Aug 16, 2024
Investing in Real Estate Opportunity Zones Revisited
w/ Greg Talcott of Caliber Funds
AZ TRT S05 EP31 (247) 8-11-2024
What We Learned This Week
- Caliber Co is an integrated real estate company from service to construction to investment funds
- The biggest idea in funds right now is Opportunity Zones - investing in below medium income areas
- Caliber deals can last 5+ years, with an IRR of 17%
- Caliber has great lenders to get good interest rates, they fund deals 50/50 - loan to equity
- Location - always looking for great properties w/ community to support biz + other real estate building
Clips from:
Investing in Real Estate Opportunity Zones w/ Greg Talcott of Caliber Funds
AZ TRT S04 EP42 (205) 10-22-2023
Full Show: HERE
Guest: Greg Talcott, Managing Director of Sales
LKIN: https://www.linkedin.com/in/gregorytalcott/
Greg Bio: HERE
Experienced sales executive with a demonstrated history of working in the venture capital and private equity industry. Skilled in Securities, Asset Management, Investment Strategies, Equities, Real Estate, and Financial Advisory. Strong media and communications professional, expertise in digital marketing to niche networks such as ultra high net worth individuals. BS focused in Law & Political Science from Arizona State University.
Real Estate Investment Experts
Caliber is a leading vertically integrated asset management firm whose primary goal is to enhance the wealth of investors seeking to make investments in middle-market assets. We strive to build wealth for our investor clients by creating, managing, and servicing proprietary products, including middle-market investment funds, private syndications, and direct investments. Our funds include investment vehicles focused primarily on real estate, private equity, and debt facilities. We market our services through direct sales to private investors, wholesaling to investment advisers, direct sales to family offices and institutions, and through in-house client services. Caliber’s middle-market specialty allows the Company to compete with agility and speed in an evolving arena of alternative investments.
Notes:
Seg 1
Preview clip of Caliber Funds
Real Estate Investing -
Many ways to invest in real estate. You could do the DYI method, you buy a property and then manage it yourself as the landlord. You could fix and flip, where you buy a property invest in it do some upgrades, and then flip it for a profit in the short term.
You could buy tax liens and get paid when the property taxes are paid off. You can invest in REITs, real estate investment trust. Similar to a Dividends stock you make money off the cash flow income to properties. There are major real estate investment funds, and this is what Caliber does.
When investing in real estate there are a number of terms you should understand. Analyzing any property you on you need to know what your net operating income is.
To do the calculation you take the total revenue generated by the property minus the operating expenses. Examples of operating expenses are property management fees utilities property taxes, maintenance, marketing and upkeep.
Other terms of note –
Cap Rate - Calculated by dividing a property's net operating income by its asset value, the cap rate is an assessment of the yield of a property over one year. For example, a property worth $14 million generating $600,000 of NOI would have a cap rate of 4.3%.
ROI – return on investment
Tax write offs like Depreciation, or expenses
Interest rates for loans, and Refinances
Valuation of property - Net operating income divided by the cap rate equals the valuation
Seg 2
Greg with Caliber Funds
Caliber is an integrated real estate company, that has multiple divisions - dealing from service to construction to investment funds. The company was started 15 years ago by Chris Loeffler out of Phoenix Arizona, and has since gone public.
Greg works in the capital raising division, works with accredited investors, people with high net worth, institutions and family offices.
Caliber has different types of funds, from growth, to income, to a balance of both. Caliber has 2000 Limited partners or LPs investing in their company.
Caliber is considered the GP or general partner, the manager of the deal. Caliber takes on the management of the deal, negotiation, paperwork and bigger risk. For limited partners or LP (the investors), total risk is the capital they invested.
The biggest opportunity in funds right now is opportunity zones.
Income fund deals you invest for 12 to 24 months with an 11% return. More common deals are 3 to 5 years looking for a preferred return where the investor keeps the first 8% then it is an 80/20 split.
Caliber has profit carried interest - Carried interest, or “carry” for short, is the percentage of a private fund's investment profits that a fund manager receives as compensation. Used primarily by private equity funds, including venture capital funds, carry is one of the primary ways fund managers are paid.
