Inside Capital Square’s Record Setting Year, With James Brunger

Last year’s economic turbulence posed a challenge to investors as well as real estate fund sponsors raising equity. But amidst the economic headwinds, there have been a few success stories.

James Brunger, chief sales officer at Capital Square, joins the show to discuss how his team was able to set new records by raising over $1 billion in equity in 2022.

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Episode Highlights

  • How Capital Square’s business strategy set up the company for a record setting year in 2022.
  • High-level differences between Opportunity Zones and Delaware Statutory Trusts (DSTs).
  • The fast start to 2022, followed by a bear market and inflation-induced slowdown, resulting in a huge drop-off in equity raising from Q1 to Q4.
  • How the Qualified Opportunity Fund marketplace compares to the Delaware Statutory Trust marketplace, and why QOF equity has overtaken DSTs so quickly.
  • A breakdown of Capital Square’s $1 billion in equity raised in 2022, across their QOF and DST programs.
  • Why diminishing capital gains due to the 2022 bear market may be just a short-term problem that hopefully won’t have much long-term impact on the success of Opportunity Zones.
  • Expectations for Opportunity Zone reform legislation in 2023.
  • Private equity real estate trends that High Net Worth investors and financial advisors should keep their eye on over the next few years — and why the multifamily sector is of vital importance to the industry.

Guest: James Brunger, Capital Square

James Brunger on the Opportunity Zones Podcast

About The Opportunity Zones Podcast

Hosted by founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast”. I am Jimmy Atkinson. 2022 obviously was a very challenging year for investors and investment fund companies who were looking to raise equity but amidst the economic headwinds, there have been a few success stories and one such story that we’ll be talking about today is Capital Square which, in spite of the market downturn, managed to put together a record setting year. Capital Square’s Chief Sales Officer, James Brunger is here with me today. James, happy New Year. Great to see you back here on the podcast. Welcome back.

James: Hey, thanks, Jimmy. Great to see you. Happy New Year as well. And thanks for the kudos too. It was a fantastic year.

Jimmy: Yeah, it was. And I wanna get into that specifically and I wanna put some context around how it was a record setting year for you guys and for some parts of the real-estate investment industry despite some economic headwinds that I mentioned. We’ll get to that in a moment and of course we’ll talk opportunity zones as well. But first, just to start us off, James, I’m sure that most of our audience of high-net-worth investors and financial advisors are very familiar with Capital Square. You guys are obviously a very big name in the tax advantaged real-estate industry. But for any of our listeners and viewers who aren’t yet familiar, can you give us a brief introduction to Capital Square and your role there?

James: Oh, yeah, sure, absolutely. And thank you again. So, Capital Square, we’re a tax advantage real-estate sponsor. We’re based and headquartered in Richmond, Virginia with offices in Washington DC as well as Newport Beach, California. Been around 10 years. Celebrated our 10th anniversary which is fantastic. When I say tax advantage, our core competencies around 1031 programs called Delaware Statutory Trust. Obviously, opportunity zone development programs. In addition to that, a real-estate investment trust and then also other types of investments that provide, just by the nature of real-estate, some great tax opportunities, tax saving opportunities for investors.

A 110 employees now which is fantastic. It was a very big year and also a very big growth year and headcount but well needed simply because we were trying to keep up with ourselves which is great. So, anybody on the call, anybody on the podcast who’s an investor and has looked at us before, thank you for your confidence. It really was a fantastic year and we continue to grow at breakneck pace.

Last thing just to be, you know, clear, we are very focused in the Southeastern United States branching out to Texas in some markets in the Midwest and very focused on multifamily solutions, both on the development side and opportunity zones as well as anything we buy on that core side. Experience across all spectrums but definitely we look at the lens from a housing solution side when it comes to our real-estate programs.

Jimmy: Good. And your role there, James? I understand you were recently given a promotion in title at least to Chief Sales Officer. Tell us about what you do there at the company.

James: Fortunately, I have my hands in a lot of different stuff. But yes, my primary goal is running the sales and distribution efforts where I have about 20 professionals who are out in the field working primarily directly with financial advisors and registered investment advisors and their best clients on solutions for their real-estate investment programs. I do also sit on investment committee. I’m on the executive committee. Like I said, I do have my hands in a lot of things. Some of my colleagues probably would like me out of some of that stuff. No. In all seriousness, I really enjoy having a good seat at the table and helping Ron and grow the company which has just been a fantastic thing for the last four years.

