Vertically Integrated OZ Strategies, With Chad DeBolt

Saxum’s national portfolio and development pipeline includes industrial, multifamily, office, mixed-use and student housing assets, with portfolio capitalizations exceeding $2BN. So what are the challenges and advantages of managing such a large and diversified real estate portfolio?

Chad DeBolt, managing director and principal at Saxum Real Estate, joins the show to discuss why a vertically integrated strategy can enhance real estate investment returns, especially in the opportunity zone space.

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Episode Highlights

  • Details on Saxum Real Estate, and their unique operating philosophy.
  • The two sectors that Chad likes best (and the fundamentals that make their outperformance more likely).
  • Several advantages that vertically integrated OZ sponsors have, relative to competing firms.
  • The main sources of current inflation, and whether higher inflation is likely to sustain for the next several years, in Chad’s view.
  • Why the simplest real estate strategies often perform the best.
  • Where advisors and accredited investors can go to learn more about Saxum Real Estate and their current private placement offerings.

Today’s Guest: Chad DeBolt, Saxum Real Estate

About The Alternative Investment Podcast

The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.

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Show Transcript

Andy: Welcome to “The Alternative Investment Podcast.” I am your host, Andy Hagans. And today we’re talking about vertical integration and how it gives an investor and an operator advantages in opportunity zone and private equity real estate investments. And joining me, I have Chad DeBolt, Managing Director and Principal at Saxum Real Estate.

Chad, welcome to the show.

Chad: Thanks for having me.

Andy: And you know, let’s just dive right in. So for our listeners and viewers who aren’t already familiar with Saxum, and I’m sure we have at least a couple of LPs who are listening. But for those of us who aren’t already LPs, can you tell us more about Saxum Real Estate and what you do?

Chad: Yeah, I’d be happy to do. So Saxum Real Estate is a real estate investment development company. We actually accrue across multiple verticals on a national scale. And I think really what is unique about us, and you mentioned it, is that we are truly operators, I think one of the biggest questions that investors should ask, really, when you’re dealing with real estate companies or real estate firms, a lot of them will say they’re a full-service real estate shop.

And the fact is that’s just not true. What they typically do is they will raise money and structure funds, and then they’ll partner with developers. So, we are both of those at the same time. So we’re a hybrid. So we have capital markets, we know how to raise money and all those types of things. We know the structure, of course, opportunity zone funds in those deals. But at the same time, we have an entire team, we call a DevCon of development construction professionals that manage our projects, really in-house, we still get GCS will perform, because we’re on a national scale in other markets to GCS, but it allows us to really control the overall process.

So that’s where we are, we’re vertically integrated. We have basically two headquarters, one down in Austin, and one up in southern New Jersey. And we’ve grown the company to about 35 teammates really with a lot of that growth happening since the beginning of COVID. So we’ve really…it’s been a unique story where we know COVID was difficult for a lot of people, but the pandemic, frankly, for us was we didn’t really just survive, we thrived through it.

Again, the company going to COVID by 10 teammates, and we’ve grown to 35. And we have about 7, 8 million square feet of development in our control, equating to approximately about 2 billion worth of capitalization of projects.

Andy: Wow, 2 billion. Okay, so, you know, I looked through your materials on your website and everything. And I wanted to ask about the verticals that you invest in, that you operate in. I read industrial, multifamily, office, mixed-use, and student housing. So, among that list, and I realized some of them are probably bigger than others, which of those you see the most opportunity on a go-forward basis?

You know, or like, are any of those sort of legacy sectors? Are they all equally attractive right now? Are there a couple that Saxum is really investing heavily in right now?

Chad: Yeah, so we’re very opportunistic as a firm. We really cut our teeth and raise our initial investment vehicles around heavy value-add office and multifamily deals about a decade ago, and you know, since then, again, as the market change, you have to change and then you start to, you know, as we’ve gotten a lot larger in terms of the size, you really want to gravitate towards asset classes where you can produce the best risk-adjusted returns for those capital, the capital that you want to be involved in those assets.

