OZ Pitch Day - July 20, 2023
OZ Investment Strategies For Uncertain Times, With Ray Mazzie
Ray Mazzie, managing partner at Southern Waters Capital, joins the show to discuss the current market cycle, his outlook on suburban, secondary, and tertiary markets, and the opportunity that they may present in these uncertain economic times.
Watch On YouTube
- Background on Southern Waters Capital and their overall investment strategy.
- Demographic trends and the investment case in the Sunbelt region.
- The benefits of taking on entitlement risk when constructing ground-up build-to-rent developments.
- Where the real estate market may be headed, and some opportunities for investors.
- How to know when to sell.
Guest: Ray Mazzie, Southern Waters Capital
- Ray Mazzie on LinkedIn
- Email Ray: [email protected]
- Southern Waters Capital
- Friendship Circle Charity
- Friendship Circle Charity Classic
About The Opportunity Zones & Private Equity Show
Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.
Jimmy: Welcome to “The Opportunity Zones & Private Equity Show.” I’m Jimmy Atkinson, and joining me on the show today is Ray Mazzie, managing partner at Southern Waters Capital. Ray, great to see you. Thanks for coming on the show. How you doing?
Ray: I’m doing great. Thanks for having me, Jimmy. Appreciate it.
Jimmy: Absolutely. So, Ray, you guys haven’t done a ton of work in the Opportunity Zone space yet, but still, I’m guessing that some of my audience of high-net-worth investors and advisors have probably heard of Southern Waters Capital at some point. But for those who may not be familiar with you and your firm yet, can you give us a brief introduction to your firm and what your role is there?
Ray: Yeah, definitely. So, I’ll start with the firm first. Essentially, the simplest way to describe us is we’re ground-up developers of rental housing, and we focus on built-to-rent, multi-family, and believe or not, some manufactured housing as well. And as far as my role, I’m the managing partner, as you mentioned. And really what that means is I’m just making sure everybody is doing their job. I mean, I wish I had a bunch of tangible technical skills. I really don’t. I’m just looking out for everybody, making sure our projects getting to the finish line. But truly what I’m best at, I think, is finding the next opportunity, getting those opportunities entitled, and then raising the money to do such. I’ve got a great team below me who really handles all the technical work to make sure that everything I’m out there ensuring my investors will happen does happen. So, it’s my role to essentially play quarterback and manager.
Jimmy: That’s great. And speaking of finding opportunities, I have to note, for those who may not be watching us on YouTube, if you’re listening to us on Apple Podcasts or Spotify or one of the other listening apps, Ray’s joining me from his car today, because it sounds like you’re always on the road, Ray? Is that right?
Jimmy: So, tell me where you’re heading today, and tell me more about the approach behind always kind of being in your car, seems like that’s probably your office most of the time. Is that right?
Ray: Yeah. Yeah. Well, first off, I’m super blessed. My late father actually was a truck driver for the greater part of my life, and so, the road is nothing new to me. I just get to stay in nicer hotels now. That’s the big difference. But yeah, no, I mean, a testament to my driving. I’ve put over 70,000 miles in my car in the last 12 months. What I really do is I live on 95, I-75, I-4, Turnpike, and I-10. Those are my areas where I’m just always hunting for dirt, basically the main corridors of Florida. And today I was lucky enough to come up to Orlando, got to stay with my brother, free hotel room last night. So, I came to Orlando late last night from Fort Lauderdale. Today I’ll have some meetings around Orlando, meeting with some people who may wanna invest in the Opportunity Zone project I’m sure we’ll touch on later. And then after that, I’ll head up to Jacksonville, where I’m doing some DD. I actually have some guys on-site right now, but I’m doing some DD on a 24 single-family home portfolio that we’re under contract on. So, running around. And then after that, I get to jet back down to Fort Lauderdale, and if I’m lucky, I’ll stop at a site visit along the way in Ocala, where we have a lot of work going on as well.
Jimmy: And I think that’s where your Opportunity Zone project is as well. And we’ll get to that a little bit later…
Ray: It is.
Jimmy: …in the show today. You mentioned DD. I think you mean due diligence, not designated driving. But maybe a little bit of both. Who knows?
Ray: Sometimes I do have a designated driver, not because I’ve been drinking, but because I need to work. I’m using an Uber if I’ve been drinking. So, no, my DD means due diligence.
Jimmy: All good stuff. All good. Just wanted to make sure there. Hey, so tell me, let’s talk about Opportunity Zones and your Opportunity Zone project that you’re working on and raising capital for in a few minutes. But first, just, can you paint us the big picture of what Southern Waters Capital’s investment strategy is, where you guys are focused, what types of properties you’re investing in?