Jimmy: Good. You guys had an incredible year. I wanna talk about that in a minute. Cut to the chase, though. I’ll just drop the number. You guys managed to raise over $1 billion in equity which is rather impressive given the tough times that we were in last year with respect to the market downturn. But first I wanted to pick up on something that you mentioned in your last response, James, which was you do have a couple of different programs that you’re putting investors into. One is the opportunity zone program which forms a pretty good piece of your business by far and away the largest part of your business is that DST platform, that Delaware Statutory Trust platform and there’s obviously differences between those two programs and we’ve covered those differences on this podcast a couple of times in the past. But you mentioned some strategies, right. You mentioned ground up development risk type strategies that typically get put into opportunity zones. Do you have any of those in your DST or I think maybe a DST legally has to be core or core plus holdings? Can you go into the specifics on that a little bit for us?

James: Yeah, absolutely. And I’m assuming you might’ve covered some of this before but just as kind of a refresher. Delaware Statutory Trust, they have to be core in nature. You can have no nonstructural or structural improvements to the property. That’s actually more around the 1031 rules than it is specific to DSTs. But DSTs themselves, you know…in 1031, you have to have your construction finished, occupied and the property in service for investment purposes within your 180-day timeframe. So, 1031, you have 45 days to name, 180 to invest. You would have to invest in a program. So essentially a development that was done within 180 days. DSTs take that restriction even kinda one step further. Really know, you know, structural improvements associated with properties organized under Delaware Statutory Trust, you know, guidelines specific to the private letter ruling that allows DSTs 2004 to qualify for 1031 exchange if organized correctly. In our case, really that limits to value add and mainly interior unit value add. You can’t take a piece of land and build something new after you raise money for a DST. Really just a big…against the rules. And part of the reason why is it’s not necessarily in service at the time of the exchange as an income producing investment property.

So, it was a little bit broader approach but I just wanna be clear and specific to our programs. When we look at ground up development, they will always be either inside of an opportunity zone, primarily inside of an opportunity zone or will be in a nontax wrapper LLC or direct investment opportunity.

Jimmy: And I think…correct me if I’m wrong but they probably only fall into that latter category if the location didn’t fall within the geographic boundary of an opportunity zone. Is that right or would there be any other reason why you would.

James: So we find something that’s really good and we like doing…we like the deal and mainly some of the specifics in the deal. We can cover a couple of these. But the specifics of the deal, housing shortage. And again, we’re housing focused. Good job growth, great market, not a lot of competition from the development side even if it’s not an opportunity zone. We wanna be able to bring that out to investors and advisors on a nice opportunity to take advantage looking at good return profile over time and a development project. But without fail, though, you’re absolutely correct. Kind of alluding to this. We love to find those same type of dynamics in an opportunity zone and primarily because we’re a development company but we’re also really good operators. Since our DST programs are all core, stabilized programs, we’re running those for a really long period of time. It really is making money through the operation of those programs and those properties.

You know, in opportunity zones, you know, part of the return is developing the program but the majority of the return due to the long nature of the hold timeframe, 10 years, really is involved on your ability to operate it well. So longwinded way of saying absolutely. If we’re looking at deals, we’re looking in a market. First and… what kinda opportunity zones they have, right? You know, where are the zones, right? We get them mapped out and we try and figure out if we can get inside of a zone and have good solutions on that housing…on the housing front for that community in the opportunity zone providing the best tax advantage. However, if it makes a lot of sense from a pure investment thesis, we’ll certainly bring it out to the market as a good development investment opportunity.

Jimmy: Good. Well, thanks for that breakdown there, the difference between those two different types of programs. They are two very different strategies. I won’t belabor that point. We’ve got other podcast episodes that went deep into the differences between those two strategies. And maybe I’ll link to a couple of them in the show notes for today’s episode. But want to get back to the intro, what I teed up in the intro which was you guys having a great year in spite of some headwinds. James, just anecdotally at least, I’ve heard from a lot of investors and fund sponsors, deal sponsors that capital raising across the private equity real-estate industry and in particular in opportunity zones in the first few months of the year was actually really good. DSTs in particular were flying off the shelves late last year. I should say late ’21 and into 2022 for the first few weeks or a couple of months. As I mentioned, OZs had some good momentum, right. But then we had the subsequent market downturn. The first 6 months of 2022 represented the worst 6-month period for equities in over 40 years. We had a huge downturn in the S&P500, the broader stock market, bonds showed some trouble. If you were in crypto, you got hammered as well. I always like to mention crypto for a second there for any crypto nerds.

Bottom line, the markets were in turmoil. Inflation was raging. Capital raising slowed. I think at least anyway. That’s anecdotally what I have heard. And in general, it was just a tough year. A lot of investor uncertainty and investor hesitancy. But in spite of all that, you guys had some really good success. I just read directly from your press release right now that says that in 2022 Capital Square acquired more than $2.29 billion in real-estate based on investment cost, raised more than $1 billion in equity for its investment programs and took five DST programs full cycle. It was a record year for you guys. What was it that you did differently to have such a successful year? Was there something unique about your strategy and basically why do your investors like you so much?

