In this webinar, Meg Epstein presents a 131-key apartment building that will be operated more flexibility than a traditional multifamily building to take advantage of the tourism draws to Nashville.

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Webinar Highlights

• Overview of the 131-key apartment building.
• Review of the Opportunity Zones and neighborhoods around Nashville.
• Timeline, structure, and projected returns for this projects.
• Overview of the operator of the building, Mint House.
• Live Q&A with OZ Pitch Day attendees.

Industry Spotlight: CA South

CA South Development is developing a 131 unit short-term-rental (“STR”) apartment development in the Wedgewood-Houston neighborhood of Nashville, a fast-growing submarket a few minutes south of downtown near the new Soho House.

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• Visit CASouthDevelopment.com

Webinar Transcript

Jimmy: …mixed-use project in Nashville, Tennessee, 131-unit short-term rental apartment development in the Wedgewood-Houston neighborhood of Nashville. Do I understand that correctly, Meg? Is that all correct?

Meg: Yes. Thanks so much for having me. Nice to see you, Jimmy.

Jimmy: Nice to see you as well. Thanks for being here. Thanks for your support of OZ Pitch Day. We’ve got a pretty good crowd on hand today to watch your presentation. Take it away when you’re ready.

Meg: Great. And we also have Brandon on here with me, Brandon Cruz, who is in our finance division. So, I am a developer in Nashville. I started the company 10 years ago, mainly focused on mixed-use, urban infill, and industrial assets. Jerry, who was on the panel before, has been our outside general counsel since I started the company, and has assisted us in setting up several of our Opportunity Zone projects. And so, I’ll start with the opportunity, and then we can get into past projects.

This is a 131-key apartment building in Wedgewood-Houston in Nashville. It’s a new, up-and-coming, it’s a up-and-coming neighborhood that has experienced tons of growth in the last, call it 5 to 8 years. I can show you some nearby developments, but essentially, we have done very well in the short-term rental space, and Nashville’s hospitality market is extremely strong. And what this asset is is it’s still an institutional apartment building. As we said, 131 keys, but it will be operated more flexibly, to capture more income than a traditional multifamily building, and take advantage of how much hospitality demand there is in Nashville. And so, we call it a flexible, you know, apartment hotel.

It is shovel-ready. We’ve owned the site, it’s down the street from our office. This is what it looks like. It’s down the street from our headquarters in Wedgewood-Houston. We have owned the site for about a year and a half now, and gotten it completely shovel-ready, with construction documents and GMP contractor pricing. This is a general basis of the floor plan, but it’s a mix of one and two-bedroom types. This kind of shows the market area. This is the Wedgewood-Houston neighborhood. Right here, adjacent, is The Gulch neighborhood, which I’m sure everybody has heard of, but it started out very similar to a neighborhood like what Wedgewood-Houston, because, not only is Wedgewood-Houston located in an Opportunity Zone, but it has a new Soho House, a new soccer stadium. I’ll show you these things.

This is the new soccer stadium. Hines is developing here. AJ Capital, which is a really amazing hospitality brand company, is developing apartments, office, and a lot of retail concepts. And it’s essentially just become the cool, hip, like, work, you know, it feels like industrial, gritty neighborhood. And so, we project, that’s why we love that it’s in an Opportunity Zone, because I set up my own Opportunity Zone Fund for our headquarters, because we just know the growth in this neighborhood over the next 10 years is gonna be exponential.

This is the new Soho House, as I had mentioned. There’s breweries in the neighborhood, lots of restaurants, lots of walkability. And there’s actually a brand-new office being built across the street, which I know is surprising in this market for everybody. But there’s a lot of demand for, you know, people hear “office” now, and they think that, you know, they think of suburban office or downtown office, which has become out of favor, but people still want this walkable, live-work lifestyle, and that’s Wedgewood-Houston. And so, we have that dynamic right by our project. So, there’s a lot of growth around there, and a lot of amenities for people.

So because of the short-term, because of the flexible nature of the building, we can build this to a 7.7% return on cost. In this market, that’s extremely hard to do. A typical multifamily building ground-up in Nashville right now is getting to more like a 5% yield. And so, we’re able to get our return on costs boosted extremely high because of that. It’s a $50 million project. We have an active debt term sheet for 65%, and we’ll be using PACE Equity to backfill 5%, to get it to 70% leverage. And so, the total equity check is $16 million. Of that, we would be putting in 10% of the equity, which is $1.6 million. And we’re also willing to put in more equity if that’s what’s needed.

We show this exiting at a 6% cap in 10 years. Obviously, exit caps in 10 years are pretty hard to predict, but we think that’s pretty conservative, because even in this recessionary environment and higher interest rate environment, cap rates in Nashville are still trading around 5% or below. And this will be operated by a… I’m gonna skip this. This is the project schedule. So, we plan to deliver this in about 18 months, once we break ground, which can be very soon. And I can get back over to this, but I’ll go into the operator of it, which is Mint House, who is a hospitality-residential operator. Again, this is an apartment building, and can be sold as such in 10 years, but in the meantime, we wanna operate it more flexibly, to where people can stay on a shorter-term basis, and get more rents, especially in a time where multifamily is quite distressed.