Ray: Yeah, definitely. So, we’re a little different. We definitely go into deals a lot earlier than most people. Entitlement risk is something that we’re well accustomed to, and it’s how we drive value. The way I really simplify what I do is I arbitrage Main Street sellers with Wall Street buyers, is the best way to say it. And really what I’m doing is finding below-market-rate land, forcing appreciation through entitlement, bringing that to a JV or co-GP partner. And then we take that asset from site plan-ready to shovel-ready, then take it to an LP. Once we take it to the LPs, we go vertical and stay in the deal. And we either sell it CO, sell it stabilization, or refi, and stay in as long as my investors are willing to stay along for the ride.
So, the major difference, like I said, is our entitlement risk that we’re accustomed to. We navigate that. You know, I’m a former attorney, so is my business partner, and we’re lucky enough to have a new member of our team as well who’s a former UPenn Law grad, so we’ve got a lot of brain power, and we really just make sure that we mitigate risk along the way, but it drives so much value when you’re willing to take on that type of uncertainty, as people would say. And in regard to what type of product we build, like I said earlier, build-to-rent’s nice. I’m really product-agnostic is the best way to think about it. That’s why I said I’m a rental housing developer. I’ve noticed that if I say one product, people start putting me in a box. I don’t like to be put in a box.
So, we’re rental housing developers. I go to a site, and I ask myself, you know, what best fits here? Is it single-family detached? Is it single-family attached? Is it low-rise garden-style? Is it high-rise multi-family? You know, is it a manufactured housing community? What is it? Is it a combination thereof? And really, we’re yield-driven and opportunistic. So, that usually leads me to, honestly, not the major MSAs. I have no problem investing in major MSAs once prices come back down to earth. But where they’re at now, I think that it’s really a game of people who need to place a lot of capital and who are really more yield-driven. They’re more, I don’t wanna say fee-driven, but that’s what it seems to be these days.
So, anyway, with that being said, we’re really ending up in, like, suburban and tertiary or secondary markets, however you wanna refer to them, but essentially, what the old-school guys used to call bedroom communities, stuff like that. So, meaning, you know, we have assets in Cocoa, Florida, if you’re familiar with Cocoa. We have assets in Wildwood, Florida, which is within The Villages MSA, not too far from Orlando. And then we have assets in Ocala, Florida. And then, as I mentioned, we may have some assets in Jacksonville here shortly. So, that will be our first major MSA entrance, I would say, but at the same time, it’s an operating asset, which is new for us. We don’t really buy operating assets. However, I don’t wanna yell that too loud, because now we certainly have stepped into that arena, considering the market cycle, and the fact that there’s a lot of sellers who are providing great financing and/or great opportunities thanks to maybe a little bit of misjudgment on their financing situation a couple years back.
So, with that being said, again, we’re rental housing developers, and now we’re kinda stepping into operating assets. And hopefully, those operating assets allow us to enter those MSAs at a much more favorable price, and then maybe get a foothold and start to find more deals there.
Jimmy: Yeah. That’s interesting. Characterize where we are in the market cycle currently. Like, where do you see us at right now? What stage of the market cycle are we? And can you talk a little bit more about how that has changed your approach or may continue to change your approach in the future?
Ray: Yeah. I’ll answer your questions in reverse order.
Ray: Our approach has not changed at all, and I’m extremely proud of that. I listen and read Jim Collins, and Ray Dalio, and all these great minds and teachers. And at the end of the day, they always mention how your strategy needs to be fit for all market cycles, but at the same time, you gotta hold the dichotomy of being able to be flexible. So, what I really mean by that is we’ve always bought dirt at below market value. Period, full stop. We’ve always been able to force appreciation to, honestly, at or above market value. And we never use debt to buy our dirt. So, I don’t have some slow bleed going on. So, at the end of the day, what really happened is the market has slowed down the pipeline’s development, but it hasn’t tarnished it or ruined it or anything like that. You just have to have investors who are understanding and sophisticated.
As I mentioned earlier, I don’t normally raise from high-net-worth individuals. It’s usually family offices or private equity. I’m really excited to start talking to high-net-worth individuals. I think that they have a different perspective and a nice understanding, and maybe just a different, you know, return parameter that allows them to be a little bit more malleable as to the development and what can happen, which provides more optionality for me and my firm, which is really important, especially in a volatile market cycle like we’re in now. So, in short, haven’t changed my strategy at all. Still buying land at a great value, still forcing appreciation through entitlements, still looking to stay in the deal and go vertical. I think the biggest difference is that it just might take a little bit longer thanks to Mr. Powell and everybody else.