James: They really like us. No. You know, thank you. I’m a little embarrassed and I’m not blushing because I’m hard to blush but the reality is that a billion dollars is just such a huge number and it’s, you know, a few years…very few short years ago we were about 450 million in total assets under management and today we stand at about 6.5 billion. So, the trajectory has been there for us. I’ll say first and foremost the beginning of ’22 was very successful for us and a lot of that was a continuation from a massive growth in ’21. We went…we did about $840 million of equity sales in 2021. A lot of that, opportunity zones actually as well. And then the first kinda quarter we saw that continuation and really to your point on DSTs, the first quarter we saw really about 225 million a week in DST sales across the industry but only about a billion dollars in total product available. So really about a four and a half, five-week supply at any given time.

We really…and this goes all the way back to COVID. In our housing, you know, properties, in all of our multi-families, we…like everybody, when COVID hit in March of 2020, we were a little bit gun-shy and we realized that for about the first month, two months, month and a half of collections, our collections went up and our occupancy stayed very stable and went up. And it really provide that housing is a core necessity and even in the wake of, you know, pandemic, housing matters and where you live matters and people are willing to spend as well.

So, we started a strategy then of buying and deploying a lot of capital and really focusing on growth. I’m bringing it all the way back then because a lot of other, you know, people in the industry and just frankly a lot of real-estate investment firms, period, across the spectrum, even the large, global ones were pencils down. We were underwriting deals. And we carried that momentum so that we were able to have product when others weren’t through ’21, ’22.

I’ll give, you know…through the first half of ’22…I give a lot of credit to our Chief Investment Officer, now Co-CEO, Whit Huffman and his team. They capitalized on relationships that became…we became the forefront of the industry in approaches and the acquisition side because of the activity we had in ’20 when the world was kinda shut down. And that carried us and continues to carry us today. We’re now known as conscientious, good buyers who close on time and effectively and efficiently. And for those of you on the institutional industry, that really matters, right. When you’re bidding for deals, it’s often not the highest price that wins. It’s those who have the ability to close on time effectively and not re-trade. And so that carried us on the acquisition, the product side even as things slowed and the equity market slowed. We continued to move up in market share in the DST space and even getting deals in opportunity zones which are coming out today, you know, now. That timeframe gave us an opportunity to expand. So, I’ll say that first and foremost.

And then the second thing is, as you pointed out, we also have…very fortunately have an outstanding and continue to have an outstanding long-term track record of full cycle in deals when we sell. We under promise and overdeliver in general and it’s been proven out time and time again. That also helped us steal some market share when things started to slow. I will say the third quarter of 2022 was our number one largest quarter in company history as far as equity raised. And then there was a large slowdown in Q4 of about a 40% drop in our core 1031 business. The industry dropped by about 50% Q1 to Q4. That has everything to do with the Fed. And again, you mentioned all of the bloodbath in a lot of the markets, why it was tough. Nobody’s immune to what the Fed has tried to do with a blunt instrument of interest rates. And we’ve certainly seen that. We just, you know…backing up to what you said, why do your clients like you, under promise and overdeliver, do it all on time or faster than expected. And over time, that competence grows and builds really in any of the programs. And then on the other side, our clients benefit from the relationships that we carry on the acquisition side. And that is also built over time of we will buy this at this price at this timeframe and executing and closing and giving us the opportunity to win deals even at maybe a slightly reduced price that benefits our investors even at the start.

So, a lot there to unpack but, you know, the last thing obviously I’ll mention. We have increased the sales team. We’ve increased the support. We’ve increased our investor relations. We have an investment portal now. We make it easy for people to get information. And we have a really just great base of distribution through advisors and registered investment advisors who, you know, had been just outstanding for us. So those investments are other things that paid off. And, you know, really the team just got out there and gone after it. It’s interesting. The bloodbath that happened towards the end of the year and obviously throughout the course of the year in the equity markets, it’s all…I don’t wanna say it was superficial but it feels like it’s not as bad as it sounds, right. So maybe that’s the other thing too. We’re just really optimistic. That’s it. We’re just optimistic all the time, Jimmy.

Jimmy: I think that’s part of it, right. There is some infectious optimism around here in spite of some of the headwinds that I laid out in my intro. Well, you know, it’s interesting that you mentioned that maybe there’s some reason for optimism and I can kind of paint a somewhat optimistic picture and that is that quite a bit of capital was still raised by opportunity zones last year. And in fact, just before we hit the record button and officially went on the air here, James, you brought up the point to me that OZs actually outraised DSTs last year. Is that correct? Can you put some context around that, some numbers there?

