OZ Pitch Day - July 20, 2023
Finding Optimal OZ Investment Locations, With GTIS Partners
In this webinar, Peter Ciganik discusses how GTIS assesses individual census tracts to identify locations that are ideal for making long-term residential and industrial investments.
Interested In Learning More About This Opportunity?
You can visit the Official OpportunityDb Partner Page for GTIS Qualified Opportunity Zone Fund II to:
- View beautiful high-resolution images.
- Learn key details about the fund and related projects.
- Request more information from the fund sponsor.
- Overview of GTIS Partners, a private partnership investing primarily in residential and industrial properties in major Sun Belt markets;
- A view of the illiquidity associated with Opportunity Zones, and how the tax incentive compensates investors for this;
- Discussion of what makes a particular census tract optimal for investment and how certain census tracts qualified;
- Review of various census tracts where GTIS has invested;
- Why GTIS is bullish on multifamily and industrial as asset classes;
- Why GTIS structured its OZ fund as a REIT;
- Investment terms for GTIS Partners’ second OZ fund
- Live Q&A with webinar attendees.
Industry Spotlight: GTIS Partners
With broad expertise in investing, structuring, design, development and asset management, GTIS professionals oversee projects in residential, industrial/logistics, office and hospitality from concept to completion. Today, GTIS is established as a leading investor in the US residential sector, with a portfolio footprint in more than 35 major markets located predominantly in the Sunbelt.
Learn More About GTIS Partners
- Visit GTISPartners.com
Jimmy: Hello. I’m Jimmy Atkinson, founder of OpportunityDb. And today I’m joined by Peter Ciganik, senior managing director at GTIS Partners. We’re gonna have a conversation about GTIS Partners Opportunity Zone Strategy. Peter, it’s great to see you. And before we dive in, who is GTIS Partners?
Peter: Hello, Jimmy. Thanks for having me again on your program. GTIS Partners is a private equity real estate firm headquartered in New York with about 4.2 billion of assets under management. We started in 2005, and we’re a private partnership investing mostly in residential and industrial properties in big Sun Belt markets. And here is our portfolio of projects over the last 17 years, 195 different properties with about $13 billion invested over that time, 56,000 homes, about 9,400 residential multi-family units, and 7.7 million square feet of industrial.
Jimmy: Peter, given your history with institutional investors and your strategy, what attracted you to the Opportunity Zones program?
Peter: Oh, that’s an interesting story. Back in 2017 when the program came about, we were raising what would’ve been our third institutional fund, and the first two projects in that fund turned out to be located in Opportunity Zones.
As you know, there are three main conditions to the program. The first one is obvious, it has to be located in opportunity zones. And when I saw that we had this initial portfolio, I studied the program and thought, how can we claim a tax break for ourselves? Well, as you know, it’s not for the managers, it’s for the investors to claim a tax break in their tax return, but it made me realize that we have been active in these types of areas all along.
We had over 180 million of equity invested in projects that were located in opportunity zones before those locations were designated, so it was a pretty easy transition for us to consider this as a market where we are active anyway.
The second condition is that you invest in ground-up development, or heavy redevelopment and repositioning. You cannot simply acquire an existing office or apartment building and cash flow it while you wait for gains. You have to build something new. You have to help transform the communities. That’s really the goal of the program, and that’s what we do.
GTIS is a development-based fund manager. We’ve been active in ground-up development since our inception in 2005. We have in-house development capabilities plus joint ventures with 30 plus local development and construction partners in all the markets where we are active.
And then lastly, you have to hold this investment for 10-plus years. To me, that’s actually a fair compensation for illiquidity. The government is giving you a substantial tax gift, if you will, for holding it. And that fits well with the spirit of the program, and we’re fully aligned with that. We have an established fund management platform investing on behalf of some of the world’s largest pension plans over a long time period, and with extensive reporting institutional style fees and governance in place.
So, across all these conditions and criteria, this was almost a perfect match for us. And as I mentioned, we simply took our latest fund, we were about to launch and certified it as a qualified opportunity zone fund.
Jimmy: Peter, you mentioned earlier that this is a location-based investment program. There are over 8,700 census tracks that have been designated as opportunity zones, but where are these opportunity zones located exactly, and more importantly, are the locations good for investment?
Peter: Many people make assumptions about what opportunity zones stand for, and, again, there is a huge variety. But when we looked at it, we realized that not all opportunity zones are created equal. Market and location are critically important, and selection matters.
First of all, they used income relative to the local area as a measure. Basically, you had to be 80% or below the median income in the area. Well, even wealthy places have locations that are below 80% of the area. We had a project in Boulder, Colorado, if you are familiar. It’s a well-to-do town in the Denver area where a lot of tech companies have set up their regional headquarters. And we had a project across from Google’s office that we started before the program was even conceived.
We were planning to build a master plan with some office and some apartments, simply on the thesis that the tech presence in Boulder would be expanding, and that one day we might be able to lease it to Google or one of their competitors.
