In this webinar, Clark Spencer shares updates on Grubb’s unique OZ strategy focusing on essential housing.

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You can visit the Official OpportunityDb Partner Page for the Grubb Properties Link Apartment OZ REIT to:

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• Request more information from the fund sponsor.

Webinar Highlights

• Background of the Link Apartments OZ REIT.
• Pros and cons of the REIT structure.
• Overview of terms for the current investment opportunity.
• Overview of Grubb’s history and leadership team.
• Economic factors in the current market driving demand for essential housing.
• Updates on the various Grubb projects across the country.
• Live Q&A with OZ Pitch Day attendees.

Industry Spotlight: Grubb Properties

Founded in 1963, Grubb Properties is a vertically integrated real estate operating company and a leader in addressing the housing affordability crisis through its Link Apartments brand. Since 2018, they have raised over $200 million for investment in Opportunity Zones.

Learn More About Grubb Properties

• Visit GrubbProperties.com

Webinar Transcript

Jimmy: Clark, how you doing buddy?

Clark: Oh, doing great, Jimmy. Great to be back with you. Yeah, we’ve, you know, loved the Opportunity Zone Pitch Days in the past, and, you know, excited to talk about Link OZ REIT, one more time. So, you know, my name, as Jimmy said, is Clark Spencer. I’m the managing director of investments and the head of fund management here at Grubb Properties. We have a, you know, a really exciting, you know, offering up today. It’s our Link Apartments Opportunity Zone REIT. We are coming up on our final closing at the end of the year. This is the culmination of really a five-year journey in Opportunity Zones. As of the end of the second quarter, that’s when we have our most recent numbers, our third-quarter numbers are about to be published, but, we’ve raised $445 million in this fund so far. That’s actually gone over $450 million in the third quarter. We have 19 investments, located in 8 markets across the United States. Total project cost of about $1.9 billion. We’ve also secured about another over $100 million in JV capital, JV equity, into the deals. Actually, one of the really interesting and sort of advantages of our structure, and this is actually true across our fund programs, but whenever we bring in JV capital, the fund itself actually sits as the GP in those deals, and provides promoted interest actually back to the fund, which can be really advantageous for the investors.

This fund is actually the result of a combination of merger we did about two years ago of three vintage year funds from 2019, 2020, and 2021. With the pandemic, we decided to combine those three funds, which had raised at that point about $350 million, and continued raising equity over these last two years, to really dive in and, you know, finish those projects strong. And, you know, just talking through a couple of the terms, just to get that right out of the way, you know, targeting a total of about $550 million. So, you know, if we can bring in, you know, that, about $80 to $90 million in this fourth quarter, that will really round us out. We have about $13 million from our sponsor and other affiliates into the fund itself. He was talking about, a few minutes ago, an 8%, you know, we do have a preferred return. It’s an 8% preferred return, and a 1.2% asset management fee annually, but that actually reduces to 0.6% in March of 2027. We have an 18% carried interest, above that 8% preferred return, and, you know, I think this is, a minimum investment of $250,000, that’s what we state. Anyone who comes to us through OpportunityDb has a minimum investment of $100,000. So, happy to, you know, do that for anyone who’s, you know, on the line today, and interested in talking with us.

The other sort of big, defining feature of the OZ REIT at Grubb Properties is the fact that it is a REIT. This has been a less-common structure in the OZ space, but there are a number of large groups that are doing it, and I think it actually works particularly well for large, diversified funds, particularly because it produces a 1099, and actually only produces a 1099 when we make distributions, rather than a K-1. You know, there are advantages and disadvantages of that. You know, it doesn’t pass through depreciation, though we’re able to use the utilized appreciation internally, to give a fairly similar experience, though, obviously, it can’t be used to offset other real estate income that you might have in your portfolio. But, that 1099 is, you know, makes it really, really simple. We do invest in some states that are non-conforming, or, you know, states that basically don’t follow the OZ rules for their state laws, and so therefore could still have capital gains tax on OZ investments at the state level, that you get completely out of that with a 1099 as long as your home state is either a non-capital-gains-tax state or a conforming state, which the vast majority are.