James: Absolutely. So, the entire 1031 DST industry, syndicated industry raised 9.2 billion as tracked by Mountain Dell, kinda the leader in tracking and also backed up by Stanger, Kevin Gannon’s firm. Anyway, in addition to that, Novogradac is one of the larger collectors of information associated with opportunity zone funding and mainly funds. Out of all the funds they track, opportunity zones raised $10 billion. So, and I just wanna be clear. That’s just the funds that Novogradac, a leader in the industry, a leader in information, a leader in the accounting side as well…that’s just the ones that they tracked. So that number of how much was actually raised in OZs is probably far larger than that $10 billion.

Jimmy: They estimate…sorry to interrupt but they estimate that probably you need to triple or quadruple their number to arrive at the total aggregate number. I’m not sure how they figured that out but that’s their estimate of how far off they are at least. But that’ll put us at maybe 30 billion plus raised last year which is pretty impressive given everything we just said, right.

James: And considering the infancy…you have to keep in mind Delaware Statutory Trust has syndicated 1031, so DSTs. A private letter ruling in 2004 gave guidance to allow for the structure to be qualified. And since then, you’ve seen the industry kind of grow. So really an industry that’s about 18 years old, right. But [inaudible 00:19:49] probably an industry that’s maybe about 10 years old. Well, opportunity zones, you know, 2007, the Tax and Jobs Cut Act, they really didn’t get off the ground until ’19, right. So OZs are really about three years old and it shows you that there’s a massive, massive investment universe and opportunity and also just really big growth. Part of the reason why is they function as they were originally intended to providing capital to undercapitalized communities and allowing for that, certain tax advantages for that capital to be deployed. In our case, happens to be provided housing. There’s all kinds of other funds associated with private equity or investments in these undercapitalized communities.

So really, it’s amazing to see and just for our purposes at Capital Square, continued focus. We are launching…we have OZ7 which you see the rendering right behind me. We’re launching OZ8 which is an apartment complex in Knoxville and we’re launching OZ9 which will be a kind of multi-plan phased community in Grand Junction, Colorado, really Western Colorado. But, you know, all that’s launching before March for us. And it has to do with the fact that there was great demand. I know there’s less capital gains in the market which is really a driver of some of the investment but overall, the market and OZ are still just reaching their infancy. But they’ve worked. The ones that we’ve gone to full stabilization, we’ve constructed, we’ve gotten to the market and we’ve filled them up with tenants, they’re operating very well. Again, a little under promise, overdeliver both on our cash flow and our refinance proceeds and our rents. So, it’s great. Good to see. But, you know, providing that housing to communities is just rallying even more support both on the political side and then obviously from the investment and advisor base as well.

I expect it to continue. I know you have your finger on the pulse on a lot of this but I bet you that number gets even higher this year, even with capital gains being a little bit more muted.

Jimmy: Well, I hope you’re right. And, you know, you mentioned opportunity zones are still their infancy. And despite being…I guess despite DSTs having a 15-year head start on opportunity zones and already being kind of ingrained into real-estate investors’ psyche in terms of what a 1031 exchange is…granted, DST’s a little bit of a different beast but it’s based on a program that’s now 100 years old, the 1031 exchange, right. And in spite of that huge head start that the DST platform, if you will, marketplace if you will has on opportunity zones, opportunity zones has already surpassed it by maybe two or threefold. At least the numbers last year. If you consider Novogradac’s numbers, you multiply that by three or four and compare it to Mountain Dell’s or to Kevin Gannon’s numbers at Robert A. Stanger & Company, right. James, do I have that right because I…

James: Yeah. I think you do. I mean, I’m smiling and laughing. I’ve known you quite a while now and obviously you are kind of a leader in the information and distribution of information in a space, a platform for people to learn, number one, and then obviously see funds and opportunities to invest in opportunity zones. And, you know, I mean, I feel like you and I, like, three or four years ago were looking at each other going, “Is anybody gonna pay attention to this?” And now we, you know, see that the numbers have outgrown even our core business. You know, it’s really an amazing thing. I also am very fortunate to spend some time with Senator Scott, one of the funders or one of the original underwriters and writers of the Tax and Jobs Cut Act that introduced the bipartisan legislation with Cory Booker out of New Jersey about the extension. So, I mean, I’d be happy to go into it a little bit more but there is a bill that was proposed last year and likely to hit the floor here in the near term this year that would extend the overall tax benefit and deferral timeframe for opportunity zones. I only think that adds more interest and investment into the space when and if it gets passed which looks favorably.