And just in general, which is, you know, sound, fundamental investments that we think we could get great returns. So to answer that question, it hasn’t really changed too much in terms of the more recent few years, but about five years ago, we did start to transition more into purely multifamily and industrial. And to clarify a little further, when you think of multifamily, we actually, we call it housing because we have about 3000 beds of student housing, that we basically consider a sub-strategy in the multifamily… excuse me, in the housing sector.

So you could argue that within housing, we have multifamily, which is obviously market-rate apartments. We have about 1600 units in development at the moment. And then we have about 3000 beds of student housing, which are typically value ideals. And then we also have, as I mentioned, the industrial strategy similar. It’s a national strategy, a lot of the main, you know, MSA’s, major ports, DC’s, you name it, but that strategy is across both dry storage and then also cold storage, we’re very heavily involved in cold storage as well.

So that’s basically been our focus. And if you look at it, really, industrial has been in darling vertical for real estate over the last five years plus, we’ve seen rents just explode at exponential rates, frankly. And, you know, second to it, but it’s really the top two are far ahead of all the other verticals is multifamily.

Class A multifamily second to industrial is the best performer in terms of real estate verticals going into and coming out at COVID. So, it’s been really unique. So those are really the verticals where we pay and, you know, we’ve hang our hats and where we really focus on.

Andy: Yeah, and you know, both of those two verticals that you mentioned, you know, your super verticals, industrial and multifamily, it seems to me, it’s almost as simple as the supply and demand curve, is there’s too much demand in those sectors, too little supply to meet the demand. And, you know, with both industrial including cold storage and multifamily, you know, constantly from LPs, I’m hearing about those sectors.

And obviously, on the sponsor side, I’m seeing a lot of projects, a lot of, you know, funds and investment there. Do you think that those sectors are being adequately addressed in terms of, you know, the creation of new products, you know, new square feet, enough square feet, enough units, enough doors? Are those curves going to begin to stabilize where there’s enough supply to meet the demand?

Or is it still just the growth in demand is faster than the growth in supply? And so those are going to continue to be…you know, are they going to continue to outperform, I guess, is what I’m asking?

Chad: Absolutely. I mean, there’s technical tailwinds and there’s fundamental tailwinds, you name it. On the fundamental side, it’s…and again, they’re both different, right. But we always say on the fundamental side, they’re necessities. People need housing, they need to live somewhere. And, you know, people need logistics, you need services, right?

Again, in terms of e-commerce, we used to look at the e-commerce numbers as a percentage of retail sales, it’s still very low. There’s different stats going out there that the supply of industrial needs to still double over the next 20 years, as e-commerce demand continues to increase. And there’s only so many enville type, you know, assets and land out there to actually be developed.

So, it’s become a really fundamentally strong asset class. You know, at the same time, like when we think if you want to dive into sub-strategy, like cold storage, you know, one of our sayings is people got to eat like the same thing, like these are recession-resistant businesses.

And I think, you know, on the cold storage sides of business, some of the stats are just interesting, a lot of these different large closed source players, even during some of, you know, the great recession, back about 12 years ago, give or take, even early 2000s, there’s almost none to very little, if any layoffs in cold storage during these moves because there’s not enough buildings, the average age of a cold storage building is like 42 years old, so these are really, again, in the United States.

So these are very old arcane buildings, when you talk about buildings that need a lot of power, there’s efficiencies that you pay premiums for. It becomes really unique. So, I think they are very strong sectors, you know, the technical, same thing for different reasons. You know, construction costs have went wild, which has slowed some deals down because the budgets are going up so hard for hard costs, we just have to decrease the land.

Well, that means that some sellers just won’t sell their land, they’re gonna sit on it, you know, but the thing is, you know, I think the construction inflation horse is out of the barn. And it’s just even during recessions, numbers we looked at back during the great recession, the construction’s cost from the peak, we’re down like 20%. We’re seeing budgets, you know, a 50%, you know, huge numbers in a couple of years, like massive numbers.

