Charlotte real estate firm Grubb Properties is launching a $200 million qualified opportunity fund to drive real estate investments in opportunity zones in the Southeast and mid-Atlantic.
The firm is capitalizing on a change as part of last year’s massive federal tax code overhaul — opportunity zones allow investors to defer tax on any capital gains made in a qualified opportunity fund, pay reduced capital gains taxes after certain holding periods (five- and seven-year holds), and pay no capital gains tax on the appreciation of capital gains invested in the fund if held for at least 10 years. Opportunity zones are low-income, economically distressed land parcels that are identified by state governors, then approved by the federal government.
Todd Williams, chief investment officer at Grubb Properties, said the firm has typically done investments and projects in what would today be considered opportunity zones before the changes were made to the tax code.
“We’ve been opportunity zone investors for a long time; there just wasn’t a tax benefit associated with it until now,” he said.
One of Grubb’s real estate strategies is to acquire dated office buildings with a large amount of associated surface parking, then develop a multifamily community — typically one of its Link Apartments-branded properties — on that land with a deck containing shared parking for the office and apartment buildings. The model also allows Grubb to secure land for development for little or no cost, as the surface lot used for the office building gets redeveloped. Locally, Grubb is doing this type of project in Montford Park, where it’s under construction on 288 apartments adjacent to an existing office building at 4601 Park Road.
The thought is office tenants will generally use the deck during the day and residents at night, dramatically reducing the parking requirements needed for the two buildings and subsequently driving down the cost to build. Williams said, on average, office and multifamily uses separately would require a total of 700 parking spaces — with the shared-parking model, only about 500 spaces need to be built. Parking today costs up to $30,000 per space in a deck environment.
Those savings can then be reallocated, Williams said.
“We’re trying to get to a price point for our apartment residents that serves what I think is the underserved segment of the population today — folks earning between 60-140% of the area median income,” he added. Grubb also designs what it describes as efficient units in its Link properties, having only six floorplans, which could reduce the cost to build and allow for lower rents that still create favorable returns.
Williams said a significant portion of the rental pool is being underserved in most of the new construction multifamily deals coming online, which typically have top-of-market rents that households earning north of 140% AMI can afford — a demographic sometimes considered a renter by choice. The Link product isn’t financed with subsidies by low-income housing tax credits, for example, although Williams noted some of its deals have included income-restricted units following negotiations with municipalities on property tax abatement. Rather, its goal is to attract renters making slightly below, at or slightly above the median household income in a market, Williams said.
High-net worth individuals, registered investment advisers and family offices are the likeliest investor groups for Grubb’s fund, Williams said. The firm’s preferred way of financing deals is long-term, construction-to-permanent debt — for example, a 42-year, fixed-rate 221(d)(4) loan from the U.S. Department of Housing and Urban Development, which Grubb is pursuing for its Link Apartments project on Fourth Street in Winston-Salem.
“We like those because it fixes the interest rate,” Williams said. “If we believe that interest rates are rising, which all indications are we’re in a rising-interest rate environment, this effectively provides a hedge against those rising interest rates.”
For the fund, Williams said Grubb will invest in Southeast markets where it’s done deals before —the Carolinas, Atlanta and Richmond, Virginia, among them — as well as potentially Florida and Texas.
Grubb has also added new employees with experience in institutional fundraising, legal and compliance to enhance its fund-management team. Grubb currently has about $1 billion in real estate assets under management.
Originally Published on December 17, 2018 at 06:14PM
Article published originally via “opportunity zone” – Google News https://www.bizjournals.com/charlotte/news/2018/11/19/what-charlottes-grubb-properties-has-planned-to.html