In this webinar, Greg Genovese presents the one-of-a-kind fund structure for his OZ fund and walks through an open project in Spokane, Washington.

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Webinar Highlights

• USG’s track record, structure, and investment thesis.
• Why USG likes smaller “in-fill” projects in non equity rush areas.
• The unique structure of the USG fund that allows investors to choose their allocation across various projects.
• Financial terms of the USG OZ fund.
• Deep dive into the Peyton Lofts project in Spokane, Washington.
• Status of GMP contracts in place for this project.
• Live Q&A with OZ Pitch Day attendees.

Industry Spotlight: USG

USG Realty Capital provides investors with a unique, mission-driven and socially responsible investing platform through opportunity zone funds, as well as a family of alternative real estate investment programs, including a 1031 exchange Delaware statutory trust platform.

Learn More About USG

• Visit USGRE.com

Webinar Transcript

Jimmy: You’re presenting your opportunity zone program offered by USG Realty Capital. So tell us more about that, Greg.

Greg: Sure will. And by the way, thank you, Jimmy, and thanks, Michael. It’s always great to be on this show, and you do, you know, the best job in the industry. And so thank you so much. And I’ll jump right into it. To you and your audience, you know, I want to thank everybody for being here today. We do have a limited amount of time, and this presentation really is about 30 to 35 minutes, and I’ll speed it up a little bit. My real goal here is to give you an idea of who we are as a company, what we’ve done and our expertise, our methodology with our unique structure for opportunities on investing, and then we’re going to highlight one of our projects that’s in the portfolio. And as Jimmy mentioned about the QR code, we know that people tend to sometimes have to get off the screen or go do something. If you have any interest in taking a good look at us, meeting with one of our opportunity zone experts, looking at the fund, in the bottom right-hand corner of every one of our slides, you’ll see a QR code. So just put your camera up to that, tap on it, follow the instructions, that’ll go right to our website. And you can fill out a short form, and we’ll get in touch with you and dig in on our program and our methodology with you.

We are a securities company. It’s a 506(c) Regulation D offering private placement. So we do have to show you the risk disclosures, and we do use what’s called a managing broker-dealer, and we do this through KCD Financial. So everything you’re seeing here has been vetted, it’s on file through our broker-dealer, and so we’re big on making sure that things are done right. There’s accountability and a process.

A little bit about what we’ll talk about today. Besides getting over the fact that that’s a 10-year-old picture of myself, we’re going to cover three areas, the USG difference and really what makes us unique in our track record and experience, our fund offering and how we put it together, what makes it so unique, and then we’re going to focus on our latest project in Spokane, Washington, which is a tax-free state, on top of being in an opportunity zone called Peyton Lofts.

A little bit about USG. As we like to say in two words, it’s experience and track record. Our executive team alone has well over 100 years of experience in real estate development and asset management, with very successful programs. We’ve now raised over $2 billion in investment in equity and over 5 billion of assets acquired over the last 30 years. And we’re now on to our 4th Opportunity Zone Fund in our 10th asset. And our methodology has really panned out well for the local communities. And nationally, we’re very proud of the fact that we’ve had some really nice awards. Our first program was awarded the top fund in the country by Real Estate Forum and GlobeSt. And we also sit, or I sit on a number of opportunities on boards that speak directly to the President’s Council as well. So we’re very proud that we’re seeing a lot of recognition not only from our investors but from the general public, but also from the media as well.

What also makes us a little bit unique is we have a top-tier advisory board. Not only do we have our internal executive committee, but we’ve put together a group to oversee ourselves of top members from our industry in varying degrees. So we have Audrey Kamin, who leads as our chairperson, who’s the head of our business development and sales at USG, Kevin Hart, who is the chief marketing officer for Oceanview Life & Annuity Company, Mark Petersen, with Lighthouse Life Capital, and we’re really proud to say, in a long-standing relationship with Prof. Jonathan Morris, who is the head of the Masters in Real Estate program at Georgetown University, also the founder of the REIT Academy. And so we meet every quarter, and we have to display everything that we’re doing. And we get the recommendations, and they can speak directly to our investors.