So, Mint House is an operator we’ve decided to work with on this. They have other assets in Nashville that they’ve used to underwrite the hotel pricing. And they’re a company that’s made it, you know, through 2020 and the pandemic, and they are not a…they don’t have a model of doing any master leases or anything like that, which is really big red flags when people think of short-term rental. So, we’re very happy with our relationship with them, and this, kind of, this page shows how, in these different markets, Nashville, Miami, Denver, Austin, New York, how you can optimize revenue by using their more flexible building model.

So, I heard… And they also include, you know, you’re booking people through, just, leisure travel, but they also have corporate sponsorships, which we really like, where, if someone’s coming for three months to be in Nashville for a corporation, or they need to work on a longer-term basis, obviously, they don’t wanna stay in a hotel, and these buildings are really, you know, it’s more professional than an Airbnb, and so it’s very, a good solution for larger corporations. And they have, I know, partnerships with Amazon and Oracle. So, and I’ll pause for questions as well, but I wanted to show our track record. So, we’ve full-circled nine projects in Nashville since I started the company, over $400 million worth of projects. Several of these have been short-term rental projects that have been very successful. These are two…this is a short-term rental project that was one of our first ones, but we completed it in 2020. Our returns on that were about over 50% IRR to be in, on the project-level basis. This is another similar construction type, is the one we’re gonna build. These are all stick-over-podium type constructions, and they’re all within a few miles of this project. So, we do have a very strong track record of building this product type.

This project here on the river was another short-term rental building. It returned, I believe, over 43% IRR on a project-level basis, and this is one we’re closing out currently, that has still been selling very well during this recessionary environment. And we have only about three units left on this project to sell. So, we’ve done, we’re very familiar with…and this is another similar construction-type project that’s also done. So, it’s very similar to what we’ve done in the past, what we know how to do, our expertise, and we just have a lot of conviction around the project and neighborhood. And I will open it up for questions at this point.

Jimmy: Fantastic. Thank you, Meg. Great overview of your project there. We did have a few questions come in through the chat here. If you have any questions, please do use the chat, or the Q&A tool, throughout the course of the day today. First questions come from Dale. Dale wants to know, “Will these be furnished units, given the short-term nature? Are all of the units furnished? Would there be any long-term tenants?”

Meg: There will be people that are longer-term, but they will be furnished, yes. But the leases range from, like, what you would do is have one, like, a section of the building that would be longer-term leases, like three, six, nine months, and then there will be more nightly travel. But yes, they’ll all be furnished, and that, given the size of it, you know, sometimes we do half and half, but given the size of it, it’s only 131 keys, and we know there’s a lot of demand in this area. The only other place you can really stay is a, the Soho House, as we mentioned, and then one other. But there’s another short-term rental building that performs very well, but it’s a different model, but it’s… But basically, you invest in the furniture, because it’s 10 years of the life of the project. You know, you would just account for it being used up by the end of the 10 years, or…

Jimmy: Very good. All other questions coming in here. “What is the waterfall structure?” Also another question about “what is the minimum investment?”

Meg: Yes. I believe we set the minimum at $100,000. Yeah. So, just for background for everyone, we’ve only ever raised institutional capital, so this is new for us. We don’t have a huge investor relations department or anything. We usually only rate, we would just get about $20 million from one group, and that’s what we’re used to. That’s, I guess, good for, you know, you all, because we have an institutional-grade product we’re offering, and we’ve already been vetted by a lot of institutions, but we don’t typically syndicate checks, just given this environment with ground-up development. That’s why we decided to, you know, to go this avenue. So, I believe our minimum was $100,000.

Brandon: Mm-hmm.

Meg: And we have several family offices looking at some smaller checks too. So, we do plan to syndicate. And I’m sorry, what was the other question?

Jimmy: Yeah, well, just to pile on there, yeah, their typical investment minimum is $1 million or more. It’s institutionals. But for this particular event, for OZ Pitch Day, because you’re here as an OpportunityDb subscriber and OZ Pitch Day attendee, they’ve lowered the minimum to $100K, and we thank you for doing that for our attendees today. The other part of the question was, “What is the waterfall structure?”

Brandon: Yeah, I’ll chime in there, yeah. So, we’re doing a 8% preferred return here, you know, followed by kind of a 12% IRR hurdle, and then a 15% IRR hurdle. And those kind of follow with 20% promote up to 12, 30% promote up to 15, and then after that, it’s a 37% promote.