And then, I think that also, you know, the OZ REIT also gives us some internal advantages. We can have earlier sales, and have internal taxable sales, where we’re not passing through external gains. It basically makes the program, for us, a little bit more flexible in the types of assets that we can execute on over the life of the fund, which, obviously, runs 10 years from the end of this year, so that all of our investors can make sure they get their tax benefits.

A little bit about Grubb Properties, and sort of the strategy of the fund, and who we are and what we do. We’re a 60-year-old vertically-integrated asset manager, developer, and property manager, based out of Charlotte, North Carolina. We have a little bit under $2.5 billion total real estate under management. About $1.3 billion, $1.4 billion of that is equity under management. Across 43 realized investments since 2002, we have a 35% weighted-average gross property-level IRR, and a 2.5X weighted gross property-level multiple on those 43 realized transactions. We have six years of experience in housing. Started out as a single-family home builder, and have really touched every segment of the housing market, and really are focusing on a single asset type and strategy today, which is, you know, integral to this Link Apartments Opportunity Zone REIT.

We generally look for a lower leverage strategy. That vertical integration also provides us with a ton of value. We are a national firm. We’ve grown out of the Southeast. We have four offices in the Southeast, with additional offices in New York and on the West Coast, with a few employees in each of those markets. You can see, the triangles on this map are the spread of our overall geographic portfolio, not necessarily only the assets in the Opportunity Zone fund, though a lot of these markets are hit in the OZ Fund with the 19 assets. Approximately a total of 8600 Link Apartments units stabilized or under development at this time.

We have a deeply experienced executive team. I’m the, as you can see with the years over here on the right side, I’m third from the bottom. I am the least experienced member of our investment committee, because this team has been together for mostly over 20 years. Clay Grubb, our CEO, is the son of the founder of our company, and has been deeply involved in the business his whole life. But his assembled executive team, that have, you know, that, you know, most of whom have 15 to 20 years inside Grubb Properties, in the business, working together through multiple downturns, you know, the .com downturn, and the GFC, and obviously, most recently, through the pandemic. So, a lot of deep experience there.

Our strategy overall, really, is a demand-driven strategy. You know, the demand in the United States for multifamily is really demographic-driven at this point. Sixty-eight percent of millennial and Gen Z workforce earn less than $81,000 a year. The average monthly rent in the United States has now crossed over $2000. That means, those two numbers, when you combine them, mean that 68% of millennials do not qualify, at 30% of their income, for the average monthly apartment rent in the United States. That is a housing crisis. But what you can see in the graph on the bottom left is what I was just talking about is, really, you know, mostly millennials and just the start of Gen Z, peak births, all-time, in the United States happened in 2007. Those are 16-year-olds now. They’re not in apartments. All of the housing demand that we’ve had over the past decade, decade-and-a-half, is still going to be increasing for another decade.

So, this demographic-driven-demand, while you’re seeing significant cost increases in construction. This is, on the bottom left here, you have construction over the past decade-and-a-half, and the inflation rate, and you can actually see that construction inflation was much higher than, sort of, top-line inflation for a long time, going back even to 2013, we had already crossed into the, you know, over 4% in construction inflation. But at the same time, in the graph at the bottom right, we’ve had a dearth of deliveries over the last 10 years, in sort of what we’ve seen historically over the last 50, though we’ve recovered some in the last 5. So, even all of that growth is still filling that supply gap that has happened from those costs.

So, how do we do this? What is our approach to this? Our approach is Link Apartments. Link Apartments is a strategy that we call essential housing, really coming out of the pandemic. What is essential housing? Who is our resident? It is a millennial and Gen Z, you know, potential early career, but also essential workers. Our teachers, our nurses, our municipal employees, firefighters, police officers. These people who need to live in the cities, you know, have a vested interest in living in the cities that they’re serving, are often pushed out into suburbs, with long commutes. Our goal is to, with essential housing, is to create a price, a luxury-lite, modern, well-amenitized but well-located as well, multifamily property, that competes against luxury product, but is available and accessible at a price point between 60% and 140% of the median income in the area.

