OZ Developments In Richmond and Knoxville, With Capital Square

In this webinar, James Brunger discusses Capital Square’s extensive history in the Opportunity Zone industry and reviews a project breaking ground shortly in Richmond, Virginia.

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Webinar Highlights

  • Capital Square’s status as one of the pioneers in the Opportunity Zone industry, including the creation of housing in undercapitalized communities;
  • Overview of Capital Square’s history, including a focus on tax-advantaged real estate investments;
  • History of Capital Square’s first seven Opportunity Zone funds, several of which are producing distributions to investors;
  • Highlights of the seventh OZ fund in Capital Square’s hometown of Richmond, Virginia;
  • How demographic factors are driving growth in Richmond;
  • Summary of a project in Knoxville, Tennessee, a secondary market where Capital Square is undertaking a joint venture right on the Tennessee River;
  • The importance of being both a good developer and a good operator to generate returns in an Opportunity Zone fund;
  • How fund structure can align investor and manager incentives;
  • Advantages of the single asset QOF structure, including clarity of timelines for the overall project;
  • Live Q&A with OZ Pitch Day attendees.

Industry Spotlight: Capital Square

Since 2012, Capital Square has helped investors navigate tax-advantaged real estate offerings. The company’s experienced, investor-centric team provides a successful foundation for investment opportunities including Delaware Statutory Trusts as replacement properties for 1031 exchanges, Qualified Opportunity Funds, and private investment offerings.

Learn More About Capital Square

Webinar Transcript

James: Thank you very much. I really appreciate it. My name is James Brunger. I run sales and distribution among a few other things for a firm called Capital Square. I’ll get into us here in just a second. I do wanna just, you know, segue with a couple of things that Andy said. Opportunity Zones, we’ve been at the forefront. We started our first opportunity zones in 2018 after the original legislation was passed. They are created under the idea of getting capital into undercapitalized communities. We are so proud of the work we’ve done here, regardless of the direct benefit in being able, in our case, to namely provide housing to undercapitalized communities, really the core of what we do. Also, echoing something Jimmy and Andy were saying, this is a once in a generational tax savings opportunity. Opportunity Zones are still completely overlooked.

So for all of you on the call, congratulations, you’re ahead of the curve. I hope you learned something throughout the day. And obviously, I’d love to tell you a little bit more about me, my firm, and what we do. With that being said, I’m going to kind of get into the presentation here a little bit, and then we’re gonna do some fun as well. I got two different programs for you. I’ll tell you a little bit more about Capital Square, and then get into those programs and keep it rolling. Capital Square, we’re about 127-employee firm based out of Richmond, Virginia, with offices in Washington, D.C., Newport Beach, California, founded in 2012. Our founder, co-CEO, is a gentleman by the name of Louis Rogers, big inside of the tax advantage real estate world. He is mainly known for syndicating his first 1031 exchange as a real estate lawyer in 1986, and really never looked back since.

So we’re founded under the idea of finding tax-saving opportunities in real estate investments for our investors. Very fortunate to over $7 billion of total real estate transacted. Hundred and thirty-five different investment programs, 160 real estate assets, more than 6,000, almost approaching 7,000 investors. So we have size, we have scale to give you a little bit more about us, specifically on the development team, and I’ll back up. We are a fully integrated, diversified real estate investment company that focuses on tax advantage real estate investments. 1031 DST programs, that’s where we started the firm. As I said, 2018 being tax advantage real estate investments, Opportunity Zones came perfectly for us. Couldn’t have come in a better time since we were diversifying our business. And so opportunity zones are something personally I’ve been at the forefront of it. I’ve been involved. And then most importantly, our development team and our investment team really has focused in on this.