A little bit about our track record. What you’ll hear from us is that we like to be in what we call in-fill areas around the country. We look for demographics for really good, strong corporate structure for stability, better than average income growth than the rest of the United States, better than average population growth than the rest of the United States. And we want those to be in areas with what we call barriers to entry. So it minimizes the competition and, therefore, increases the value. So our first deal, Marina Square in Bremerton, Washington, fully subscribed, and it’s open and leasing. Market Flats in Olympia, Washington, fully subscribed and leasing. And then our latest project, which you’ll hear about today, Peyton Lofts in Spokane, brand new, and we’re now accepting Investments.

Oregon 9th & Washington is fully subscribed in Hillsboro, Oregon. Connecticut, Bristol, Connecticut, this is in our fund as well, KindCare Assisted Care. It’s completely built. We’ve just received the CFO, the certificate of occupancy. And it’s in pre-opening and leasing right now, fully subscribed Elevation 1659 in Milwaukee, Wisconsin. This is under construction now. There’s just a tiny, tiny bit of equity available for investment there. If you have interest in any of the ones that still have some equity available, please give us a call, and we’ll dive into it with you and show you that project. And then one of our newest deals too in North Dakota. Fargo, North Dakota, this is where Microsoft’s second largest campus is right downtown. You can see, it’s an in-fill area. And this is called The Avery Apartments.

So if you look at our track record, 10 assets. We’re currently managing a little over $275 million in assets, with most of the programs open and leasing, or pre-opening, or under construction in one. And we’re starting our next two projects this year.

A little bit about our methodology and why it’s unique, why we like smaller in-fill projects in what we like to call non-equity rush areas. So let’s start with the non-equity rush areas. We focus…because of the 10-year hold in opportunity zones, one of the concerns I had going into this was areas that have the ability to spread out and move. Now, I like Austin, Texas. I like Phoenix, Arizona. I like San Jose. I’m actually from that area. I love these areas, but when you’re looking at a 10-year hold, our philosophy is to be in areas that have all this better-than-average growth potential, but we really want to have those barriers to entry. And in-fill is really the area to be to maximize the value. And then, again, we try to stay away from what we call equity rush areas.

And my big calling cry is I tell our investors how you get out of an investment is as important as how you got in. A lot of people love the looks, they put their money in, but at the end of the day, as I like to say with my hands, at some point, the investors are going to go, “Where’s my money?” And so everything we do at USG, it’s about risk mitigating the deal as best we can from every avenue we possibly can for the investors to maximize the value going into smaller projects that can get built quicker, cash flow quicker, and don’t need as much loan or construction loan. So it opens up the banks and the regional banks to get involved, and it usually will enter to a better interest rate, therefore, better return.

So just to give you an idea of what we call in-fill, this is a picture of our Milwaukee deal. It’s in Track 113 in downtown Milwaukee. You’ll see the river to the right, which is a barrier to entry. You’ve got class-A apartments on the right-hand side of your screen, and then you’ll see that, where the site is, is in-fill right against the main thoroughfare. And so there’s a limited amount of growth from the standpoint of what can be built and developed but unlimited amount of growth potential for that area.

So you’ll see on our map, we have projects all over the country, mainly in Washington, our first project in Bremerton, Olympia, Hillsboro, Oregon, our newest project in Spokane, up across the top Fargo, North Dakota, Milwaukee, our Bristol, Connecticut project. The ones in yellow do have availability for equity, the ones in orange have been fully subscribed, and the ones in white are currently in due diligence. We have one just outside of Boston that’s in due diligence right now. It’ll probably be added to our fund. And also one in Houston, Texas.

So we took that dynamic, and we developed an overall fund of $50 million to $100 million offering that really does something unique. It gives investors multiple projects to pick from, national demographics that you can pinpoint that correspond to our methodology, and we get to pick the assets to be the most recession-resilient assets for those particular areas. And then, at the end of the day, we give the investors the choice. They can go into all of them. They can go into some of them. They can go into one of them. They can also mix and match the amount of investment to go into each deal.