And then, in regard to, like, where we’re at in the market cycle, my business partner’s an old bond daddy, as they call him. He’s a bond nerd, so he has taught me… We’re all pessimistic. Let’s put it that way. I was writing some piece or talking to somebody about something. I was like, “You know, it’s funny. You barely ever see a bond trade above…” Not barely ever. You’ll see bonds trade above par value, but you’ll rarely see it trade above 10% of its par value, right? That would be amazing. But you could find tons of bonds that are at 50% below their par value. So, the bond guys are naturally pessimistic, by their asymmetric return. But at the same time, you know, we’re not so pessimistic that we’re not still chasing deals. I’m in the car right now looking for deals.
So, what I’m getting at is I think we have, like, another year or so of potential rate hikes. I mean, I don’t wanna scare everybody, but at the end of the day, I need to remain super conservative. I think I ascribe to, I think his name’s Shaun Rowles from UBS. I gotta tip the hat to him. I read a lot of his stuff. And at the end of the day, I think, you know, I hate to make a prediction, but who cares? I’ll do it. So, I think the highest we’ll end up at is 6.25% on interest rates, which is super high. I think everything grinds to a halt at that.
I was just in a meeting with my buddy, and he’s sitting and he’s telling me, he’s like, “You know, well, I’ve done a historical lookback, and, I mean, the average cap rate’s somewhere in the 10s. Like, you can have…” He was going all the way back to the ’70s and stuff. And I looked at him, I was like, “Andre, that really distorts the picture.” I was like, “It really distorts the picture.” I was like, “I would probably wanna look back to the Great Financial Crisis, because that’s the biggest time of downturn in the new economy, if you will.” And look, I have an economics degree from Florida State. Not gonna sit here and act like I’m the smartest guy in the room. So, I just always make sure that what I do is as conservative as possible. And if my deals still pencil over a 10-year period, at an interest rate environment where it’s 6% or 6.25% for a year, a year and a half, two years, whatever it is, then I’m okay. I’m gonna keep moving forward.
So, I think what it’s really about is just being conservative, understanding that things can get worse, but also knowing that, you know, the odds of them going apocalyptic are pretty low, and if they do go apocalyptic, at that point, everybody’s in the toilet, you know? So, I’m not trying to say that that’s how you should operate, but, you know, you can’t be an entrepreneur and, as my late father used to say, you know, scared money doesn’t make any money. So, we do our best to be careful, but at the same time be brave.
Jimmy: Yes. As high as interest rates are kinda creeping up now, you know, relative to the last 20 years or so, you look back 40, 50 years, to the ’70s, we haven’t quite gotten there yet even, totally different ballgame. How interest rate-sensitive are you guys with how you’re operating? You mentioned you’re not putting any debt on buying the dirt. Are you doing debt on the construction costs, and how has that impacted things?
Ray: Yeah, returns would be trash if we didn’t use debt on the construction. And a quick note on that. You know, we may not be in the Volcker days, but we certainly ramped up faster than we ever had before. And it was funny. Before rate hikes were starting, I had a bunch of older, smarter people telling me, you know, it’s gonna be a point, you know, the first rate hike is gonna be 100 basis points, it’s gonna be this, it’s gonna be that. And what do I know? I mean, I’ve seen low interest rates my whole life. I just turned 30 a couple weeks ago. So, I mean, I don’t even know… I don’t even understand markets with high interest rates. Or I should say I haven’t experienced them. I definitely understand them. But my point is, is they were, you know, preaching to me about how it’s gonna rise, it’s gonna do this. And I told ’em, I was like, “Guys, 50 basis points today is literally 2X’ing the interest rate, essentially.” I mean, it’s, the first one I’m talking about, a huge jump. I was like, doing 100 basis points, I mean, everybody’s gonna stomp on the brakes and look around and go, “What is happening here? Is this gonna keep going on?” Now, hindsight’s 20/20. Maybe the Fed wishes they did do 100 basis points in the beginning, and get everybody to stop and slow down, but…
Jimmy: Or if they had done it sooner, right? A lot of people think they waited too long.
Ray: Well, I’ll tell you this much. Hindsight’s always 20/20, but you don’t know when you’ve reached the point that it is 20/20. So, we’re talking about it today. We don’t know. In a year we may not say that. I can say this. If it went up sooner and faster, I probably wouldn’t have half the pipeline I have today. So, I’m gonna say thank you, always, and, you know, take the hand I’m dealt, and play it as best I can. I do my best never to get caught complaining about anything, because there’s always somebody in a worse off position. And my dad used to always say, you know, “If you threw all your problems in the middle of the room with everybody else, I bet you’d go to the middle of the room and pick up your problems and walk back, walk back to where you were.” So, yeah, I mean, I tend to agree with what you said, but at the same time, I like to think I’m a little…got a little bit of luck on my side too.