And we’ve had some great success, which I’ll highlight here. A couple of the players at the top of the firm, but really a deep bench overall. The team itself, again, on the investment side is about 30 individuals, on the development team about 12 individuals with a ton of experience. Since our first funds were funded and our first development started in 2019, we have actually about 680 million of total development value now. Need to update the slide. And we’ve delivered three and now four of our Opportunity Zone funds. At Capital Square, we focus mainly on single property, single asset, ground-up Opportunity Zone investments. We do that for clarity of vision and underwriting so you as investors know exactly what you are investing in, where the potential risks are, please review all of the risks, and where some of the potential benefit is.

It’s worked very well for us, and the reason why is because our non-blind pools, you should have confidence going into the investment. Our investments generally carry a low minimum of $100,000 with some exceptions below that. So we allow you, your investment professional to be able to determine what the best allocations based on your risk tolerance, market selection, and to Andy’s point, the fund you would like to have in making some of these investments. Specifically, this is a highlight of the seven funds, and I’m gonna also introduce our eighth fund. So far we’ve delivered fund one, fund two, fund three. One and two are 100% leased up. Both of these have had a cash-out refinance feature. I’ll get into more detail here in a second and are producing quarterly distributions to our investors today. Fund three will have that happen by the end upon stabilization, likely by the end of 2023 the project is fully delivered and in lease-up today. Our fourth project is a hotel in Charleston, South Carolina.

You can see by this rendering an excellent project. Fund five is another very large multi-family project currently in lease-up with a ribbon cutting coming in May. And then our sixth opportunity zone is a ground-up 20-story residential tower in downtown Raleigh, North Carolina that is vertical and getting out of the ground. The first six of our funds are fully committed, under construction, and have no room for additional capital. I just wanted to show you a little bit about our scale. The seventh fund is one that I’m here to talk to you about today, which is our West Marshall project in our headquarter hometown of Richmond, Virginia. So to tell you a little bit more about one of our projects that we have available for investment today, it’s our seventh opportunity zone fund, as I’ve said. I want to give you a little bit of kind of the visual if you will.

And as you can see really our goal here, this is a formerly industrial neighborhoods called Scott’s Edition. Our goal is to have projects that add a really high level of design and in addition to that, really fit into the neighborhood. So a little bit of some appeal to the old industrial, but obviously with very modern and great features. One thing I’ll point out specifically on real estate opportunity zone funds, real estate opportunity zone funds, you have your return in two areas. We currently have about 14,000 apartments in our overall portfolio, including our stabilized portfolio. The vast majority of our 7 billion or so on assets, about 80% are housing core stabilized product that we manage, and that is really located in the southeastern U.S, so core markets like this in Richmond, Virginia.

My point on opportunity zones is you have to be number one, a very good developer. You have to develop great properties and great projects. But number two, you also have to be a good operator. And the reason why is these projects aren’t build and sell. They’re build, hold, manage and maximize return over at least a 10-year hold timeframe. So the opportunity zones for us really fit well to the core of who we are since we do manage, and have managed for a number of years, a number of properties specifically in the multi-family and housing space. A little bit more rendering here, but overall, to give you more scale on this property, so the opportunity zone fund seven, we launched this last year on the capital raise. The total offering size is $63 million of equity, $100,000 minimum investment. And again, some exception there, $1,000 per unit. This is only open to accredited investors. Our loan value on stabilization is estimated to be at 65%.

We do have construction financing that we’ll close in early June. We’re looking closer at about 56%, but we have gotten great bids and at great rates there. There is a 7% preferred return cumulative compounded annually to our hurdle rate after your investment of A7, and then investment splits of an 80/20 beyond that. So that puts the investor very clearly a return potential that we need to meet. The reason why we have a preferred, good preferred return, for those of you who haven’t invested in these types of structures, it incentivizes us to return as much cash as possible to you, get that 7% above cash flow or try to. And then in addition to that, with that 80/20 split of investment profit above A7, it incentivizes us as a manager to maximize the sale potential since that’s where we’re going to make most of our money.