And we also give what we believe are the highest preferred returns in the industry, $50 million offering, $50,000 minimum investment. That can come down depending on the person. We do have the flexibility there. And our preferred returns on our projects are between 10% and 12% per annum. Also, our distributions to our investors, 100% of the investment comes back to you until we give you all of your money back, plus your preferred return. We get zero out of it until we hit that preferred return mark. Then, it’s in anything above that we do an 80-20 split with our investors. There’s no clawback provision in our deals at all. So what that means is when we hit that mark above the 12% or above the 10%, we don’t reach back to what we’ve already distributed. It’s just whatever new returns come in we’ll split 80-20. Very advantageous for the investor.

So looking at our available investments, KindCare, Elevation has a little bit, Avery Apartments, but today, we’re going to focus on Peyton Lofts in Spokane, Washington for this presentation. This is in Spokane. It’s in a tax-free state, has a 10% preferred return, very unique property because it’s an indoor build, therefore, the weather doesn’t hurt or slow down the development, 96 multi-family units, but we also have 16,500 square feet of retail space that’s already up and running, already fully leased for the next 10 years, and already cash flowing from now to when the project is complete.

So if you were to look at our dynamic, the way the fund works is you could have those four projects. This particular Investor A has $1 million, decided to go 500,000, 250,000, 250,000. The next investor wanted to split 400,000 evenly throughout the projects. Investor C wanted just Fargo and Spokane. And Investor D split it up this way with 2.5 million. But here’s the big thing. Because we’re one fund, multiple projects, it’s just one K-1 to the investors, and we deliver those K-1s no later than March 1st annually. Each one of the projects and each one of our development partners, we have it contractually agreed to that the tax returns and all the financials for the project has to be to us at the fund no later than the 20th of February. So that gives us time to get… I’m sorry, 15th of February. That gives us time to get the K-1s processed by our auditor and our fund servicing group out to our investors by March 1st.

So let’s dive into what this deal is in Spokane. Now, this is just a great straight-up development deal. It’s in an opportunity zone, full opportunity zone benefits. As I heard someone asking Ashley, “Can you put regular money in non-capital gain money?” The answer is yes. We are one of those funds, a few funds, that allow for direct investments. About 15%, and it’s going up, of the investments we take in are non-capital gain, because these are just good straight-up development deals. Ten percent preferred return, development opportunity, in a tax-advantaged opportunity zone, in a tax-free state of Washington.

So just giving you a little summarization. That’s the building, both… It looks like two buildings, but that’s actually one building. This is a historic building, over 100 years old, as they say, great guts to the building, and 96 market units will be building in here, 16,500 retail space, fully leased right now. Our developer is one of the largest developers in the area, 4Degrees, and our general contractor is T.W. Clark, also one of the biggest contractors in the state. And we also have, if you’ve heard of a GMP, a guaranteed max price, we have the guaranteed maximum price already negotiated and signed for this project, and our investors never have to go above what the budget amount is. Each one of our developers takes on the cost overruns. So our investors can feel comfortable that the maximum amount of the deal itself for the project would be no higher than what we put out there as far as the project costs.

In this case you’ll see down below, the project costs are $34.2 million, and all of our pro formas and our estimations to our investors are based on that number, and for our investors, it would never be higher. Moving up a little bit, this is right downtown Spokane. It’s literally adjacent to the multi-transit terminal for trains and buses, Ubers, etc. It’s in the heart of downtown where it’s the most popular dining in business section. We’re bringing in $11.9 million of equity for the fund. We have a $22.3 million construction loan already in place, again, risk mitigation, risk mitigation, risk mitigation, already in place with the Bank of Idaho, and a 10% preferred return,

For those in the audience that may not know where Spokane is, let me just give you a little bit of a map here. I come from the San Francisco-Oakland area. So you see that down below. It’s in the Pacific Northwest, just east of Seattle, and going down south, it’s about an hour and a half from Pullman, Washington, and Moscow, Idaho, where the Washington State University and University of Idaho is. And kind of drilling in a little bit more, you’ll see there’s I-90 at the bottom. I-90 in this picture, it’s going west to the left towards Seattle and east headed towards Coeur d’Alene, Idaho.