Jimmy: Sure. Well, you can’t always determine what happens externally, how the markets react, what the Fed does, but you can have an effect on how you react to it, right? How you react to it is all you can really control.
Ray: And Jim Collins always says, in one of his books, I think it was, like, “Good to Great,” or, “Great by Choice.” I believe it was “Great by Choice,” but he always says, it’s like, “It’s what you do before the storm that determines how you’ll weather it, not what you do, you know, during it.” Of course, you need to make the right decisions in both times, but you can make all the right decisions, or go to make all the right decisions during the storm, but if you didn’t prepare yourself and you don’t have the tools at your disposal, you know, you’re up the stream with no paddle.
Jimmy: Sure. So, how have the increase in interest rates, the rate hikes, impacted your construction financing?
Ray: I mean, yeah, listen, we’re looking at, like, 4% to 6% rates. I even saw LifeCos back in the day looking at, like… Back in the day. A year ago. Looking at, like… I mean, I never sign any agreements with this type of rate, but I literally saw LOIs, you know, in the high threes, mid threes for interest rates on construction. That is just nuts. It’s at, you know, 9%, 10% now. You know, that’s 3X, 4X. It’s a big deal. But when you think about it, really, the construction period is the shortest period of the whole development, right? And you’re actually in and out of construction, hopefully, between 18 and 24 months, depending upon what you’re building. You can be in entitlements longer than that, or just as long. And you certainly own the asset longer than that most of the time, or whoever buys it does.
So, my point is this, is developers can certainly support higher interest rates. The issue is that, so, when you go to refinance, are you gonna have a requisite interest rate for when you’re going to refinance and stabilize this asset? If you don’t have that, you’re in trouble. So, the answer is yes, things have gotten much more expensive. It’s really about where am I exiting at though? And whether that’s a refi, a sale or whatever it is, it’s where’s the interest rates at that point? So, right now, everything that I’m doing, the yield on cost has definitely been squeezed. The timelines have been delayed, but they’re certainly still penciling. If you’re like me, you look at the deal, you say, “Hey, if I have to hold it for 10 years, that’s okay. It still pencils. I’ll exit at the right point in the market cycle.”
And like I mentioned earlier before we jumped on here, was, like, you know, it’s my job to give my investors the returns they bargained for, and do my best not to incur any inordinate risk getting there, and certainly not incurring any inordinate risk to go past what they bargained for. So, at that point, really what I’m trying to say is, if I look at my pro forma, I think my yield on cost is conservative, I think my underwriting’s conservative, I think that I can hold the asset for 10 years, and I think that I can come out of my construction into a stabilized asset at the right time, then I’m gonna move forward, even if it is a little bit more expensive right now. Because, to me, having deals sit there is worse than anything, not because they lose value or anything, but just the opportunity costs. You wanna get your cash moving, and if you’re like me and you have a lot of investors, they have preferred returns, and that might as well be a slow bleed on you. Thankfully it’s not a current pay, but at the end of the day, their return is accruing, and it’s preferred, so it’s primary, senior to everybody else.
So, yeah, it’s affected the cost analysis, obviously. It’s affected the timeline. But thankfully, due to the way we approach deals, it hasn’t affected the overall success or the overall ability to bring the pipeline to fruition. It’s just, it’s more difficult, which is honestly an opportunity, you know? When people say that, you know, things are harder, that’s great. Usually when things get harder, the weaker players and the weaker deals fall to the wayside, and now all of a sudden there’s only, you know, the cream of the crop left to select from. So, I’m happy to say that… You know, I’m proud to say that my team has put together over 1700 units of awesome assets that are still getting attention from family offices and private equity and high-net-worth individuals in today’s market, and yesterday’s market, and I’m pretty positive it’ll be in tomorrow’s market too.
Jimmy: Great position to be in. You know, one aspect that you mentioned a little earlier that makes you somewhat unique is that you like taking on entitlement risk. I get emails, calls all the time from different real estate developers that are trying to raise OZ equity or trying to get their projects in front of OZ fund managers, and then they always tout, “Hey, this thing’s shovel-ready, it’s already through entitlement phase,” but you actually like taking on that risk. So, why is that? Can you explain that approach?