We’re directly and completely aligned with our investors under this structure. We are gonna hold this for a 10-year minimum from the date of our last investor, which we expect to close out sometime in July or August based on current trajectory of raise. We have closed 39 million of total equity. Any of you on the call who have invested in this project, thank you so much. Really appreciate it. So we’ve got about 24 million or so to go, and we are averaging about $1.5 million to $2 million a week. So one thing that I wanna just point out before I go too far down the road, I know the market has had turmoil. There still are capital gains. That’s why you’re on the call. I know most of you know this, but opportunity zones being overlooked, being available for capital gain there are still capital gains in a choppy or market like we have today.

What we’ve seen is it’s primarily business owners who are selling for very large gains with very low basis. So the idea of deferring tax through an opportunity zone and then completely eliminating the gain beyond 10 years is very attractive. Please, if you haven’t looked in really good detail to some of the information provided by OpportunityDb, please dig in deep. This is something that’s completely overlooked to Andy’s point, and I really feel that there are a lot of people who could benefit knowing what opportunity zones can do for them. Backing up on this project, we have been very active in the Scott’s Edition neighborhood of Richmond. Again, this is our home city. We have about 4,000 apartment units that are stabilized that we manage and own on behalf of our investors throughout the greater Richmond area. We are the number one buyer of multifamily for four years in a row in central Virginia all the way out to Virginia Beach.

We’ve been very active here, we know this market well. And then as you can see by our first, second, third opportunity zone, fifth opportunity zone, we’re very active specifically in this neighborhood. The fund we’re talking about today, Opportunity Zone Seven, sits right here. In fund one, two, and three, we have broken our own record on the rent per square foot. So this market and what we’re delivering here has been extremely well received by the tenant base. Giving you just a little bit more about Richmond, it’s a million and a half people on the total MSA growing at about 1% a year. It’s the number one city for people fleeing the Washington, D.C. area, looking for more affordable living. And then frankly, we’re building exactly to what they want and the quality they like.

Some of the key strengths, you can see here at $2.51 cents a square foot or $1,700 a unit. That’s what we’re experiencing today, and that’s just in line with our underwriting on this project when we look to deliver. Part of what you see, just to give you some updates, specifically on the submarket of Scott’s Edition, this is why we like the market so much. On yearly projections, independent third party, you see a 98% occupancy view, 97.6% over the next 10 years. Although there is some supply, namely we are creating, the reality is demand continues to be a view of outstripping that supply, realize forecast, and then realize future forecast. These numbers remain quite strong. One other reason, and this is probably the biggest reason why we like single asset opportunity zone funds like this, is clarity of delivery. Why? Our goal, and I mentioned this before on our earlier opportunity zones, is to stabilize and provide a cash-out, tax-free refinance to our investors targeting between 40% and 60% of the original equity you invest.

We do that when we move from a construction loan to a permanent fixed-rate finance loan, generally at stabilization, which takes about 12 months or so, especially a 350-unit project after delivery of the program. You can see here we’re targeting a completion 24 months of construction schedule. Groundbreaking is on April 17th. And we’ve already started some infrastructure. So this project is live, and is currently under preliminary construction. And then what you can see is our goal is to deliver refinance sometime in Q2, Q3 of ’26, well before your tax due on April of ’27 through your deferral. And again, our goal is to hold this to 10 years from the date of the last investor. Why do you invest in a project like this today, be an “early investor?” Number one, we have a 7% preferred compounded annual return that starts in the date of your investment. And number 2, you have 180 days from the date of your gain to make your investment to qualify for an opportunity zone.

So there’s a couple of things there. Perpetual, it’s not a perpetual vehicle, it is a closed-end vehicle. We will cut off the fundraise on that project again, opportunity fund seven. To highlight one other program for you in the remaining few minutes, I’m gonna go through this relatively quickly, but we recently launched this, a ground-up multi-family development in Knoxville, Tennessee. Knoxville is the home of the University of Tennessee. It has about a 900,000-person MSA. It’s definitely a secondary market in Tennessee, but we have been the number one buyer of multi-family in Chattanooga for two years in a row. And we’ve been very active in the Knoxville market. Unique things to this development, number one is gonna be a beautiful 348-unit multi-family project.