So, I mean, for you and me, you know, four years ago [inaudible 00:24:30] Is anybody gonna pay attention be at 30, 40 billion today, 10 billion reported to the main collector of information. Could it be 50, 60 billion of total equity investment and then provide that, you know…the original intention which is, you know, capital to undercapitalized communities. Really, I don’t know if any legislation could be more of a homerun of using, you know, economic forces to get investment in communities that otherwise would’ve continued to be underinvested in. So really excited. Still very exciting in the opportunity zone space.

Jimmy: Yeah. Well, absolutely, James. I think you’re preaching to the choir now. Of course, I do wanna ask you a little bit more about that legislation toward the end of the episode today. I’ll make sure I save a couple minutes toward the end for us to talk about that a little bit more. We’ve covered it a lot in 2022 since it was first introduced last April but we’ll get to that in a minute. Wanted to talk fundraising numbers with you a little bit more. That’s what the bulk of this episode is about. So, we were just discussing how opportunity zones, despite some headwinds, despite how new it is and it’s a little bit…maybe it’s kind of a clunky program or at least it’s clunky in the sense that it takes a little bit of a learning curve. It’s only a few years old. Has surpassed DSTs in terms of equity raising by a pretty good amount in 2022. Now that said, though, I look at Capital Square’s numbers. Like, I have the breakdown of the $1 billion plus that Capital Square raised last year and your DST program is by far and away the bulk of your equity raising, $955 million you guys raised through your DST program last year compared to $57 million through your opportunity zone program, all your different qualified opportunity funds. Do you expect your OZ program to grow over the next few years relative to your DST program or are you still leaning into DSTs? Where it looks like…I guess if I’m recalling the numbers correctly, you guys have captured close to 10% of the marketplace there for DSTs. Is that right? And what’s your strategy going forward with these two programs?

James: Sure, no, it’s a great question. And I’ve got a couple of things to unpack there. Number one going forward, I’ll just give you scale. If we maintain that 10% market share, maybe improve it a little bit in DSTs, I’d be thrilled. You know, for us to grow to this spot, we’ve kind of reached our goal, if you will. It would be nice to get a little bit closer to 14% or 15%. But there are some really great providers in the space in addition I would say to us, arguably us being one of the great providers. So, it’s really been a nice, good maturity of the DST space and seeing some really great real-estate companies in there. For us to get up to 15%, that would be kind of the high goal. To maintain that 10% to 15%, I’d be perfectly thrilled.

When we looked at the growth of our business over the next few years, it really is on the backs of our development and our focus in development which obviously is inclusive of opportunity zones. In addition to that, we have our own REIT but the REIT is not quite as much in focus for the shorter term. It’s more kind of three to five year. But really over this year and years to come, I have targets to grow our opportunity zone business and capital REITs by 300% this year and then grow again by about 200% next year. So big focuses in getting great programs out in the marketplace for investment opportunities.

The other side to unpack there is I made a mistake. In 2021, we had some great opportunity zone programs and we actually sold more in equity raised in opportunity zones in 2021 than we did in 2022. My mistake is that I didn’t think they would all sell out as fast as they did in 2021. So, we were a little behind the curve in getting really great programs and investment opportunities out to investors in 2022. For a lack of a better term, I didn’t have quite as much vision as I might have today. And we’re a little bit more focused on making sure we have great programs. The last thing I’d unpack, though, is we really are…and this kinda…I didn’t bring this up in the beginning about Capital Square. We’re focused primarily on single asset opportunity zones. We don’t raise multi and we don’t raise blind pools. So, what I mean by…

Jimmy: That’s why you’re on fund 7 and 8 and 9 and 10 are coming up, right. You roll them out as each project is ready for equity raising, right?

James: That’s right. And what that does is that gives…we really like that. We’ve listened to the advisors. We’ve listened to our investors. It gives them a lot of clarity and vision of what they’re investing in, on timeframes, on deliverables. And frankly on the risks to a degree. You know, and again, I’m not knocking any of my, you know, colleagues in the industry raising money in opportunity zones. They all have created some intentions and will ideally be very successful in what they do. Our vision is just wanting to make sure that we have great programs fully underwritten and ready to go. We’re as close to underwriting as we can before we bring it out for investment opportunity.

So, my mistakes was well intended and thank you to everybody who invested with us in ’21 but you basically sold out what I was trying to sell last year, a year early. Now as you can tell, we have this fund, OZ7. OZ8 Is actually launching next week which is good here in the beginning January, middle…about third week of January which is nice. And then OZ9 will launch right at the beginning of March. So, lesson learned. Our sales are down. They won’t be down this year because I’m gonna have great product available a lot faster than I did. And working with our development side a lot faster than I did last year.