Ray: Yeah. I mean, I’m just getting a better cost basis, number one. Number two, I’m also designing what I want. I’m not being handed a sandbox and being given certain tools to build a castle. I create the sandbox, I bring the tools, I tell people what we can and cannot build. And if we can’t build what I wanna build, I’m out. And that’s way better in my opinion than getting stuck with some piece of shovel-ready dirt. The reason investors like shovel-ready dirt, and rightfully so, is that, one, they don’t have any of that risk, obviously, but it’s the timing. They get to buy the dirt with the debt if they want to. They can use the bank’s money to buy the dirt now. Everything’s ready to go. Your actual exposure to the risk is shorter. So, not only do you have a duration risk decrease, you also have a financing cost decrease because you’re less time in the deal. You have an increased IRR because you’re less time in the deal. You just probably have a lower equity multiple because you probably paid more for the dirt.
And for me, as an operator and a sponsor and a developer, what I care about is control, number one, is control of my asset, and being able to do exactly what I want with it because it’s me who has to go out and fight for the equity and tell people what we’re gonna do and make a bunch of promises. So, when it comes to shovel-ready dirt, one, I’m cheap. I don’t wanna buy shovel-ready dirt. I think it’s too expensive. I think it’s a rip-off. I shouldn’t say it’s a rip-off because there’s tons of great shovel-ready deals out there. I shouldn’t say that. But to me, it just feels that way.
Jimmy: There’s a tradeoff. There’s a risk/return tradeoff, and there’s also a control tradeoff.
Ray: Mm-hmm. And I wanna be very clear. People who buy shovel-ready dirt make tons of money. Let me not put that out there that buying shovel-ready dirt… I don’t wanna be known as some guy who doesn’t like shovel-ready dirt. I certainly do. It’s just, I’m not willing to pay the retail premium for that. I will JV with shovel-ready dirt. I do not want to buy it from somebody.
Jimmy: Understood. Well, let’s talk about Opportunity Zones now. Well, let’s start here, actually. What got you interested in Opportunity Zones? Southern Waters Capital’s been doing real estate deals for the last several years, but you’re just starting to get into Opportunity Zones now, if I understand correctly. Tell me about why you are interested in doing some Opportunity Zone deals now.
Ray: Yeah. Well, as a, you know, former attorney and all that, I’ve always been interested, and really, the only two classes I was good at in law school were tax and real estate. So, I’ve always been interested. You know, it’s a 1031 exchange on steroids, it’s really what it is, and it’s awesome. The reason we haven’t gotten into it right away was just because we never let the tax tail wag the dog. That’s rule number one when you’re taking a law school class in tax. You know, don’t let the tax tail wag the dog. And by the way, dollars deferred are dollars saved. Those are the two rules I’ll never forget from tax class.
And anyway, the reason we’re looking at it now is, one, it’s motivated capital. Number one. It’s motivated. Number two, you know it’s…it’s kind of the same thing. It’s motivated, it has to be placed, and you just… It’s really easy to understand what the investor wants. So, aside from being motivated, it’s a very cookie-cutter type of raise. And you know if you fit some investor’s buy box and they’re motivated, it’s pretty likely it’s gonna go through. And in a market like today, really, to make deals pencil, you need to hold them. So, having a QOZ factor, where people basically want to stay in the deal for 10 years, now, like, that whole argument of…or not argument, that whole discussion with the investor who is in Qualified Opportunity Zone, or Qualified Opportunity Fund investor, I should say, that whole conversation about, “Hey, we’re gonna stay in the deal for 10 years,” it’s not a big deal anymore. They’re like, “Okay. That’s what I expected.” Whereas with the usual investor, they’re like, “Hey, I want out in three to five years,” especially for ground-up development. So, really, it’s a market cycle thing.
And then, since I don’t let the tax tail wag the dog, I wait until the opportunity is there and it makes sense. And this one is a public-private partnership that I’m doing, with the city of Ocala. I’m very close with them, and, you know, not everything is completely settled yet, so let me be clear on that. We have a lot of things in place. There’s about one more trigger we gotta get done, but the project’s been awarded to us. And we’ll be taking down the land, hopefully, here in the next 60 days. But it’s essentially 56 units on top of 20,000 square feet of commercial surface plots. We’re getting a little bit over $2.2 million in incentives, 6-year tax abatement, and no land use restriction agreement, which is huge for anybody who knows what it’s like to fight for a tax abatement. Usually, it comes along with a LURA, as they call it, the land use restriction agreement. But I don’t have any of that, so I’m very happy about that.