So, even if the market did call and you had a 10% to 15%, say 20% move lower in hard costs, you’re still much higher than what we were. So again, there’s a lot of reasons for that, right? There’s a labor, there’s materials, there’s just general tough supply chains. There’s a lot of reasons these budgets have to carry more contingencies and just more room for error in general.

So that’s my long answer to your question, but we think that again, multifamily and industrial is going to be here to stay. And the quick bullet point for multi, it’s as simple as class A multis absolutely crushed it coming out of COVID. I mean, some of these markets, I mean, class A multi in Austin was up to 30% last year, 25% year over year in Dallas Fort Worth, you hear similar numbers in New York City.

Remember, New York City sold off a lot too, so they’re higher numbers off lower numbers. These percentages are not often much lower numbers. It’s like they’re big numbers. And then like Philly, we have some deals in Philly. Philly is not as exciting to say nothing against Philly, but it’s not going to get that type of growth like in Austin or Dallas Fort Worth. But Philly rents grew up 10% last year, really unique and it’s still big numbers and really 5% to 6% for the 3 years before that in class A multi, so definitely outpacing inflation.

And the last point I’d make is, no matter what you’re investing in, in front of the LPs on this call, the one question you got to look in the mirror and ask yourself over and over again, is am I investing in assets that have utility where the operators could pass on cost to consumers?

And if you’re in a business where cost can’t be passed on, then your bottom line is gonna get squeezed badly. And that’s the thing is we believe, and we’re seeing it, again, these rents are exploding in multifamily because right, it’s more expensive to buy houses now too. So, you rent. Again, rents are typically positively correlated to fed funds, which has obviously been moving higher.

Typically, unless you get Volker inflation in the mid-teens, and then everything is going to have a lot of trouble. But it is keeping up and same thing, where we’re seeing similar, you know, in an industrial rent. So, again, I always ask myself, for my investment strategy, can cost incurred on the business be pushed on to consumers? And again, I don’t see that in a bad way.

I just basically mean, but consumers are happy to pay it because they still need that service. It’s mission-critical to them.

Andy: So that’s an interesting rule of thumb. So, you know, just off the top of my head, I’m like, well, that means the retail is riskier, right? Because if the consumer is feeling a lot of pressure, doesn’t have as much disposable income, they still need a place to live, right? They’re still going to put a roof over their head, they’re still going to spend money on food, that maybe some of that discretionary retail investing, maybe they’re going to cut back on that.

So you know, retail, real estate, retail operators, there’s going to be pressure on them. What about office? I mean, honestly, I’ve been running “The Alternative Investment Podcast” for over…about a year now, right, coming out of the COVID lockdowns and everything. And no one even talks about office real estate anymore, you know, even operators who used to invest in it and build and operate office, is office real estate just dead?

I mean, I don’t think it is. But, you know, obviously, you didn’t mention it in terms of your top two, you know, hottest sectors. Do you think there’s opportunity there? Or is it just are the macro trends so poisonous that we should treat it like it’s radioactive?

Chad: Well, first off investments, there’s nothing’s ever dead, arguably. And the reason why it’s nice to be a bond trader for over a decade, which is to say no bad bonds, just bad prices. And I borrowed it for real estate, there’s no bad buildings, there’s just bad prices. So there’s a race to the…there’s a price where you could charge rents and still have a lot of upside where office could make sense.

But the question is, is how much does that have to reprice? And that’s just not the game we play. I don’t like under-cutter type games, where you’re just trying to get that reset the basis lower to basically undercut the guys that are next to you because what happens when someone buys the next building cheaper than your building? It’s not really the most sound investment decision, arguably. And I think that’s what’s going on with a lot of office.

And I don’t even know what the updated occupancy numbers are in Manhattan right now. But I still think they’re probably severely under 30%. Under 40% I’d probably guarantee. If they say it’s not the case, they’re probably lying. And I know there’s some seasonality with summer. But, yeah, I think offices…I mean, listen, I’m sitting in a building right now that we built in Austin, Texas, which is the first opportunity zone development in Austin, Texas to break ground.