The reason we do that is that segment of the population, as we talked about a few minutes ago, is so much bigger than the, sort of, for the luxury segment, and so, that middle segment here in this chart is this gold segment in the middle. The true luxury segment, the 140% to 210% of area median income, you know, is less than half the number of total renters in that renter pool, and many of those people in those next bands are obviously graduating into home ownership. Are we actually achieving this? Yes, actually, we are. Sixty-eight percent of our Link households are below 120% of the U.S. median income. The median income at Link properties is $52,000, and a median age of 26 to 31. I think we actually are achieving these goals, and these goals were incredibly important to us in the Opportunity Zone program, because of the intention of the Opportunity Zone program. We have been developing this strategy for over a decade, and had, actually, 10, of our 10 Link Apartments developments at the time the Opportunity Zones came out, 4 of them were in Opportunity Zones already. Only one of those projects was at a point where we actually brought it into this fund. But, so, we had three, you know, multifamily deals in this brand, operating in Opportunity Zone locations, in non-Opportunity Zone Funds. So it gave us the confidence to approach the market.

Our acquisition strategy has grown out of the Southeast. We have a lot of those high-growth markets, but coming out of the recession, in ’08, ’09, we did see a lot of volatility in those markets, and we looked for highly resilient markets as well, to sort of balance that in a portfolio. Those resilient markets are both markets that are often located in state capitals, Washington, D.C., as the federal capital, is also incredibly resilient. But the traditional gateway cities, New York, Los Angeles, those types of cities were incredibly resilient. But, during the pandemic, the capital flight from some of those cities created a lot of great buying opportunities, so we were able to enter into some of these markets, and as we talked through a couple of, a few of the assets in the portfolio, you’ll get a sense of sort of where these are. But, we were able to get into those more resilient markets because we had capital coming, during the pandemic, when a lot of capital was fleeing those markets. So, we’ve really created a balanced portfolio, both at Grubb Properties overall, but specifically in the Opportunity Zone Fund.

Link Apartments, this brand, what is the secret sauce? I essentially break it down into two areas. First, it is a highly efficient design. We have a highly efficient focus, six units. We replicate them in our properties across the country. So, whether you’re in a Link Apartments community in Charlotte, North Carolina, Los Angeles, or New York City, it’s the same six basic floor plans. This allows us repeatability both of design teams, architecture teams, general contractors, which we reuse in market to market, creating efficiency, and creating cost savings, and driving that price down, to get to that median price point, where that big pool of renters are. We have a tailored amenity program. We’re not competing in the amenity space race. We have very nice amenities, very nice gyms, dog-focused amenities, pools, but we’re not blowing it out with the, you know, the big, high-end amenities that cost a lot, and are lightly used. We also then, you know, utilize 59 different techniques across our platform, everything from brownfields credits, affordability set-asides in exchange for tax advantages from states or municipalities, green building standards, shared parking concepts, individual things either lower our cost basis or increase our non-tenant revenue, again, to drive additional value to the property, so we can deliver these units at that price point that keeps them so full, across our portfolio over time.

In the last five minutes, to dive into a little bit of the portfolio, you know, I have 19 assets, I had 20 minutes. I could have done a minute on each asset and one minute about myself, but I didn’t think that that was the best use of my time. As you can see here, the assets are spread across the country in 8 key markets, targeting over 3200 units, with a little bit over half a million square feet of commercial space. We actually already have units online, 400 units, those top, two properties, Link Apartments Fourth Street in Winston-Salem, North Carolina, and Link Apartments H Street, have already delivered units, are in lease-up. Link Apartments Fourth Street is actually almost stabilized, at 91% occupancy. But you are able to still get into that fund today. It’s a fully-qualifying investment. I’m happy to walk through all the details of how that works, but the REIT structure is a big facilitator of that ability. We have, as you see, you know, from the map earlier, you know, a large presence across the country, both the Southeast and some of those gateway markets. I’m gonna highlight a few specific assets that I think tell some representative stories, but happy to go into more detail into all of them on a separate call or a follow-up email, or something like that.