Jimmy: And you’re expecting to raise probably well over $100 million in your OZ program for ’23, then?

James: Yep. We’re targeting about 175 million in opportunity zone equity. So that’ll build somewhere around 556 hundred million [SP] in property value, gross property value, gross asset value and stabilization. And then $75 hundred million dollars associated with non-opportunity zone development projects. Again, multifamily project and more private equity focus. You know, I take that in consideration when I look at my total development equity raised. But just on the OZs, you can see 175 million will be that 300% growth goal. I will say we have a number of other project lined up either options, LOIs where actually land purchased in opportunity zones but we are waiting to see…just because their development timeframes are a little bit longer, we’re gonna wait to see what really happens on the extension legislation that we’ve mentioned.

Jimmy: So, one thing I’m picking up on, though, is Capital Square…correct me if I’m wrong. You guys really made a name for yourself in the DST…with your DST program over the last decade plus. Opportunity zones come around and you’re going in on opportunity zones but it does require a pretty big strategy shift. You need to lean into your development skill much more so than…you really don’t need much in the way of development, ground up construction for DST products. So how do you make that transition and why is now the time to make that change within your company to lean more heavily on development?

James: Yeah, no. Great question. We added…we’re very fortunate. Adam Stifel, who’s our Head of Development, he has a long track record and we’re very fortunate. In 2018, we merged his company with Capital Square to create Capital Square Development. A lot of that under the vision of Whit Huffman who I mentioned before who had a pretty good background in both, you know, purchase of stabilized core real-estate but then development. Specifically, multifamily development all around the Washington DC area for now a publicly traded company called JBG, JBG Smith.

So, this sounds weird but it’s kinda been our DNA more than just acquiring core stabilized DST real-estate. You know, the opportunity zone program gave us an opportunity [inaudible 00:33:24] to be able to, you know, expand into one of our core competencies for really some of the leaders of our company. It was always part of the vision where it worked really well for us when we saw the opportunity, we dug into it. Again, 2018, bringing the development company in house where we saw that opportunity is that really, truly is unique to be a good developer and a very good operator and the long timeframe…you know, you have three years or so in development but you have seven years in operations. So, if you’re a good builder, operator, you’re gonna do pretty well. There’s good firms out there like us that can do that as well. We saw it as an opportunity, gave us the chance to branch.

Now that we’ve reached and have a track record, we’ve reached stabilization, we’ve delivered three and now we’re delivering our fourth opportunity zone project this month and with great results, it gives us even better opportunity to continue that. We’ve been able to hire very well. We did add…I can’t even remember what the press release says. I feel like we added 26 or 28 people last year. It’s amazing to see the growth. Those people, a lot of those heavy development focused backgrounds, outstanding people that, you know, have kinda caught the vision of where we’re going. Many through relationships that we’ve carried from some of our other colleagues. Many, you know, who have seen what we’ve been able to do and would like to participate. It’s been just a great thing to see. The last thing I’ll mention. Even under DSTs, we’ve always had a construction management division that reviews before we buy properties. We always get third-party property condition assessments PCAs. But our internal construction management headed by Mike Ollinger, they’ve always participated and even in our stabilized programs reviewing any kind of deferred maintenance capital expenses that may come up going through with a fine-tooth comb and then also looking at any value-add opportunity and really the construction cost of that.

They cross over from kinda development as well as the DST. So, OZ and DST. But then on the backs of that, we’ve beefed up and continue to really, you know, hire out any opportunity zone development side of the company. You know, the last thing I’ll say is that it was always kind of part of the vision and then sometimes you take what Congress gives you. So especially under the opportunity zone legislation it just kinda, you know, got us a little more motivated.

Jimmy: Yeah, I was gonna say the Tax Cuts and Jobs Act and the OZ provision in particular kinda gave you that excuse to finally make that pivot that you guys…it sounds like you guys had been planning on looking for a way to do it. So now that said, though, you know, we started with a rather pessimistic, bleak view of things at the beginning of the episode. We turned things around with the success story of Capital Square and all the capital that’s been raised by OZs per the Novogradac numbers. But now kind of turning ahead to 2023, what does the trajectory look like for 2023 given that there aren’t a lot of gains out there? Or I should say there are still a lot of gains out there but clearly, they have been diminished a lot by the downturn in the market over the last year. Is there a challenge there in raising capital for equity, I should say for opportunity zones in ’23?