It’s adjacent to an awesome historic building that’s being redeveloped into a hotel by a friend of mine who’s done boutique hotels in Europe and South America. It’ll be cool. We’re hoping to put his restaurant in our retail, and have some nice connectivity across the street to each other. We’ll have a little rooftop terrace, fully amenitized, all that kinda fun stuff. So, it’s interesting, and it’s in downtown Ocala, which, you know, it’s certainly not LA, New York, or Miami, but it’s well-trafficked. I can say that I brought my team there for a big closing about a year ago, and we were able to do a bar crawl without having to get into a car, and so, we needed to go back to the World Equestrian Center, which is a beautiful, billion-dollar horse and equine facility over there in Ocala. It’s unreal. So, anyway, the project’s super sweet. It’s gonna be fun. And the city’s all behind it, and we’re gonna hopefully transform the midtown area of Ocala, which is pretty exciting.
Jimmy: Really good. Really good. Yeah, it’s the… I think it’s, like, the horse capital of the state of Florida at least, right? Ocala?
Ray: Oh, it’s definitely the horse capital of the world if you look at the trademark website.
Jimmy: Horse capital of the world. Okay.
Ray: Yeah. So, let me get that straight before anybody takes shots at me the next time I go there.
Jimmy: Good. I stand corrected. One thing you said that I found really interesting was, I think you were trying to imply that Opportunity Zones should be more valuable to investors given where we are in the market cycle right now. And yet, if you look at equity-raising activity for Opportunity Zone funds, we’ve actually suffered a downturn recently. I think that’s probably due in part to the fact that the markets are down, economic uncertainty is…
Ray: I think I know.
Jimmy: …and there’s fewer capital gains to place, but how do you reconcile that?
Ray: Well, I would say this. I think it’s also down because, like, the 2026 horizon that’s coming up.
Jimmy: Yeah, that’s true. We’re getting closer to that deferral date.
Ray: Yeah. There’s just not… So, a lot of the things when I’m talking to investors, they’re like, “So, I’m only deferring for three years or whatever?” And I’m like, “Well, yeah, you could think about it that way, or you could look at the, if we stay in for 10 years, you’re not paying any capital gains and any appreciation from the QOZB.” So, I think one thing is that 2026 sunshine or horizon, whatever you wanna call it. But, I guess my reasoning for saying that it’s still motivated is the fact that if the capital is in a QOF, it needs to be placed. It still has… So, I think what you’re seeing is a downturn in investments to QOFs.
Ray: Yeah. So, I would agree. But I’ll say this. If your QOF has money in it, it needs to be moved. So, the flow from the QOFs to the QOZBs is different. So, I’m not raising a QOF. I wanna be clear. I allow my investors to have their own QOFs, and I go to separate QOFs. I set up a compliant QOZB. I make sure that everything stays in order, and that their QOFs can invest in them. If I wanted to go do a bunch of projects and all that, I would raise a QOF. But like you said, at this time, that’s really not the most motivating thing, so instead I was like, “Hey, let’s do a QOZB.” Honestly, it’s a little less money to the attorneys, which is always fun to do. And you can raise that capital through their QOFs. And then you’re not, like, doing this double-layer BS where the investor’s like, “I’m in two QOFs and a QOZB.” They have no idea what’s going on at that point. It gets confusing to me. Every time you gotta look at the org chart, you’re like, “All right, who am I dealing with here?” But no, I mean, it’s nuanced, but yeah, I think we’re both right. It’s not flowing into the QOFs as much, but it’s certainly flowing out of them.
Jimmy: No, totally understood. Yeah, I think there’s a couple of points along the flow of equity where the capital is motivated. One, at the time where the investor realizes a capital gain, he or she has 180 days to put it into a QOF. Oftentimes, they’ll find a third-party QOF to write a check to, and they’re just an LP. But sometimes, you know, if you’re high-net-worth enough, if the capital gain’s large enough, you’ll set up your own self-directed QOF. So that buys you a little bit more time, but even then, now you’ve got the clock is ticking depending on when you made the investment. You typically have about six months or so.
Ray: Another 180 days, right?
Jimmy: I think at that point, once it’s at the QOF level, it’s roughly six months, give or take. It kinda depends on when your asset test is. I don’t wanna get too technical, but it’s roughly six months, basically, you have to then deploy the capital…
Ray: This is not legal advice.
Jimmy: …into a QOZB. Yeah, exactly. Some of this stuff is above our pay grade, but we’ll…
Jimmy: Yeah, exactly.
Jimmy: It does get pretty technical pretty quick. But your point is well taken. The capital in the QOF is highly motivated to move quickly, because it has to in order to stay compliant with the QOF regulations. Absolutely right. Absolutely.