First, that Link Apartments Fourth Street asset, in Winston-Salem, North Carolina. I talk about this for a lot of different reasons. We have a number of strategies that are at play in this, a lot of those techniques, those 59 techniques I mentioned. But the one thing I wanna touch on here the most is this is representative of some of the early assets from that initial 2019 fund, where we were able to lock in pre-pandemic pricing, and pre-pandemic financing. This property carries with it a 3.99% fixed-rate loan, fully assumable to future buyers. It’s called a HUD 221(d)(4). It was actually a construction-to-permanent loan. So, we still have 39 years of term left on this loan. And again, fully assumable to the buyer at a 3.99% rate. That’s a loan that has now turned into an asset. It’s gone from a liability to an asset, because of the way rates have gone over the past, you know, year, year-and-a-half.

Another great property we have, here in our hometown of Charlotte, North Carolina. This is one that, you know, is really important for me personally, just being here in our hometown, but we are delivering over 500 units into the NoDa neighborhood in Charlotte. There is a commercial pad. We have put, we are pivoting away from a, what was initially a commercial office execution, likely into more of a retail execution on the front pad. But 534 units in this development, and delivering first units, in the first phase, within the next 30 days. So, again, this is a fund where we’re bringing units online now, and you’re able to still get into this fund and take advantage of this opportunity, and be able to have confidence in seeing this type of portfolio.

The next one I wanna mention is another just great site for us. This is our first site in the Denver area for Grubb Properties, but an amazing Opportunity Zone site. We actually did an assemblage across a few different properties, but this property is located across from one of the largest hospital campuses I’ve ever seen. It’s called Fitzsimons Innovation Campus, in Aurora, Colorado. Has three full-service hospitals, and it’s that type of job center anchor that I think is so valuable to us, and that’s what we’re looking for, you know, those types of middle-income jobs, both the nurses, but then the orderlies and other hospital administrators on that campus, we think that we are just gonna be in, you know, in great position on this asset, and it delivers in first quarter of next year.

Link Apartments Queens Plaza, this is, you know, sort of my crown jewel of the program. It’s a 400-unit asset, about 150 feet from the base of the Queensboro bridge, already under construction, at the fourth floor. It is fully qualified for the 421-a Affordable New York program, which is incredibly powerful tax incentive. And I’m running out of time, so I’ll stop there on that one, but it’s great. And then finally, Link Apartments Cykel, this is one of the first bike-only, or car-free, bike-only communities approved for city council zoning in Charlotte, North Carolina. We have actually foregone our asset management fee on any capital invested in this. We wanted a higher-impact project. Because of that zoning, we were able to set aside 50% of the units as truly capital-A affordable, available under 60% of AMI, and this is sort of our, like, high-impact project in the fund, but a really innovative project for Charlotte.

That’s my 20 minutes. Again, my name is Clark Spencer. I have my contact information up here, as well as John Jarvis, our head of sales on this project. With that, Jimmy, I’ll turn the floor back over to you. I know there’s some questions that came in, though I may not have time. I’m happy to take emails and follow up.

Jimmy: All right. Awesome. Well, appreciate it, Clark. We built a little bit of a buffer into these, into the schedule here, so we do have a couple more minutes for some questions, and we did get a few questions, actually. Bo wants to know, very simply, are you gonna make this deck available for download afterward?

Clark: So, this is…yes. I actually have a more fulsome version of this deck, one that has an individual…those asset pages I was just showing. It has a page for all 19 of the assets. So, I’m happy to, we can make that available, if you reach out to me or John Jarvis. John Jarvis is probably the best person to reach out to, though I can get you connected with him, and we can get decks out. Absolutely.