James: Yet to be seen because we’re still seeing about the same consistent numbers that we were seeing really through the course of last year. Had a big spike at the end of ’21 and it had to do with the fact that there’s additional benefit of basis adjustment. But I’m gonna answer that question more so on development vers just opportunity zones. And the reason why…when you’re a developer, it’s really amazing to me…and this has been…for me, just been a fascinating growth in my knowledge of real-estate investment is that, yeah, you really have to be a future teller, right. Yet, you kinda have to take all of the data, all of the science, all of the trend lines and say, “You know, four years from now, three years from now, when this building is done, this is what’s gonna be happening here, right.” And there’s risk to that.

That’s also why obviously investment returns are generally projected and can be much higher in development real-estate than core real-estate. You have no income while it’s being done. You have all kinds of risk. You de-risk whatever you can. You get your GMP, your guaranteed maximum price on construction, etc. But really have to have to be a future teller. In the development side, it’s kinda linear. Three, four years from now, what does it look like, right? On the opportunity zone side, you get a little bit more forgiveness. And I say that simply because the forgiveness is what’s it look like 3, 4 years from now when you deliver but what’s it look like over the next 10 years, right. Because that’s really the minimum hold timeframe.

And so, you know, when you have that and that ability and that vision, you know…the current world…lack of gain, trouble in the water, interest rate spikes like we haven’t seen really, you know, in most of a generation. I’m a little bit older than our average employee and most of them didn’t experience a lot of what I’ve experienced in my career. You know, you look at that and it takes…a longwinded way of answering your question. It takes a lot less pressure of what’s going on today and more about what does the future look like over time. For us it’s lack of housing, lack of quality housing. And then frankly, you know, the more immediate theory of recency, the recent past will continue on for the indefinite future. No. Interest rates won’t go up forever at the fast pace at which they will. And I’ve got news for you. Inflation isn’t gonna stay at the same pace that it’s been either, right. Again, the blunt instrument that the Fed has deployed, effectively, I would say, you know, isn’t gonna be around forever. And so longwinded way of answering your question. This year it probably will be more challenged. We will be raising equity in our OZs. We will have a lot of conviction and confidence in the programs that we’re putting out with the reference to risk. And there is always transaction volume and deal volume.

I mean, personally, I’m just thinking…you know, you’re bringing up gains to be had. I still own Apple, you know, at, like, $92 average a share. So, I mean, sure. The price is down but is my gain gone? No. I mean, right? And I’m not a genius when it comes to investing so I think there’s a lot of people out there and frankly especially around opportunity zones…this is a great year if the extension occurs to get us even more attention on where this once in a generational tax haven investment opportunity is. So long answer but don’t think about the short-term. Let’s think about the long-term.

Jimmy: Oh, yeah, yeah. James, that’s great. And, you know, you just mentioned legislation, the extension, I should say and I wanna talk about that legislation now really briefly. Just to recap from the last few months. Some OZ reform legislation was introduced into the House and the Senate last April. I was on the record as predicting that it would pass by the end of 2022. It did not. I’ve got egg on my face. And now we’re in a new session of Congress. So now that legislation would need to get reintroduced to the floors of the Senate and the House. James, I know you mentioned earlier you’ve been in contact with Senator Tim Scott’s office. What have you heard? What do you think is most likely in terms of when it could get reintroduced and then when do you think it may or may not get passed?

James: Yeah, a great question. I’ve been very fortunate to be in touch. And I know you have been staying in touch with the senator’s office as well and really paying attention to legislation and bringing it up quite a bit. So, thank you for that. And yes, you were wrong. It didn’t get passed in ’22. Sorry, man.

I spoke to him this year. I’ve spoken with him last week actually and by all indication it looks like the legislation will get into a bill form by February. It looks very favorable to get passed. There are a few holdouts on the…there’s actually just one holdout on the Senate side that they need to work a little bit more on. Just a reminder. It’s Senator Cory Booker on the democratic side and Senator Tim Scott on the republic side. And they’ve rallied bipartisan support even for this extension of their original bill. A lot of good under the idea of reforming some things, allowing fund to funds for smaller investment opportunities. So, we were talking about lower, you know, lower capital gain out there in the world. Well, now a fund-to-fund provision would get people the opportunity to go in at lower dollar amounts than many of the reg D required amounts…ours generally is $100,000 minimum as example.

But it does look like it’ll hit bill February or at least let’s just say this Spring, first quarter, maybe beginning of second quarter. And Senator Scott’s office does think it will pass. They have very good conviction on that just because the final holdout on the democratic side…there’s only small kinda changes, adjustments but, you know, it’s gonna take a little bit to work through that. Unfortunately, the last thing I’ll say is that Congress is slightly busy with debt ceiling extension and a few other things that are gonna suck the vacuum out of real legislation for a little while here.