Caliber shoots for deals that have a 5-year hold, with an internal rate of return or an IIR of 17%. Part of that is pass-through losses and depreciation, and tax write offs. Each investor in a 5 year deal receives a K-1 each year for their tax return. Fixed income, or note funds investors receive a standard 1099 for their tax return.
Most real estate investments want to get a high return as it is an illiquidity premium. Your money could be tied up for 5 to 10 years so you should get a higher return. For investments that have a lot of liquidity like stocks, you may not expect the same type of return.
Not uncommon after 3 years in a fund, there’s a liquidity event where there’s a refinance and then a capital distribution back to investors.
Opportunity zones were created in 2017 with the passing of the Tax and Jobs Cut Act. These were real estate areas where there was below medium income, based on 2010 data. There are about 8700 of the zones in the US.
An example could be a distressed part of town or even a college area. One of the locations that Caliber is targeting in Arizona is 80 acres, in and around the Talking Stick location by the 101.
There are many tax benefits to investing in real estate. What the opportunity zones offer is to defer or possibly even eliminate capital gains over the long term.
The way capital gains works with real estate, you have 180 days from a sale to put the sale proceeds somewhere or you need to pay taxes on it. Currently with the law, opportunity zones allow you to defer taxes to April 2027. There is also talk of extending this law to 2029.
Seg 3
Capital gains works like this - long term capital gains is 12 months plus, and it’s at a 20% fixed federal rate. Short term capital gains work at 12 months or less, and then you pay your standard income tax rate.
An Accredited Investor is someone who earns $200,000+ per year or has a net worth of investable assets of $1,000,000+. This is defined by the SEC.
Caliber does a lot of education events to teach their investors about their private equity structure deals and how private equity real estate works. They often have webinars, different live events, classes and online videos.
Investing in opportunity zones have many benefits. No. 1 is being able to defer the capital gains. No. 2 is there’s a 10 year hold on the investment, and then after that all appreciation is tax free. No. 3 as a limited partner you get the K-1 with the pass-through tax depreciation and other potential benefits. Caliber is the GP general partner or sponsor of the deal.
The way a deal will break out as in the first 5 years you might earn zero, but in the second 5 years with a distribution in a refinance you could earn 50% plus. An example of a recent Caliber deal is they are working on a downtown revitalization of Mesa.
With growth funds you can get the ROI and the tax benefits. Caliber shoots for high internal rate of return (IRR) of 15% plus where you can double your equity every 5 years. After year 5, then an 8% distribution.
The goal is a 2.5x return multiple over 10 years in an investment. Typically a refinance is going to be the largest form of distribution.
Another example of a recent caliber deal was a Shopping Center in north Scottsdale at Northsite & Raintree corner. A high occupancy property (strip mall) which they were able to improve on and get a return of 30+ percent after 2 years. They bought, increased tenants and amenities - then resold the property
Seg 4
Interest rates always matter in real estate deals. Last 10+ years interest rates have been near zero, which has been great for real estate. Now with interest rates going up, you have to structure deals differently.
Caliber brokers their deals very carefully with a 50/50 loan to value. No one deal is over levered. With more equity in a deal, you can get a lower interest rate on a loan. Caliber has a debt load of 33%.
Caliber also has good relationships with specialty lenders and banks. Given the current interest rate environment, a refinance will not be as good as they were pre 2022.
A sale of a good property with cash flow, is always a possibility. Especially, if you get a good enough offer.
Example: Caliber bought a big property at $21 million, then 2 years later they were able to sell it at $27 million - after upgrades lease renewals etc.
Anytime you own a commercial piece of real estate, there’s always the risk of no tenants. You want to de-risk the deal and buy a property with a high occupancy rate (tenants). You also get the depreciation and the steady income after the deal is closed.
Rule # 1 - location, location, location. You’re always looking for a great neighborhood and the support the local businesses. This provides tailwinds to any real estate deal. You’re also looking for any other construction building in the area, for example apartment homes.
Caliber has a few different funds to offer - fixed income, growth fund, core growth and income fund, opportunity zones, and syndication deals.
Syndication Deals are large real estate investor deals that typically are going after bigger properties. Examples of this could be hotels being converted to apartments, or hospitals or hospitality trusts.
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