partnership with additional partners, as Jeff alluded to earlier.
And at that point, since we have our site development permit, we will be ready to begin construction. A few months later in October, we’ll start the vertical on phase one. And continuing on after that, we’ll have our first move-in and for phase one in June of 2025 while the project is still under construction, which is expected to conclude in October, 2025. Lease up will continue for the next several months, and then we’ll be refinancing in September, 2026. And using those refinance proceeds to partially fund the development of phase two, which should also have its site development permit at that point as well.
And then for phase two and three, it’s going to be just like phase one. Vertical begins a few months after that, and then we got our first move-in, construction will be complete in May 2028 during lease-up, stabilized towards the end of 2028, and then we’ll refi again, or at least refi phase two, use those proceeds to partially finance the construction of phase three, which is going to look just like phase two in terms of product type. And something I didn’t touch on is phase one, as you can tell from here, is a, kind of, traditional multifamily product, it’s more dense. While phases two and three are going to be that Big House product that Jeff mentioned earlier, which will have about 10 units per building all twos and threes, to kind of capitalize on that suburban feel.
Jeff: Maybe I’ll just jump in here. I think what’s unique about our site is we have some pretty unique topo on our property. And what you can see how we’ve designed it with some trails and some water features and a lake is to really take advantage of this topography in the Texas foothills or the Austin foothills. So, it’s really a unique site that we’re excited about and we think people are going to be, you know, really appreciating the differentiation that, you know, The Lane is going to be able to offer in comparison to other product types nearby. And so just where we are on the project, as we talked about a little bit earlier, we’re going to have, you know, we’re kind of calling this the Series Founders Round. We’re going to have a Series A shareholder, kind of, at our $12 million basis, and then we’re going to be bringing a Series B institutional investor.
We’re targeting an IRR, you know, between 20% to 25%, three to four equity multiple. Once the project is up and running in cash flow, we’re projecting, you know, somewhere between 6% and 8% cash on cash. The acquisition date is January of ’24. That said, we are calling capital now to continue to fund pre-development costs. So, the ask is we’re raising $20 million. And like all of our other investments, we as the GP put a significant portion of our own money in to each one of our projects. And so the same here, we’re going to be making a large co-investment. The term, like all other OZs, is 10 years. The minimum investment is $100,000 or another amount, you know, dependent upon GP’s approval. We’re paying a 6% preferred return. Over that 6%, profits are split 80-20, 80 to the investors, and then 20 to us as the GP.
And then we have very minimal fees. We have a 1% asset management fee on the $20 million of equity, and then, you know, half a basis point on the project cost for an acquisition fee, disposition fee, half a basis points on the sell price, and then we charge you half basis points on the loan origination. So, again, thank you for having us, Jimmy. And if people are interested or have questions, you know, feel free to reach out to myself, Mitch, or Rex. Here’s our contact details as below. And, you know, again, we appreciate the chance to present The Lane and share with everybody what we’re doing.
Jimmy: Fantastic. Well, Jeff and Mitch, I really appreciate you coming on and being a part of OZ Pitch Day today. We’ve run out of time. We had a few questions, but I’ve directed those folks to get in touch with you directly, [email protected] And I’ve also linked to the contact page on your website as well. So, I’ll have to leave it there for you guys. We have to move along with the program. But thank you so much for being here today.
Jeff: Absolutely. Thank you.
Mitch: Thanks, Jimmy.