Jimmy: Yeah. And then, just, so, that’s great. That’s, specifically for Grubb Property, please reach out to John at that email address now, Bo, if you would like to get that deck instantly. And then, just generally speaking, for the majority of our presenters today, they’re gonna make their decks available to us, and we’re gonna post those to our website, at ozpitchday.com, a little bit later this afternoon, and tomorrow morning we’re gonna be updating that website with the replays, and with all of the decks when the sponsor makes it available to us.

Next question is, “Does the REIT structure limit your ability to reinvest or acquire new assets internally?”

Clark: No, it actually enhances it. So, within a traditional LP structure, really, your only option for doing that is a 1031, you know, because if you have capital, and you reinvest it not in a 1031, you’re gonna pass through an unfunded gain that could potentially pass through, and if it’s before ’27, you could actually even trigger your deferred taxes early, and cause issues. A REIT can do a 1031, and certainly, we would look at that. That’s the most tax-efficient way to do that type of recycling. But, if we’re unable to find a right-sized 1031, or unable to find one where we would be able to meet the requirements or something like that, we actually can do a taxable sale. The advantage of doing an internal taxable sale is it basically blocks that pass-through liquidation event. It doesn’t cause any external tax issues. You know, obviously we’re taking a haircut internally, but then we could then reinvest that. But even more than that, we could then allocate that to multiple projects, and have a lot more freedom with that cash than if we, you know, were just simply locked into a 1031.

Jimmy: Okay. Well, that’s good to know. Greg asks, he has his own captive QOF, it sounds like. He wants to know, can his own QOF invest into the Link Apartment REIT, or does he have to invest as an individual that has a gain?

Clark: No. So, well, I guess it… If they pass the legislation, yes, it could. That would essentially then just be a fund of funds. If that legislation ultimately is not passed, that you spoke about earlier, Jimmy, the answer would be no. However, you know, some of our projects, as I mentioned, we have JV capital. That JV is mostly coming from people with individual QOFs. We generally have the same economic deals. Obviously, you’re not getting the diversification, but we’re happy to talk about individual asset investments out of your QOF as well.

Jimmy: Perfect. And then I think we got time for one more question here. “Are you seeing more rental demand, given the high cost of buying?”

Clark: Seeing more rental demand. Yeah, got you.

Jimmy: Or home ownership, essentially. Yeah.

Clark: Yeah, right, right, right. Yes. But I think… So, yes. I think that’s, the long-term trend is increasing rental demand, as the buying market has really tightened, for a lot of different reasons. You know, I have plenty of anecdotes, one about my head of underwriting, who actually lives in the Link Apartments across from our building, who sold his house, to live there. So, I think some of it, somewhat yes. I think, you know, we’ve seen over the past… Well, I guess over the past two months, we’ve actually seen some, you know, the increases in rental rate, and rent rates in a lot of markets are starting to increase again. We’d kind of seen three to six months where, in some markets, we weren’t seeing a lot of growth, and even some markets slipped backwards. I mean, nationally, not necessarily the markets that we’re in, the…it’s true for some of them. And so, yeah, I think, you know, that dynamic is absolutely in play, and driving rent, and driving rent prices. And, I think, you know, that underlying demographics, right, you know, one of the statistics on the slides that I didn’t actually call out, but Peter Linneman, who’s a professor at Wharton, puts out a quarterly letter, and that’s just the, sort of, the stat we use. His estimate is currently around a four million total housing unit shortfall. Now, he says that about 300,000, 400,000 of that is in multifamily, but a housing shortfall is a housing shortfall, right? You know, if we need 4 million homes, those people have to live somewhere. And if single-family homes aren’t available, that rent does, or that demand does migrate over to rental.

Jimmy: Very good. Well, Clark, we’re at time. I’m gonna cut you loose there, but thank you to you and to Grubb Properties, and we’ll see you next time, I hope, Clark. This was great.

Clark: Absolutely, no. Thank you. And certainly, we’re definitely…we’re having our final closing at the end of this year, but we’ll certainly still be in the market next year.

Jimmy: Very good. Thanks, Clark. Appreciate it.

Clark: Thanks, Jimmy. Talk soon.