Jimmy: And then we did get, your legal counsel, Jerry, did chime in with, “At this point, Meg and CA South are only looking for indications of interest in this development. This is not an official offering. That would have to be done through an appropriate offering document.” Thanks for clarifying that, Jerry, as their legal counsel. Another question here is, “Is there any risk of the Nashville market getting overheated, maybe too much equity coming in? Is that a concern of yours, or why should it not be a concern?”

Meg: Nashville has a lot of demand, so there are, in terms of multifamily, straight multifamily, Nashville is overheated right now. There was so much multifamily investment that hit Nashville that it created a lot of supply. The hospitality and market, on the other end, is, it just seems to be unlimited in terms of, I don’t know, you know, come try to look at hotel rates in Nashville during the week. They’re over $300 a night, downtown. And so, what we like about this asset is, if that shifts in five to six years, say, and there hasn’t been any construction starts because we’ve been in this environment where it’s been hard to get, you know, multifamily projects out of the ground, we can always, you know, it’s a flexible asset. So, it can almost always offer longer-term housing to people as what’s needed and in demand. And so, Nashville is a very hot market, but there’s a reason for that, and there still continues to be companies coming here. Oracle’s campus isn’t done yet. More people are still coming from Amazon. You still, you know, you hear about businesses moving every couple months, and there’s still a huge influx of people moving from Chicago, New York, and California. And so, we imagine even the multifamily supply we have now will be absorbed quickly. But, in this space, it’s a pretty conservative bet, and especially in a neighborhood that’s kind of hip and up-and-coming like this.

Jimmy: Yeah. We’ve got a lot more questions. We only have one or two more minutes left. Dale just asked a great question, I think. He wants to know, Dale, it looks like, has his own captive QOF, with some capital gains dollars in it. He wants to know, is he able to invest directly into your QOZB at the project level, or can you only come in through the QOF? Jerry actually just answered there for you.

Meg: Thank you. Which is probably more of a Jerry question, because he’s been our Opp Zone expert on all of our Opp Zone deals.

Jimmy: Yeah. So, Jerry has clarified, Dale, that is possible to come in directly through the QOZB. Thanks, Jerry. Great. Tim wants to know, “What are the fees? We touched upon the 8% pref and the waterfall distribution schedule, but are there any other fees, asset management fee, or any other fees that you’re able to go over?”

Meg: I mean, we take a standard development fee for building it, which is in every single deal we’ve ever done. We are contributing the land at our cost, which is pretty rare, I think. We’re not charging any fee on the acquisition of the land, or any increase in our basis, besides our costs, to do the project, just because we want to, you know, we think that we’ll get our value on the other end. But that’s pretty rare, but it’s basically just a standard developer fee. And then, after the project’s stabilized, it’s a flat asset management fee.

Meg: Which is 1% asset management fee, which is, I think, at the very bottom end of the market to asset-manage the project for the 10 years.

Jimmy: Yeah, that’s pretty standard. I’ve seen asset management fees anywhere between about 1% to 2%, or sometimes even higher than that. Last question, then we’ll move along to our next presenter. “What time frame will distributions to investors start after the beginning of the investment?” So, I guess, when do you expect to stabilize it, lease up, and start distributing cash flow to investors?

Meg: The stabilization’s a lot faster than on a multifamily deal, because you don’t have to lease up the whole building. You basically just turn it on for short-term rental. But we’re underwriting year…

Brandon: So, year three is when it start, at the refinance. We expect proceeds to come back, and get cash out there. So, distributions will be made there, and then every year following, we’re cash flow positive, so we make distributions there as well.

Meg: Yeah. We would make quarterly distributions to, once it’s cash-flowing.

Jimmy: Fantastic.

Meg: And then I saw Dale’s question. about the 10-year exit strategy. So, we, there, we’re already seeing buildings of this type with the flexible nature comp out in the market. In 10 years, you know, I can only imagine there’ll be a lot more of them. Our backup is, why I like this strategy, is because we still have an apartment institutional asset class. It’s not purpose-built for anything. It’s still just an apartment. You can always just get rid of the furniture and lease it up traditionally, and you just would sell, you would just exit it to a bigger, you know, like a pension fund or something that buys stabilized multifamily assets in 10 years.

Jimmy: Perfect. Very good. Well, we are at time, and we do have to move along to the next presentation. Real quick, before I cut you loose, where can our audience go if they wanna learn more about you, your firm, and this particular opportunity? What’s their next step?

Meg: Sure. They can go to, I mean, to learn about our firm, our website’s great, casouthdevelopment. We also have a LinkedIn and Instagram page, where we send updates. But happy to, just, if you just email assistant@casouthdevelopment with any inquiries, then she’ll get us all, you know, she’ll get answers to your questions, and can get any materials you need.

Jimmy: That’s [email protected]. I’m gonna just post that in the chat right now. And I previously posted the link to your website, casouthdevelopment.com. And you head there to learn more. Thank you both so much today. Really appreciate your time. Thank you.

Meg: Thank you.

Brandon: Thank you.