Well, in 2017, it became designated as an opportunity zone because even in a wealthy place like Boulder where average income is over $200,000, there will be one census tract that’s below average. Well, it happened to be the parking lot we owned because there were no households on it at the time, and therefore no household income.
Over the next few years, we constructed a beautiful master plan, and today it has three apartment buildings and an office that we eventually sold to Google. Following the pandemic, they asked their workforce where they would like to work if they returned to office, and they had over 1,500 applications for Boulder, so they had to expand quickly. We sold it to them at a nice 25% return.
The second criteria or condition that was used was basically old data from the 2010 census. They just didn’t have the 2020 census available at the time. And by doing that, they really included areas that in the meantime have changed dramatically. Places like downtown Brooklyn, the LA Arts District, Wynwood in Miami. Those were perhaps places in 2008, 2009 that were lower income, but as you know, in Brooklyn, that’s the place to be in New York today. When in 2008 you might have lived in Brooklyn to commute to downtown Manhattan for a job because it was cheaper, it’s the other way around today. But all of downtown Brooklyn is an opportunity zone.
We have a project in Park Slope, which is a very nice area of Brooklyn on the border of the Gowanus Canal, where we’re building an apartment project on Fourth Avenue in an area that we have considered investing even before opportunity zones came about, and there is certainly a lot of development happening regardless of the tax incentive. This will be a 200-unit mid-rise residential project that will also have an affordable housing component.
We just managed to squeeze in the affordable program before that expired in June 2022, so we’ll have a 30-year tax abatement on top of the opportunity zone tax abatement. This is just referring to real estate taxes from the city.
Thirdly, a lot of non-residential areas qualified because they used household income. There are places that simply don’t have households. Some of the notorious ones that people like to point to are Fifth Avenue in New York. The museum mile is an opportunity zone because it has museums and Mount Sinai Hospital and no households.
Of course, that’s probably the most expensive real estate in the world, but it’s not a very usable opportunity zones. The museums are not gonna tear themselves down to redevelop, but there are places like industrial parks, airports, places where people don’t usually live, but that are perfect for investing in non-residential properties.
We have a project in Goodyear, Arizona, which is a town in the Phoenix MSA, where the Goodyear Tire and Rubber Company was based. So, a very large campus that they’ve now reconfigured and turned into an industrial park was designated as an opportunity zone because there simply are no households.
We have a project right next to the runway of the Goodyear Cargo Airport, which is one of the hubs to transport goods into the Phoenix NSA. It’s literally right next to the runway. You can see it on the bottom picture here. But due to the fact of how opportunity zones were designated, it became an op zone, and we have now constructed a project with two warehouses, one cross-dock, and one rear-load, and listed to HelloFresh, the frozen food distribution company, at a very nice return.
Fourth, income is not the same as full potential like student housing. Grad students are cash poor but have great potential. University campuses is where you want to be for future, and you have two dozen university campuses, including Columbia, UPenn, University of Southern California, which are very vibrant areas, but they have lower student incomes.
We have a project at the University of Maryland. The entire campus is an opportunity zone, and we have a parcel that’s actually on campus. We’re building a 432-unit project there that will satisfy that demand, or at least add to the available inventory in a very tight market. This is a non-replicable true “A” location on the border of campus.
And lastly, there was a definition of contiguous cracks in the legislation, which allowed the governors to include some census tracts. They were not necessarily low-income, they just bordered a low-income area. And some of the more notorious ones are downtown San Jose, where one part of town includes the headquarters of Adobe, and Google, and other tech firms, but the other side of the highway is a low-income census tract. Well, they joined them in a contiguous tract.
We had a situation similar to that in Phoenix where we have a project, a large community that we’ve been working on since 2012, was the former proving ground of General Motors. They used to test their trucks in the desert, and the city of Mesa basically grew around it like a donut.
So, when GM became distressed in 2012, we offered to buy the entire proving grounds, and the city rezoned it for us for residential. It was contiguous to some very nice areas that certainly wouldn’t quite qualify for opportunity zones, but because it was contiguous, it was designated. And today, it’s a vibrant community of 1,200 homes with beautiful amenities, parks, trails that we built over a decade.
The last part of it is the 200-home single-family rental community where we are leasing these bungalow-style homes to folks who love the suburban lifestyle but are not ready to buy.
Jimmy: Peter, really enjoying this presentation so far. A few questions for you, I wanna hear more about your strategy. I know you and GTIS partners are really bullish on doing multi-family and industrial within your opportunity zone structure. What is it that you like about those two asset classes?
Peter: Yeah, our approach really starts with a diversified pool of assets, but in the last decade or so, the most interesting property types to invest in have been industrial and residential. We’ve done all of them, but office hasn’t been an opportunity in quite some time, retail is still going through post-e-commerce pain, so we focus on multi-family, single-family, which is a little bit different from other managers perhaps in industrial logistics. And it’s mostly in big regional Sun Belt markets and talent magnets as we call them.