Ray: And then, I believe, if I’m correct, the QOZB has, like, 30-plus months to move the capital. So…
Jimmy: Yeah, the QOZB is then subject to a working capital safe harbor written plan, which can buy them an extra, I think you’re right, I think it’s 29 months, 30 months, 31 months. There’s a few different tests and I get ’em confused, but it’s something in that ballpark. That’s right.
Ray: Yep. Yep. So, yeah, it’s pretty motivating. If you only have 180 days, then you almost get, like, two and a half years. You’re like, “Yeah, take my money.”
Jimmy: Yeah, exactly right. Exactly right.
Ray: So, yeah, I mean, that’s pretty much it in a nutshell. And we ended up there, like I said, because there was a unique opportunity through the city. We’re getting the land at a bang-up price. They’re fully behind it. And yeah, it’s not a huge project. It’s only $20 million total capitalization, which to me is very, very small. Usually, we’re $80 million or more. So, yeah, so this project is something where it’s still very juicy. And in today’s market, I’m happy we have it because it’s something that is still, you know, when you put a 10-year time horizon on it, it looks amazing. If you put a three-year time horizon on it, it’d probably be really tough. Probably be really tough to do. But yeah, so, it’s our first mixed-use project. It’s the first time we’re doing a QOZ, and we’re super excited about it.
Jimmy: Good. Has your investment thesis changed at all given that it’s an OZ, or are you still, does it fit in with exactly what you’ve always done?
Ray: Well, like I said earlier, right, we always make sure we can hold the baby for 10 years. So, this is just saying that we’re going to this time. So, I’ll say that my analysis is the same, my exit assumptions are different. And my exit, you know, timeline is different, but the original underwriting is right where it was in the beginning.
Jimmy: You always prepare to hold the baby for at least a decade, but if an opportunity comes along to exit after three to five years, if you’ve already hit your returns, you take advantage of that exit opportunity. Whereas with the QOF, the QOZB fund deal, excuse me, you don’t really have an exit on the table. I mean, unless it’s such an incredible offer after 3 to 5 years, you’re gonna hold for 10 plus.
Ray: Yeah, exactly. And the idea with this one is there’s another city block that I have my eye on that could be the phase two. So, if we refi the right way, you roll that capital right in the next one, and now you’re recycling your investors’ money twice and getting them in two deals, which is always fun. So, yeah, no, it’s funny. I just turned 30 a couple weeks ago, so I can’t believe I’ll be 40 years old when this thing’s supposed to be sold. That’s, like, kinda wild to think about, but yeah.
Jimmy: Well, you’ll get there eventually, and happy birthday. So, you’re $20 million total capitalization on the Ocala project. How much equity are you raising? How much left do you have to raise?
Ray: Yeah. So, in this world, today…
Jimmy: I’m just thinking about if we have any listeners or viewers who have QOFs and they’re interested.
Ray: Of course. Yeah, we’re doing 65% leverage. We’re putting in a little bit over a million bucks. So, we’re raising anywhere from, just call it $6 million bucks to be safe. We got a couple million committed. So, yeah, I think we’ve got about four or so that I could use. So, $250 grand minimum, if anybody’s out there listening, but we’re happy to talk to anybody. We haven’t even gone out to QOFs yet or anything like that. I haven’t called any of them. I’ve only dealt with some friends and family who have thrown in some cash. So, we’re gonna go out to market pretty hard here in the next probably 30 days or so, 30, 60 days. But nah, looking for $4 million bucks. Whoever’s got it, give me a ring.
Jimmy: Sounds very doable. I wish you luck. Ray, this has been really fascinating talking with you, and I really appreciate all the Opportunity Zone insights you’ve given, and then just the general real estate insights that you’ve given. You know, I consider you guys one of the leaders in the real estate development industry, especially down there in the region where you’re developing in Florida. Given that, what are some of the trends that you see playing out over the next few years across the broader private equity real estate industry?
Ray: So, I mean, trends, I’ll tell you what I hope, because I can’t guarantee anything. I really do hope prices come back in line. Dirt is really the only lever you have. It’s the only part of the deal. You know, construction pricing is construction pricing, don’t get me wrong. You can take out sub-tiers and not have as many subs, and you can self-perform, and you can have your own property management and find all those cost savings, but really, the biggest difference in every deal is the price of the dirt. So, I’m hoping that price of the dirt comes back down, or at the very least, sellers find unique ways to make high prices of dirt make sense. I think that’s gonna happen. In fact, I’m seeing it already. So, I know that sellers are gonna come back to Earth eventually.