There are 35 units with an income restriction to qualify those units. In exchange for those units being income qualified for 10 years, the city has provided us with 6.5 million of TIF grant or equity. As you can see, this project’s going to be constructed to the best quality possible, condo quality, again, a 10-year hold. We are in a joint venture with LIV Partners on this. LIV Development is somebody we’ve bought from and worked with in the past. They build exceptional programs. We are the JV here, so we will have our hands on the construction management. This is a $46 million raise. We did recently open this offering. It has an 8% preferred return with an 80/20 split. A couple of unique things to it, is that it is right on the Tennessee River, just across from the University of Tennessee Neyland Stadium.

This is going to be something that really changes some of the market. This is not a student housing focus, but the reality is, is the large base of students at the University of Tennessee have put a massive strain on housing throughout the city of Knoxville. This is unique in the fact that the construction loan is in place. We are at 61% loan to cost. We are on a 48-month term for that construction loan and at very good rates of so far +285. The GMP guaranteed maximum price contract with Southern Development Corp is in place. This project is going live and will be breaking ground in the middle of April with a groundbreaking in early May. We’re a little bit behind on getting our groundbreaking done on it.

But you can see here by the location, this is exactly where it’s located. University of Tennessee Stadium, directly across the river, downtown Knoxville right up here. There is a footbridge directly south of our property that the city has already put the money aside, and we’ll start construction with a delivery of 2026. That is exactly about the same time we will be leasing up this property. So a total return here or a total raise of $46 million, we’re about $1.7 million in. Again, we just opened the fundraising after closing the land in January. A couple of other big talking points. As I said, the guaranteed maximum price loan is signed…I’m sorry, contract is signed. TIF proceeds, so 6.5 million on the equity stack guaranteed by the city. The loan is in place. The income restriction rents, those roll off at 10 years. I’ve never seen that from any project I’ve ever worked on.

Please contact us about these two projects. They’re really exciting. As you can see, we provide you with these single-asset view on our properties simply because we want you to take into consideration exactly what you are investing in. And for us, it’s all about providing housing in housing-deprived communities throughout that opportunity zone program. So, Jimmy, I think I’ve got less than a minute left. I covered a lot of ground. Hopefully, it kicked us off very well. But that being said, do you want to throw one question in the minute I got? Or am I over already?

Jimmy: No, you’re fine actually. I sandbagged you a little bit, James. We got a few more minutes. Let’s take a deep breath. We’ve got quite a few questions coming in. I’ll get to Bob’s question first. He was the first one to submit one related to your presentation, James. Bob asks, “Does Capital Square perform the development or are you guys relying on local development partners?”

James: It’s a great question. A little bit of a combination of both, Bob. In Richmond, we are the development head and the lead, oftentimes not taking a co-JV or a co-developer. In Knoxville, we are a co-developer on that project. I would say about 80% of our projects, we are the sole developer, and about 20% we’ll look for JV in certain markets. In this case, this is just a JV that we bought a lot of properties from LIV. They’re an excellent developer. We’re thrilled to be partnered with them. We have to have a relationship before we would enter into a JV just on knowing kind of who they are and them knowing who we are. But a great question. Thanks for asking.

Jimmy: Yeah, thanks, Bob. Thanks for joining us today too. Brad has several questions. I’m gonna get to Brad’s first question first and then we’ll come back to him if we have more time. He wants you to discuss on the 7% pref that you mentioned, is capital return before the 80/20 promote?

James: Yes it is.

Jimmy: And then he also asks, “Is there an entrance fee…” I’m sorry, “an entrance or exit fee paid to the sponsor?”