It’s an office though. And so leasing has been slow. And this is top of the line class A building that we built on budget on time. But you know, over 50% leased, but I hope to be fully leased by now. It’s just a factor that things take longer. We’ll lease it, if I went on to an office anywhere, I would want one in Austin, Texas. That’s how you get some of these other high growth, you know, really capital-friendly states.

But yeah, I’d beware. Again, I think you’re talking about it’s hard to put your finger on from an investment standpoint where it’s cheap enough to buy when you’re talking about change in behaviors of the actual consumers. And when you get this work-from-home setup, and then companies start to bake that into their budgets and their models and what have you, it makes it a really tough proposition to see a lot of people coming back in droves.

So it’s, again, like I said, I don’t even say it’s a dirty asset class. Again, the company was founded on office, really. A lot of our deals, but there’s really more boutique deals outside Manhattan. We weren’t buying large Midtown Manhattan deals, where there’s, you know, very high barriers to entry and minimal supply.

And we were able to really push rents heavy, but we’ve been selling a lot of those assets right now. And it’s just more so because they’re smaller deals that, frankly, just they’re not in our strategy anymore. We’re doing much larger deals, but they’re good assets. But I think there’s, you know, we attracted a lot of value out of them, frankly, and it’s time for us to move on. But yeah, I do think…I think it’s pretty simple.

It’s multifamily and industrial. Or, like I said, housing and industrial. I think those are the…if I’m an investor and I’m looking at real estate, that’s where I’d focus.

Andy: Yeah, that makes sense. I appreciate your perspective, as a bond trader that there’s, you know, no bad assets, only bad prices, you know. It comes to mind that, you know, you mentioned societal changes, right, and then that’s hard for an investor to quantify.

So some of this office space is going to lease up and is going to be, you know, fully leased 5 or 10 years from now. And some of it probably is going to be like the Blockbuster Video building, you know, the triple net lease on a Blockbuster Video 20 years ago or something. You know, and I agree, it’s probably a lot riskier.

What is the Warren Buffett quote, it’s something like, “I don’t look for the three-foot fence to jump over, I look for the one-foot high fence that I can just step over.” And that might be multifamily right now. Well, let’s talk about the pipeline, because, you know, you mentioned economic uncertainty, you know, federal rate, inflation, just a lot of changes in the past six months compared to where we were during the lockdowns.

And you mentioned that Saxum actually thrived during 2020 and into 2021. How have things changed into 2022? And, you know, is the economic uncertainty, is it affecting your pipeline? I mean, obviously, it has changes on, you know, on a pro forma, maybe on the budget, but is it materially changing the projects that you’re getting involved in?

Or are you able to sort of adjust and pivot to execute, you know, on what your original vision was for this year?

Chad: Yeah, I mean, absolutely. I think that the market really did get rattled in, you know, April, to kind of what’s happening today, we’re getting a rate scare ourselves, right, market’s almost off 2% purely off, move higher rates. I think people…the market is very, you know, if you look at the Fed Funds curve, there’s actually an ease is being priced in at the end of…I think, believe at the end of next year. So the market is basically saying, which almost sounds like a soft landing, which is not going to happen, almost never happen. Fed’s always behind the curve, and then they over hike and cause a recession. That’s just what happened. So I think that would be really tough. And I think, you know, we’ve had…

Andy: Well, sorry to interrupt, Chad. But I mean, isn’t that really the only way to stop inflation is to put the economy into a recession? I mean, so I went back in, I listened to a show that you recorded on the “Opportunity Zones Podcast” with Jimmy Atkinson. This was about a year ago, and you mentioned that you were seeing both kinds of inflation, you were seeing cost-push inflation and demand-pull inflation, right.