But you’ll see the barriers to entry there, the mountains, you’ve got the I-90 corridor in the river, and then the downtown is very limited as far as the ability to build. So let’s draw it in just a little bit further. You’ll see that Peyton Lofts is right smack dab in the middle of the city center itself. And again, I bring up barriers to entry. Digging in just a little bit more, you’ll see where the Lofts are. And to the right, you’ll see in bright yellow, Peyton Lofts parking garage. With this project, we have 96 units, but we have 120 parking spaces dedicated to Peyton Lofts. And literally, it’s a half a block from the… And these are all on 10…we have a 10-year lease with the parking garage. So there’s no worry whatsoever as far as will the garage or will the parking spaces be there.

Starting to the top left, you’ll also see, there’s over 77,000 students in Spokane, Washington. This is one of the fastest-growing cities in the state. Gonzaga University. You also have Eastern Washington University. You also have the University of Washington School of Medicine, and you also have the Washington State University School of Medicine and Gonzaga’s law school, etc., etc. So 77,000 students and growing, plus 11 colleges and universities, all within the close surrounding area.

Going down a little bit, you’ll see the entertainment and events district. This is where the new professional soccer teams have a new stadium being built right now. They’re coming to town, a men’s team, a women’s team, and a junior team, and they’re set to start for the 2024 season. Riverfront Park, which is the main hub for walking around and enjoying life in Seattle. Just above that, you’ll see the U District, which is a growing area for restaurants and a lot of the kids from college. The Spokane Convention Center is right across the street from Peyton Lofts. And then towards the bottom on the left, you’ll see I put a Nordstrom sign there. That’s Riverfront Mall. And I was just in Spokane two weeks ago, and that mall is hopping. Every name brand you could think of is in that mall and a lot of people. It is not… Well, you may have heard it during that time, but COVID didn’t hurt the people from coming back. You’re looking at an area with over 555,000 residents and 270,000 in the workforce and growing. And you’ll also see the U.S. Federal Building is near the location of Peyton Lofts, the Marriott Davenport Hotel, which is a top-level autograph hotel, or the Marriott.

So digging in just even deeper, you’ll see the project there, the U.S. Federal Building, the Davenport Hotel, the parking garage, which I mentioned, and also supported by the Riverfront Mall and three major buildings that are 100% lease, the Chase office building, the Bank of America office building, the Washington Bank and Trust office building as well. What I’d like to draw your attention to before I go on to the next slide, in green, you’ll see M Apartments, upper left, and the RID Path Apartments, upper right. Those are the only two other multi-family projects in the opportunity zone in Spokane. Past Payton Lofts, there is nothing else on the drawing board for multi-family/retail anywhere in this area. And this is a good thing. M Apartments is, market rate, they’re right now above 95% leased, and most apartment buildings stay around 95% because leases turn. So they leased up very, very quickly. The demand is there. RID Path Apartments is really an affordable housing. It’s always 100% leased. It doesn’t really fit our dynamic for market rent, but I did want to show you that the only competition for this particular building or our project are really those two apartments, and they’re fully leased.

Just a little bit of a cross-reference of what the building looks like. If you took a cross-section here, you’ll see bottom floor is going to be our leasing. These are actually what it’s going to look like. These weren’t just drawn up, you know, just for this presentation. Above that is going to be the hall for the kitchen and common area. Above that, we’re going to have a full fitness center and climbing wall and a snack area. Above that is going to be our garden, our green wall garden, and library. You can see to the far right, those are our one-bedrooms. And then, in the middle, you’ll see those are the studios. And then, to the left is a mix of one-bedroom and two-bedroom apartments. Right now, it’s 96 units. Most of those will be one-bedroom units, 66 of the 96 will be one-bedrooms, 18 studios. So 84 of the 96 will either be one-bedroom or studios, which is where the greatest demand is, and only 12 units will be two-bedrooms.

Jimmy: Greg, this is a gentle notification that you are running low on time, and we do have some questions I’d like to get to.

Greg: Okay. I’ll breeze through it right now. Getting there. So just to give you a schematic of what this looks like. Sorry. This is what one of our one-bedrooms looks like. This is what one of the studios looks like. And these are the current interior shots. Again, these are retail people that are up and running and cash-flowing right now. Looking at the exterior of the building, you can see it’s very well maintained, big windows, which we will replace with new, better windows, but no structural construction has to happen in this deal. But here’s the real risk-mitigating benefits.