James: Well, as said, there is a construction finance fee or a construction fee. There’s a development fee that goes along with any of our projects. That’s true of any development project that you’re gonna see. There is an asset management fee generally running at 1% across most of our projects. And then you have obviously the 80/20 split on a profit above. To just give you some high level on our performance numbers, we’re generally in the low to high teens on our IRR targets with 10-year equity multiples, somewhere between 23 and 27, 28. So you know, really attractive. Those numbers are net of all fees on our projection. And again, past performance does not dictate future performance, but we provide every piece of underwriting as to why we think we will perform there inside of our offering documents, our PPMS. So certainly stuff to dig in a little bit deeper than OZ Pitch Day.

Jimmy: Good stuff, James. Bo wants to know about distributions. “When will distributions begin? And don’t you have to wait to build it and occupy it to create distributions?”

James: That is correct. You’re absolutely correct. So to review again… Oh, let me get to my timeline. Oh, come on. Here we go. Right. Here’s a good timeline. This is the timeline on OZ7. And each of our projects are different. Okay? I wanna be clear. This is why we do it. We want you to have confidence knowing what likely will happen. So OZ7, we’re groundbreaking next month, really, June so in two months. We’ll finish construction sometime in Q1 of ’25. We’ll pre-lease in Q4 of ’24. And then we’re gonna give ourselves all the way till about Q2 of ’26 to fully stabilize. Once fully stabilized, we expect to move from a variable-rate construction loan, which is true of pretty much every development. And then go to a refinance feature targeting 40% to 60% of your original investment in return tax-free.

And then quarterly distributions thereafter. Obviously, depending on how the property performs, ideally that will go up over time. If we have rental or inflation. But that big thing for you is that refinance feature after stabilization, stabilization taking about 12 to 14 months on a 350-unit project after it is completed. Good question. You would’ve no cash flow up until the refinance, and then starting quarterly distributions as it’s earning.

Jimmy: Excellent. James, we’ve got time for one more question. We’ll get back to Brad here. He wants to know how is the sponsor handling any cost overruns? And he also asked, “What is the development fee and is it on hard costs only?” You got one minute, James.

James: Yeah. It’s generally on hard costs. And what I mean by that is, you know, you’re gonna see it range. And some of it depends on the complexity of the project. Oftentimes it’s about 3%. So I would say 3% is a good number there for you. Again, 1% on our asset management fee while we’re running the program. All of this, all of the fees are completely outlined in our PPM, including, and not only obviously our projection, but our yield on costs, our projections on our full land costs, land bases, financing costs, every piece of underwriting you could possibly wanna get to. So, I would just defer any real detailed questions to the overall costs to be in there. If you’ve ever invested in development real estate, you’re gonna see us directly in line with every single program you’ve ever seen. We are building with institutional builders as well. So you know, it’s really kind of in line with what we do across the entire spectrum.

Jimmy: Awesome, James. Can you flash your contact information one more time? How can people reach out to you, if they’re interested in learning more or if they have… We didn’t get to all the questions either, so I would love to give everyone a way to reach out to you if they have questions?

James: Yeah, that’s no problem. Actually. It looks like my contact slide was deleted off of this. Sorry about that. capitalsq.com, so capitalsq.com. Simply feel free to Google Capital Square Real Estate, Capital Square 1031. You’ll find us Capital Square, Richmond. You’ll find us on every offering. You’ll see my direct cell phone and contact number, which sometimes can lead to me not calling back immediately. So please give me a little bit of time. Again, we have a team of 125 employees. On the sales and distribution side, I manage a team of over 20 people. Team members will be back with any of the questions. I see there’s a number of additional questions, Jimmy, I’m sure you guys will send them to me.

Jimmy: We will.

James: Enjoy the rest of the pitch day. Hopefully, this was a little bit of fun. And you guys, good luck on the rest of the day here.

Jimmy: Thanks, James. And I’ll post your conduct info and your website in the chat in a minute here. Thank you, James. Appreciate it.

James: Sounds great. Thank you.