Of course, places like Denver and Nashville are not that sunny, but they are among the markets that attract today’s talented workforce. And lastly, we try to make sure that we mitigate the risk of a single asset exposure. That’s why we set this up as a diversified fund in a REIT format, which we believe is suitable for private wealth investors, but we offer institutional terms similar to how we work with the world’s largest pension plans, sovereign wealth funds, and endowments.
Jimmy: Okay, that’s interesting. I want you to talk to me more about the structure that you chose. Most opportunity zone funds are structured as LLC partnerships. What are the benefits of the way you’re doing it, structuring it within a REIT?
Peter: Yes, we approach it a little bit differently. There are a couple of REITS out there, but our premise was to offer a diversified fund, a commingled fund, if you will, of about 15 assets targeting $20 to $50 million per commitment rather than what we call one of mega deals or one of small deals. There are plenty of those out there.
And sometimes that local one-deal fund could be a great deal. Local investors, local developers know their market, but structurally we don’t think that’s the best way to approach opportunity zones. I’ll give you an example. If you have an office project and it performs well, you build it, you’ll lease it, you have a five-year lease, and everything goes swimmingly, but the lease ends at the end of five years, you may be presented with a structural issue if it’s a one deal fund.
Let’s say you have to put in some tenant improvements or fix the roof, where do you get the capital in a pool of one asset? You can call the capital from your existing investors, but that would reset their tenure clock in opportunity zones. Or you can approach new investors, and bring in new money, but in that case, you automatically create a bit of a conflict.
Who should benefit from the terminal value of this project? The people who first put money at risk with you initially, or those who came into, so say, rescue it down the road?
We don’t like that kind of conflict. In the diversified fund, keeping just a 10% reserve will be more than sufficient to fix any issue with one or two assets in a 15-asset portfolio.
Now, imagine a deal goes badly, and it’s a one-deal fund. Well, in that case, it often happens that sponsors essentially abandon a project. If that happens to you in a regular fund, the returns will suffer, but you’ll move on. In an opportunity zone structure, that would accelerate your tax exposure.
So, again, structurally not a good thing. You would have to pay your deferred tax right away if that happens. So, we thought a commingled structure would make sense, and a REIT in particular for its tax efficiencies, there’s an automatic 20% tax reduction for REIT dividends.
As you know, rental income from opportunity zone funds is taxable. It’s only the gain that is forgiven, but a REIT will get a 20% tax reduction on that income. There are no state-source income filings. If you never set foot in California, but your fund invests in California, they will make sure that they reach out to you in terms of tax time, and you’ll have to file your K-1s with California if your fund is not a REIT. And it’s easier to administer with this 1099 versus multiple K-1s.
But really the most important reason why we chose this was the optionality on exit. We thought about this in 30-year terms. The program has a 10-year minimum hold for tax abatements, but a 30-year maximum as you know. You can hold this until 2047 tax-free. And a REIT IPO is a way to both offer liquidity, but for those investors who would like to keep it for longer, have them preserve that tax benefit.
If we manage to IPO this fund or perhaps sell to a larger REIT, our investors will hold shares in a liquid vehicle that they can decide on their own to sell 10, 20, or 30 years down the road, while preserving that tax-free treatment. That can be a supercharge Roth IRA, if you will.
Even if the basic return is 5% compounded over 30 years that can mean a very large capital gain. And that’s why that capital gain abatement is so meaningful.
Jimmy: For our viewers today, can you walk through some of the key terms? If they’re interested in making an investment with you, what’s the minimum investment and those other types of logistics? And then also tell us where they can go to get in touch with you if they wanna learn more or get on the phone with you or request subscription docs.
Peter: Sure. Here are the key fund terms for our fund two. Our first fund that we raised in 2019 to 2021 was a $630 million pool of diversified properties in industrial and residential. Same strategy for the second fund, targeting 500 million currently open to accredited investors. So, I have to make a disclosure here that this entire presentation is meant for investors who can qualify under the accredited investor criteria.
We’re targeting a 12% to 14% gross property level IRR and about 10% net. Here are the terms for fees, and particularly I’d like to point to what we call the fund-wide waterfall that we use as a commingled fund. Our incentives are tied to the performance of the entire fund and not a deal-by-deal incentive as many offerings out there have, which means we offer a 7% preferred return to investors before we take any kind of incentive from the performance of these assets.
The asset management fees vary from 1.5% to 2% in these types of funds. Our asset management fee is 1.6%. We think this is a pretty institutional setup, but again, the fund-wide waterfall nature of this product, I think aligns the incentives very well with our investors.
And if you’d like to invest, we welcome individual investors. You can reach out to me at my email or phone number here, and we’ll look forward to discussing your situation and our strategy.
Jimmy: Peter, we’ve run out of time, but thank you so much for presenting today. Really appreciate your time.
Peter: Thanks for having me, Jimmy.