Number one, the 10-year parking lease, 120 spaces. The project is already cash flowing from day one, with all those tenants on new 10-year leases. Floors two through six of all seven floors have already been cleared and demoed to accept new construction. So we don’t have to worry about the demolition on those floors. And this is an indoor construction project. So when the weather comes in, we can still build, and we don’t get shut down. So real quick, you’ll see that the area is continuing to grow from a population standpoint.

And the support, corporately, Amazon just built 2 years ago a 1.6 million square feet distribution center. Providence Health is a big player in the area, Pyrotek, which is a global engineering company, Avista, which is a global instrument company, SkyOne Aerospace, Kaiser Aluminum, Caterpillar, which is the largest manufacturer of construction equipment in the country, PepsiCo, and then the U.S. Air Force Base Fairchild. And then, from the education standpoint, Gonzaga, Gonzaga law school and medical school, Eastern University, and then nearby, an hour and a half away, is Washington State University and the University of Idaho.

Spokane International Airport is 10-minute drive. It’s only 6 miles from the downtown. Amtrak’s going in and out on a daily basis around the country. We also have the Sound Transit System, which takes people directly into Seattle, and then the local Spokane Transit.

So looking at the market analysis real quick before I get out of this, Jimmy, is our rents are going to be higher than what you see here. So for instance, our one-bedrooms might be at 1,400. The average in the area is 1,200, but what we do is we believe we’re going to be getting those 1,400s and 1,500s, because that’s what the others are getting. But what we on our pro forma is we use the average amount to get to our preferred return.

So bottom line summary. Why do we like it? It’s in-fill, limited capacity, barriers to entry smaller project, low loan amount, and we’ve got that from the Bank of Idaho. A quicker build means we get to a quicker refinancing to get you cash and your return. How you get out of the investment is as important as how you got into it. Strong long-term demand for multi-family and the population growth continues to grow above the national average, strong characteristics for growing the workforce, and multiple corporate headquarters, the 77,000 students that I mentioned. The project is fully permitted and local government, the EDAs, the Economic Development Alliances, are fully behind the project. And the rental growth continues to be well above the national average.

So the last thing on my pitch is if you have some interest, and we do have a lot already, I would say contact us, use that QR code. Audrey came in, who’s the head of our advisory board, also our managing director of sales and distribution. Contact me, contact Audrey, contact the company, and we’d be more than happy to talk to you at any time for any of your needs. So I kind of had to fly through that, Jimmy, and I apologize I talked too fast, but I hope I was able to give your audience a good overview of this project.

Jimmy: No, that’s great. I’m just trying to figure out how this QR code works. You said to point my camera at it, but I don’t know. Maybe I got to take the lens cap off. No, I’m just kidding. Hey, use your cell phone, everybody.

One question for you before I’ll let you go. There’s your info. Please do reach out to Greg and his team at USG if you want to learn more. Hey, Greg, Dale wants to know, what’s the exit strategy at the 10-year mark?

Greg: Yeah, great. That’s a great question because we are an overall fund, we don’t technically have to have the same type of asset in the fund itself. But for the most part, it’s multi-family, and usually, there’s some retail there. We do have an assisted care facility. And it really comes down to risk mitigation, as I’ve been saying over and over again. And the exit strategy here is for the multi-families, because they’re all on target to hit the 10-year mark around the same time, we can certainly do a portfolio sale. And we’re at the size that we could sell that to a REIT. But the nice thing about being in a smaller demographic, in a smaller project is selling them off one at a time is also a very strong strategy because you have local investors or national investors who want to invest in these locally. So we can do a roll-up, we can sell to a REIT, we can even make this a REIT, I guess, you know, if we really wanted to. But our strategy would be get to the value.

Now, the last thing I want to mention on that, I get asked this all the time, what if somebody gives us a ridiculously high offer in the fifth year, right? And so now you’ve got a $40 million project. Now, we could sell that project, and it’s going to be a lot easier to find another opportunity zone project around the country that meets our dynamic at the $40 million mark than it would be if we sold, let’s say, a $250 million or $150 million project. So if we did that, and we can do that, that avails itself to our dynamic better than it does for some of the larger funds.

Jimmy: Great answer, Greg. I got to cut you loose there. Thanks so much for joining today though.