Unique OZ Strategies, With Centennial Advisers

In this webinar, Axel Adler shares a unique OZ investment strategy involving double net leases.

Webinar Highlights

  • Overview of the OZ services Axel and team provide for private clients.
  • Discussion of the rules around OZs and triple net leases, and procedures for ensuring that investments qualify.
  • Example of a series of transactions to maximize the value of an OZ investment for clients.
  • Examples of appealing OZ projects throughout the U.S.
  • Discussion of the optimal gain size for investors to take advantage of this strategy.
  • Live Q&A with OZ Pitch Day attendees.

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Webinar Transcript

Jimmy: First up will be Axel Adler. He’s gonna talk about a, really, quite a unique strategy, that I hadn’t heard of up until Axel and I had dinner at that Dallas steakhouse for our OZ Insiders meeting, back earlier this year. Axel was talking about the ability to do a double net retail lease, within the Opportunity Zone structure, close on these buildings pre-TCO, so there’s very little construction or lease-up risk. But Axel, I’ll stop talking so you can talk more about it, and you’ve got the next 10 minutes, Axel, to present Centennial Advisers, and this pretty unique OZ investment strategy.

Axel: Perfect. Thank you, Jimmy. Appreciate that. So, good morning to those tuning in on the West Coast. Good afternoon for those on the East Coast. It’s a pleasure to be here, and since I am on the clock, I will jump right in. So, my name’s Axel Adler. I lead the Opportunity Zone team here at Centennial Advisers. I’ve personally been in the commercial real estate space for the past three years. And all I do, all day, every day, is Opportunity Zones. I’ve been working closely with our managing director, Justin White, who has 25 years of experience in the business, and he started Centennial Advisers about six or seven years ago. Has now grown it to about 30 brokers, across 4 different offices on the West Coast. So, unlike most presenters today, I’ll be doing something a little different. I’m not gonna be pitching an OZ Fund. Most of our work is with private clients, who basically need help navigating the OZ world, and figuring out what route works best for them.

So, that said, we mainly help clients do two things in the OZ space. The first, which is what Jimmy has been talking about, the double net lease deals, we help clients acquire brand-new, corporately-backed, net leased investment properties in Opportunity Zones. So, you can see on this map, couple of examples from this year. Chipotles, Starbucks, Caliber Collision, 7-Elevens, those kinds of tenants. And many of you probably think that this can’t be done. The main question I get, I always get, is, “This is a triple net lease. You can’t do that.” And you are right. One of the steps in our strategy is basically to renegotiate the lease from a triple net to a double net lease, so that the property qualifies as an OZ investment. Ninety percent of our clients have been referred to us by accountants and attorneys who understand how and why it could be done within the tax code and the IRS guidance on OZs. So, a lot of people have taken a very deep dive into it, and given it the green light, which is great.

So, this next slide that I wanna share with you is an example of a series of transactions that we did back in 2022, to maximize the OZ benefits for one of our clients. I don’t have time to kind of walk you through all of the numbers. I’m happy to share the deck with whoever wants to later. But what we basically were able to do is combine Opportunity Zones and bonus depreciation, to create losses that sheltered much of their original gain, obviously, using our strategy of buying, you know, 7-Elevens, auto-related properties, car washes, etc. So, by doing this, this client got a bunch of brand-new construction properties. He added debt, to create basis, and therefore utilize depreciation. Let’s not forget that after the 10-year hold, there is no depreciation recapture on the exit, which is a huge benefit that some people sometimes forget. And he also got immediate cash flow from the properties, and high-quality tenants, that always pay on time. So, that’s kind of one of the case studies that we were able to do for one of our clients. You can see that he bought a 7-Eleven, a Caliber Collision, a car wash, another 7-Eleven, and another 7-Eleven. So, you know, we like those 7-Elevens, those auto-related properties, and car washes.

During the whole day that I was on the Pitch Day, I’ve been listening to a lot of presenters, and there’s a lot of questions and comments about the best Opportunity Zones in the country. In addition to our unique strategy, since no one else is doing it right now, my job is to find the best-located OZ deals across the country. So, I’ve got two that I just wanna walk you guys through very quickly, just to kind of illustrate that. The first one here is a Caliber Collision, at the bottom of your screen. Brand-new construction. And it’s located in West Lafayette, Indiana. As I’m sure a lot of you guys know, West Lafayette is home to Purdue University, and this property is only 3 miles away from Purdue University. I think it has over 45,000 students enrolled, and over 15,000 employees that work at the university. I actually took this picture last month, when I went to go check up on it for my client, and found that there was a under-construction multifamily development in the back. So, we look for areas that are close to universities, because they’re low-income, but we all know that universities are great areas to be in, and also areas that are growing, as you can see, with some multifamily developments in the back there.