My concern is that you raise interest rates, you sort of assist the economy to go into this recession, but mainly, it might only affect certain types of inflation, you know, so we might see inflation moderate a little bit, but not necessarily see a solution to like the supply chain issues that we’re seeing.

Is there any chance that we’re actually going to lick inflation this year or next year? Or is it just going to be structurally higher for here on for the next, you know, half-decade or so?

Chad: I mean, I think it’s going to be structurally higher. It depends on the Fed. I mean, not getting political here, but I think the Fed has become a political body, and it shouldn’t have been, you know, I think the last term that wasn’t arguably political was probably Alan Greenspan, that since that it’s gotten politicized.

So, I think now, it’s…but Jerome Powell, I think he’s, you know, his legacy is going to be awful. It’s going to be almost like pre-Volker error, which is going to be on his hands because, you know, and they all sat there, Janet Yellen too, just saying, “Oh, this is transitory.” How many times did you hear transitory? And then, you know, installation is insidious.

And the thing is I think someone said at once like, you know, when you have deflation, you know, generally people they’ll complain about it here and there. But it’s not like the end of the world. When you have inflation, like wars happen. Like, people lose their minds, it’s a different thing. Inflation is very scary because it affects people’s livelihoods tremendously in terms of being able to buy food and necessities.

So I think like, you know, and I would say like I’ve always said that inflation like…and again, this kind of answers your question how long it’s going to be around, we’ve just printed trillions of dollars, like that’s still in the system, like, there’s has to be some…has to get drained, whether it’s through, you know, QT, which is quantitative tightening, right, which is the opposite of leasing, where the Fed would just buying all these bonds to keep their portfolio from decreasing its size, which most people don’t even understand, which is insane.

While rates are at zero, so now at least, like they’re draining some of this money out with QT, but at the same time, you know, there’s just still a lot of money in the system. And once you start to anchor people’s view on inflation, it’s hard to slow it down, and the way you slow it down is just to really hike and hold rates higher longer than people expect. And this market is not going to like if rates are held higher, say 4% Fed funds for longer than people think.

The market is not expecting that, those type of level of Fed funds, and I think it could happen, which should be pretty dicey, I think, in general for risk assets, so I think that…

Andy: So, you think the Fed then is more afraid of the higher sustained inflation than they are of a more severe recession because I guess my calculus is, if they really want to moderate inflation, I don’t think they’re going to get it back to 2.5% percent. But if they want to get it to 4.5% to stay there, we’re going to need a pretty significant recession to achieve that.

And I don’t know which they’re more afraid of at the Fed, you know, the sustained deep recession or the sustained higher inflation.

Chad: The more worrisome is the higher inflation, I think, because again, like what I’ve said, people like Weimar Republic, go back and look at history, wars, like people die from inflation, like on a global scale. And again, I don’t mean that in a dark way, you see, like, things people have worse…

Andy: No, but you’re right. I mean, if you read early 20th century, and you read about World War One and World War Two, inflation, a big proximate cause of a lot of warfare in the 20th century. You’re absolutely right.

Chad: Yeah, I think they’re…and like I said, it’s harder to stop inflation as opposed to , you know, if we’re going into a big recession, they can take out all the alphabet soup tools and tarp and all these things they did before and clean up assets, and then create inflation again. But I think like this is the fear of, you know, kind of where we, you know, are now. So, I do think…I think it’s something that is hard to overcome.

I think they can but like, I mean, look at two stents, it’s never been proven wrong. It’s almost negative by 30 or 40 basis points. It’s extremely negative in terms of the bottom curve. In the bond market, we used to joke and say the bond market traders are smarter than the equity guys, but what have you, that’s neither here nor there. But the bond market is telling you we’re going into a recession.

The equity guys, we are S&P 4300, nothing to see here. Ra, ra, ra. Right? But there’s big credit issues that are coming, you know, down the pipe at some point here. And I think that, you know, and that’s the thing, like, if you got to say, like, “Oh, well, do we have to reprice what’s that look like?” I mean, S&P hit 2200 at the lows in COVID, we’re almost double that.