Jimmy: Yeah, indeed. That seems to be the case just about every year for the last…in recent memory at least. Well, James, I really appreciate you joining me here today and great insights on opportunity zones and on DSTs. I wanted to zoom out for a minute here in the last few minutes we have and just to paint some context. Capital Square is really viewed as a leader in the private equity real-estate industry. That’s why I’m so glad we get you on the show again here today, James. You know, with that said, what are some of the most powerful trends that you see playing out over the next few years cross that broader private equity real-estate landscape?

James: Great question. And we’re very fortunate that Dr. Peter Linneman from the Wharton School is an economic advisor for us. He’s written and rewritten enough data to…a whitepaper for us called “The Golden Age of Multifamily Investing”. Originally, we were in touch with him and hired to prove out some of our theses of where we see multifamily investing, our core competency and focus and then branched that also into multifamily development. It’s been a great relationship. And, you know, frankly, it’s really nice to have somebody with his team’s acumen and focus to be able to provide real hard and raw data. So longwinded way of saying we still are woefully underhoused here in the United States. We do not have anywhere near the number of housing starts. You know, the number of total housing starts needed to fulfil our current demand on housing that includes multifamily, it includes single family. One thing that, you know, is noted on that in the current market conditions is interest rates have gone up as affordability is going up. We’ve also seen home builders basically stop. Cancelations and deliveries are gonna be way, way down because of the current economic trouble.

It takes time to restart that. So, any of our kinda outlook based on some of the data from Dr. Linneman is only becoming more challenged. And so, for us, development…you know, housing development real-estate will continue to be a big focus, opportunity zone or not. That is where we will continue to branch and do more. Specifically on the private equity side we’re branching into a built for rent development communities. So, these are purpose built single family or town home communities. We call them horizontal multifamily, that are built for rent. And that’s to fill the need of really two individuals and family types. Those who are not interested in extending the overall view of renting for a longer period of time and then those who are priced out or it’s unaffordable to buy. And that will grow. You know, we see a number of statistics. That will grow significantly and that’s also a play on kind of improving the overall rental stock for single family homes. Most single-family rentals are, you know…and I’ve owned them individually. They’re, you know, grandma’s house down the street that’s rented for…you know, to a family for a long period of time and does great but run by mom and pop which are many of our investors including people like myself as I’ve said. But building and managing and looking at these communities more on a holistic institutional quality, you’re delivering a better product to an increasing demand structure.

So, I’m getting specific on our outlooks in private equity real-estate but I use that in filling a big demand for more housing even if it’s not build and sell or multifamily etc. It really is just getting more housing stock into the country and into specific communities as populations have continued to increase. You know, I see some data about rents coming down etc. They’re always quoting these big national numbers. Obviously, real-estate is super local and geographic. So, I really wish they would always add an asterisk of, “Nationally, you know, rents have gone down 1% after they went up 13% nationally.” So, you know, you would think that’s a good benefit to renters which is great. I’d love for things to become more affordable, especially with inflation the way it is. But inflation and housing inflation really is a symptom of the long-term challenge we have. It’s just not enough. So, our goal…you asked. Our goal will be continuing the opportunity zone, non-opportunity zone to get more development out there and hopefully, you know, development that resonates with investors and advisors as well.

Jimmy: That’s great, James. It’s just that simple. Just build more housing. It sounds simple anyway but it’s been a challenge for a long time in this country. Well, James, we’re out of time. Thank you so much for sharing your insights today. Where can our audience of high-net-worth investors and advisors go to learn more about you and Capital Square?

James: Absolutely. Advisor centered distribution model. So please, first and foremost, contact your financial advisor, your registered investment advisor, your wealth manager. And in addition to that, That’s Capital Square’s website. You can easily google us as well. Capital Square 1031. Any information like that will pop up. On our website, contact information, more information about our offerings, history of the company, development cameras. You get to see our construction cams for all of our opportunity zone and non-opportunity zone developments which I actually just go on, goof around a lot. My kids catch me like I’m watching YouTube or something. But thank you again, Jimmy. It’s always just great to spend some time with you. I love what you’re doing. It’s amazing to see where the industry have gone. You know, someday they’re gonna give you an award for, you know, being on the forefront of all of this. And then maybe by then, we’re talking about $100 billion a year OZ industry, right. We’ll see [crosstalk 00:49:54]

Jimmy: That’d be great, James. And a final reminder for our listeners and viewers. I will have show notes available for today’s episode at And there you’ll find links to all of the resources that James and I discussed on the show today and please be sure to subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episodes. James, we’re out of time and your dog’s barking so I’ll let you go. Thanks again.

James: Hey, man, have a great time. I’ll see you soon, okay.

Jimmy: Thanks, James.


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