The second example I wanna talk about real quick is CNC Metals, in Sparks, Nevada. Sparks, Nevada, is about 20 minutes east of Reno. It’s part of the Tahoe-Reno Industrial Center, which is a 100,000-acre industrial park, that’s home to Tesla, Google, Apple, Amazon, Walmart, Home Depot. I could go on and on. All the big tenants are out there, and the whole county is actually an Opportunity Zone. So, obviously, this area is expected to have significant growth over the next three, five years. Workforce housing, hotels, retail, industrial, all of it. So, great area for Opportunity Zone investments, so my client is obviously very pleased with this acquisition.

So, that’s kind of the first part. What we do is help our clients buy these properties across the U.S. The second thing we do is we work with developers during the construction process, to maximize the value of their property. We understand the benefits for these OZ products on the acquisition side of things, and there is a premium for developers, that developers can achieve, that isn’t really widely-understood or recognized by the brokerage community. And so, this client engaged us during the construction period, and what we were able to do for him is provide faster-to-market disposition strategy, compared to a traditional post-completion execution. We closed on this pre-CO. And then we bring a buyer pool of our captive OZ Fund buyers, that essentially results in more offers and better terms for the seller.

The third thing is we obviously calculate the OZ benefit for the developer. Kind of based on product type and location, the range is usually between 45 and 125 basis points. And finally, we bring a nationwide network of investors, 1031 buyers, OZ Funds, attorneys, wealth managers who deal with private high-net-worth individuals and families. So, this is one of the examples, 39 units in Wilmington. The next one right here is a 3-acre parcel in Pomona, entitled for 300 units, OZ Fund bought that one too. So, that’s kind of the two things we do. We can help private clients acquire these retail or industrial deals, double net lease deals, and we can also help developers sell their projects for a premium, basically.

Since this is OZ Pitch Day, I will end with two projects that we are currently working on. The first is a 3.5-acre piece of land in downtown Tacoma. Highest and best use for this project is mixed use. You can build a couple hundred units on top, with some first-floor retail.

Jimmy: And then I did just get a question I wanted to ask you, which is, “What type of investor is this strategy best suited for?” What’s the minimum amount of gain that an investor would really need in order to execute the strategy? And does that investor need his own captive QOF, or do you help with that, or…?

Axel: So, yeah. Hundred percent. I would say the range, we’ve dealt with clients who have $500,000 in capital gains. The reason that works is because we usually add debt to these properties, to take advantage of the depreciation. So, with $500,000, you could get 50% LTV, and buy $1 million net lease deals. They’re definitely out there. And on the higher end, you know, we’ve done some $20 million, $25 million deals. So, the range is, it’s pretty big. I would say the sweet spot is $3 million to $5 million properties. So, equity-wise, or capital gains-wise, $1.5 million to $2.5 million is kind of the sweet spot. But we can definitely help from $500,000 to anything above that. To answer the question about captive OZs, we definitely have a team that can help you with that. We work with attorneys that do that all day, every day, as well. And yes, you would have to set up your own captive OZ Fund, so you could keep control over the whole process, and go buy those properties.

Before I hop off, I just have one more project I wanna touch on real quick. This piece of land, which is basically shovel-ready, in Vero Beach, Florida, it’s for industrial use, for industrial product. The client we’re working with right now has done most of the heavy lifting. Zoning, permitting, you know, everything is up to code. It’s really shovel-ready for someone to come in and just start building. There’s 25 subdivided lots, and a unique opportunity for businesses to relocate to a tax-friendly area, as we know Florida is, and have a great quality of life. Vero Beach has had some tremendous growth. This picture just kind of shows, you know, Lennar built 260 units right there on the left. D.R. Horton just broke ground. I think they’ve got a total of 900 units. I think it’s gonna be 600 single-family homes, and 300 townhomes in that area. So, it’s growing, and that whole stretch of I-95, all the way from Melbourne down to West Palm Beach, is gonna be booming in the next couple years, for sure.

So, that’s kind of what I got. In conclusion, we’re kind of a one-stop shop. We can take care of you from the start to the finish. And we’ve got relationships with the people that can make the process very easy. Attorneys, accountants, lenders. So, that’s what we do. And that’s what we’ve found the success in doing, and happy to connect with anyone that has additional questions. I know my time is up. So, my contact information is right down there. More than happy to hop on a call and kinda help you guys figure out what’s the right OZ strategy for you guys.

Jimmy: Perfect. Well, Axel Adler, really appreciate you being a member of OZ Insiders, and a presenter here, and supporter of OZ Pitch Day. Many thanks, and I did just post your email address in the chat, so please do reach out to Axel if this strategy seems compelling to you, and especially if you have a more sizable capital gain $500k or above, I think it’s a really interesting strategy. Worth a look. It eliminates a lot of risk, and a little bit simpler type of arrangement, that you get direct control over the deal. So, Axel, again, thank you so much.

Axel: Thanks, Jimmy. Appreciate the time.