The market is still high on an absolute basis, people aren’t poor, like if they didn’t sell in the hole, or I think going into COVID, that was the lows of COVID, right? But like going into COVID, I think it was like, you know, 32%, or 30%, 40% of like before COVID happened. Again, because that’s all the money that was printed, frankly.

So, I think you got to be careful, I think you do. Again, I’m not a stock expert, but I think like, again, stick to companies that could push, blue chip companies that could push through, you know, their costs on to consumers that are in assets with high utility.

These dividend aristocrats, they’ve never missed paying dividends. These are companies that have been around a long time, things like that. When I think of dividend aristocrats, I think of multifamily class A. Like, you know, when you got a building that’s 95% occupied and it’s a core market, that’s, you know, great location and what have you, it’s going to do really well, and especially when you build it, each year, the building costs don’t go down then your competition of supply is they have to charge higher and higher rents because their basis is higher.

So, and again industrial is similar too. So, again, I think that’s like a reoccurring theme is real estate does protect against inflation. But you know, I missed to tell you one other thing is like we are seeing repricing real estate like right now, like industrial depending on the market, industrial which is the darling, right, of real estate, so that we are seeing land prices down 20% to 40%, some of the larger industrial markets because they were just so high, right, and now costs aren’t coming down on construction much, land prices are still high, well deals don’t pencil us, the land goes to zero.

So you just won’t build, then you’ll wait, right? So you’re starting to see that happen in some markets where if construction doesn’t come down, then you just fill out supply, which again, argues, right, from a technical basis for higher rents as well. And that’s from purely a technical, you know, cost standpoint.

Andy: Well, and Chad, this brings up the point, some deals aren’t penciling, right? But as we discussed earlier, the supply and demand curve for these real estate sectors isn’t going to change. You know, industrial, you mentioned, there might be twice as much demand in industrial 20 years from now.

Multifamily that we have a huge shortage of housing units. And the shortage appears to be getting worse every year, not closing and actually getting wider. The delta that is needed. So if all of these deals aren’t penciling, it seems to me that, you know, the operators who are able to kind of hold the line and figure this out and control their costs and get deals to pencil and, you know, still make money, still make their investors money, they’re potentially poised for enhanced returns, right, if some of the other competing projects aren’t penciling.

So, let’s talk about Saxum and your vertical integration. Because I understand that, you know, Saxum isn’t just a sponsor, you are also a developer. And you take a lot of pride in that. And that adds a lot of value to your operations. So, can you talk a little bit about how Saxum is different from a lot of, you know, competing funds or sponsors, where they’re contracting with a developer versus being the developer, and how that affects your ability to control costs and execute?

Chad: Yeah, I mean, it’s everything. I mean, costs are changing by the day, right? So…

Andy: And are they still spiking? I mean, compared to three months ago, when it’s like very clear now that we’re in a recession, has that not slowed down the input costs?

Chad: Not much, believe it or not, even it’s not much, because it’s just, there’s always anomalies in the market. It’s not just actual costs, you know, of the actual material, it’s also the ability to refine the material and, you know, get it to where you could actually use it, there’s always different bumps in the road, which have caused tremendous stress into the supply chain.

So, yeah, it’s very difficult. And that’s where I mean, like, another thing I just tell all the investors is you always want to understand how people are aligned to deals. And again, I’m pointing out the point where a lot of these companies will have sponsors where it might be a JV where you have the partner that raises the money, and then the partner that builds the building. And what happens is the partner that, frankly, builds the building, the development partner that the investors might not even know, besides a bio and a deck, those guys might not have any payment performance based on the rents or how the deal does, it’s purely like a development fee.

It’s called fee-based development, where they make a percentage of the total hard costs for the deal. And that’s what their money to make.

Andy: So, they have a totally misaligned incentive with the investor, the NLP, but even with the GP, there’s not an aligned incentive in that case.