What really worries me is net migration. And it’s a good thing, it’s a double-edged sword. I’m in Florida. Net migration is certainly a positive, but net migration is why land prices don’t adjust as quickly as they should. And a shortage of supply in the housing sector is certainly prevalent. And it’s just like anything else. It’s people rushing through the door, right? Through the same door. That’s what keeps prices up. It’s concentrated demand. Concentrated demand leads to inflated prices that are outside of what I believe market equilibrium should be at. And right now, I think private equity firms that are smart are gonna wait. I think private equity firms who base their stuff, base their lives off fees, they’re gonna spend money.
So, with that being said, I really, I prefer dealing with the family offices anyway. They’re a little bit more patient, a little bit more understanding, and especially the family offices that are really multi-generational development shops. You know, I’m lucky enough and blessed to be partnered with the Motwani family on a deal in Ocala that’ll be a 360-unit multi-family asset. You know, 300 units of multi, 60 units of townhome. And, you know, Merrimac Ventures is the name of the firm, and they’re happy… They’re long-term thinkers, and they know and understand value very well. And aside from that, and most importantly, they’re consummate gentlemen and a well-respected family in the real estate development world. They’re leading Miami World Center development, the 27-acre downtown Miami development, with the Falcone Group. I mean, they’re not only a partner to us, they’re, to be frank, they’re a mentor as well. And it’s groups like that that are so awesome to partner with because they bring something to the table that you don’t have.
It’s the experience, and just the patience, and of course, the balance sheet support. And then past that, you have somebody if you do right by people like that, usually they’re there for you in other times. So, that’s kind of the partners we look for in the groups that I really focus on. So, in regard to private equity and everything, you know, they’re all over the place, depending upon their mandate. That’s the problem with most of these equity firms. They have these specific mandates. And we’re doing a mixed product, which is my favorite. It’s where you get the highest yield, and I think you get to hold onto the most tenant base and everything like that, and drive a lot of value. Most private equity firms won’t allow that, because they’re like, “Sorry, we’re multi-family only,” or “Sorry, we’re build-to-rent only,” or whatever, because that’s their mandate. Whereas a family office will go, “Look, it’s, they’re units. These are tenants. All the tenant demographic is pretty closely aligned, and we think that this is a great product, and you got the dirt at a great basis. And if you lend us in below market value but above what you bought it at, we’re still happy.” And that’s how we’ve been cutting deals.
So, it’s a long way of saying that private equity based on fees will still spend money, private equity stuck in mandates, that isn’t really fee-driven, will probably be patient, and family offices that are opportunistic are out there buying right now, and those are the people that I’m talking to.
Jimmy: All great thoughts, Ray. Hey, thanks so much for sharing your insights today. Before we go, if any of our audience of high-net-worth investors, family offices, advisors, want to learn more about you and your deals at Southern Waters Capital, where can they go to find out more information?
Ray: Yeah, people think I’m crazy, but if you go on my LinkedIn, I literally have my cell phone number there, and my email. So, it’s [email protected]. I’ll not repeat my cell phone. You guys can go find that on LinkedIn. And if you abuse it, I will block you. And one thing I would like to mention that I always like to plug is we helped found a charity. My business partner Dean Myerow helped found a charity, and I’m blessed enough to be a founding member on the board and everything like that. He certainly gets the credit though for starting it. It’s called the Friendship Circle Cafe. It’s on Las Olas. It’s literally, it’s teamed up with the Friendship Circle, which is essentially, it’s a charity that allows or that helps those with developmental disabilities reach their highest and best capabilities in the workplace.
So, not a lot of those individuals get the ability to work and earn a living wage. We have started a cafe that they operate, and, I mean, my hand to God, I can’t believe it, it actually, it is profitable. So, it’s really cool, and it’s a not-for-profit, but it does drive a profit, which obviously goes back to the individuals within the charity. But most importantly, we’re gonna have our second annual Friendship Circle Charity Classic, which is a golf tournament. And I know not everybody will be able to come down to beautiful South Florida and play, but any types of donations, you guys can go to friendshipcirclecharityclassic.com. And last year we raised just over $100,000, which we’re super proud of. And we’d love to exceed that this year. So, as much as I want the QOZ money, you know, I can get that anywhere. I’d really prefer if people went to friendshipcirclecharityclassic.com and made a donation whenever they can.
Jimmy: Okay. Awesome, Ray. We’ll make sure to link to Friendship Circle Charity, and we’ll also link to your LinkedIn, and we’ll have your email address and maybe your phone number on our show notes page also. You can find those show notes, as always, at opportunitydb.com/podcast. And please be sure to also subscribe to us on YouTube or your favorite podcast listing platform to always get the latest episodes. Ray, this has been great. Thanks again so much for joining me today.
Ray: Pleasure’s mine. Thank you, Jimmy.