Chad: Yeah. Now, if they don’t build it on budget on time, and things like that, there’s wasted callbacks and other provisions in the budget, right, which, of course, those are things that are important. So, there’s ways to put some teeth to it. But a lot of times, you’ll see that, you know, where guys can be cutting corners if they’re not fully aligned. So, I think that’s a big thing.

That’s something that we really work hard on is just, again, the whole company’s aligned and, you know, again, we delivered three buildings on budget on time during COVID. Three of those were, they actually were all steel two, and steel prices were parabolic. So that we’re really proud to say that and, you know, I think that’s a testament just to our team, our team of, you know, across the whole team too, frankly the acquisitions into leasing, obviously into DevCon, our development and construction team, legal, everything, asset management, you bring it all together, it’s a full team effort, but it’s to build these buildings and get them done, you know, on budget and on time is not easy.

So that’s been I think the biggest thing about having a vertically integrated platform. Again, we are truly operators, being an operator means that you’re running these deals in-house. So I think it’s a question I’ve asked, you know, I think everyone should be asking, you know, in this space and also like, another just to kind have a pointer here is remember OZ deals or development deals, as we said, right, the development deals, you got to double your bases in 32 months, what have you.

And the key is too is I’d always ask that, you know, if you see a deal in opportunity zone, I’d always ask is it as of right or does it require variances? That’s a very important question too. Because there’s a thing called…it’s not just, you know, construction risks, the risk of building a building, you’d have a thing called entitlement risk. Entitlement risk can actually build what we said we’re going to build, or, you know, you have to go to our meetings and things like that, and it becomes political, and you have issues.

So, what as of right means is it means that your deal, your density, which is the number of units, the height, all these, the use of the building is all per code. So, it legally fits the code in that market. So in other words, that doesn’t mean they can’t still cause you problems, because they can always find a way to slow you down and cause problems.

But legally, they couldn’t stop you, like you literally would sue them, which again, would waste two years and no one wants to do that. But you can get a deal done. But it’s important for people to ask because a lot of developers won’t explain that to their investors. And they might be in a deal that needs entitlements in terms of it’s not as of right, where you need variances, variances you have to go the zoning board, as the right deal is typically going to the planning board, the zoning board is a much higher barrier where like pretending a marquee can only have 10 floors, but you need 12 floors for deal to pencil.

So, you have to go explain to them the burden of proof is on you to explain why you should be allowed 12 floors and why it’s for the general good of the community. There’s going to be all these positive reasons for doing that. But there’s a lot more risk to that. So I would just say, again, a whole nother reason to invest with operators who understand how to raise money, and what have you, but also understand how to navigate the complexities of development and construction.

Andy: Chad, I got to say, everything you just described, it’s all given me heartburn, just imagining dealing with it, right. Dealing with inflation, dealing with costs, dealing with zoning, and all of those risks. What really is the biggest risk? You know, what’s the thing that might keep you awake at night, if anything?

Chad: Yeah, I mean, I’d say right now, it’s straight-up construction. Again, we’re not taking heavy risk on the entitlements. So, we think all the deals we’re raising money for I got after will get approved, it might take longer than we expect for the reasons I mentioned, but we feel comfortable to get them approved.

And it really just meant navigating the supply chain on the construction side. Like I said, materials, labor, you name it, it’s a big lift, there’s a lot of moving parts. And again, you know, the goal is to really lock in budgets quickly and start to buy out trades quickly, to limit that risk.

So, I would argue that it’s probably the most complicated, difficult, challenging, however you want to describe it, development environment that we might have seen the last 50 years. And it’s just because of all those different inputs that we’re talking about. Now, what we do, there are ways to combat that, like I mentioned, and other one is you carry larger contingencies in your deal.

So contingency is light items, where, you know, if you have a 5% contingency and hard costs are $50 million, that’d be an extra 2.5 million dollars in the budget that you’re adding to the budget that you’re going to just assume you’re going to have to spend because things are going to cost more, right? What it does, though, is that drags the returns on the deal sometimes because if you don’t need that money, it just gets returned to investors.

But when and if you do need it, right? So it’s just there’s different ways to plan for this, but it does [crosstalk]

Andy: Doing development, I mean, thinking with O-zone projects, and like, you know, a ground-up development, where I’m trying to estimate costs two or three years from now, that seems almost like mission impossible to me because if inflation moderates to 4.5, versus if it’s at 8.5, over 24, 36 months, I mean, that’s a huge Delta.

That’s a… How do you even underwrite that?

Chad: Yeah, and we don’t, so that’d be…that example you just gave would be for non as a break deal. So it’d be like a deal that you have to go fight the town and get at variances and all that stuff that you could argue three years plus, so we just wouldn’t even touch that. In most our deals, it would be…typically should be under a six-month approval process. So it’s just, it’s still time.

Still, I mean, you could have in this market, you have a budget move 10, 20, 30, 40, you know, last year, budgets were moving 20%, 30%, 40% in a year. You know, so if it’s 40% a year, that could be a 20% move in 6 months, that can really cause problems. So you still have to be careful. But in general, the projects we’re doing, they’re not that…we’re not waiting that long.

So it’s just something that you got to be really in tune with.

Andy: Got it. So let’s talk about MSA’s and the geographic areas that you all like right now. So, I understand you’re looking mostly at multifamily and industrial. And that, you know, inflation and construction costs are a big headwind right now. Does that affect where you decide to build?

Does that affect what projects you like? Are there areas where it’s, you know, still cheaper to build, ultimately? Does that factor into the decision? Are you more just looking at the demand side, where there’s the most demand for multifamily where there’s the most demand for industrial?

Chad: I think it’s mostly fundamental to start, I mean, technicals [SP] do matter. But, you know, the value of real estate is it’s not to say it’s not rocket science, but like, sometimes the best investment strategies are the most simple ones. It’s really just, we do this in student housing, you know, where are people moving to? And I’ll give you the student housing example, even though it’s not exactly opportunity zones, but it’s a good way to think of things.

Like, in student housing, like, we’re buying universities with over 20,000 students, we’re over 80% of the kids are in state where in state tuitions are 5 to 15 grand, these aren’t an 80,000 a year art school with 2000 kids, right? In states where, you know, we own a couple of deals in Georgia, where Georgia is the third fastest growing state for population, and it’s the eighth largest populated city in the nation.

So, like, you’re lining up all these fundamental things, people want to live there, being in state, and you just start to build those stores. A lot of it again comes out to a lot of these small states down the south, which are pro-business. I mean, you look like the stat that was astounding during COVID, I think 101…I think it was 2021, 140 or 50 million people visited Florida.

Andy: So are you all investing then in the smile states or the sunbelt? I mean, is that pretty much your wheelhouse?

Chad: That is a target for multi but I will tell you a lot of…we have a number of our units right now are Philadelphia and some of the areas outside the city. So like, again, it’s not to say those were our initial deals that we’ve found and those deals will still do great because, like, I’ll give an example one of our deals that’s live right now is in Port Chester, New York. Port Chester sandwiched between Rye and Greenwich, which are two of the most affluent zip codes in the nation.

Porchester, just it really never have been developed. But it’s got a lot of good pluses to it. It’s a 42-minute direct train To Grand Central Station, right? And that’s really unique. And the reason why it was an opportunity zone was obviously qualified, but it hadn’t really been developed the last 20 years because a very arcane zoning, we knew about this. And when it came open, we were one of the first developers to start locking up land and get a deal going.

So like that’s unique because Manhattan is not going away. Yes, it could slow and the Manhattan office could have issues, but like multifamily in a town like that outside of Manhattan, and on the water, have 50 yards to the train station, you know, that is truly unique. So, again, like I was saying, no bad buildings, just bad prices. But you could do great deals everywhere.

I think like in broad strokes, I would say obviously, it’s, you know, multifamily in the south is, you know, been a focus for sure. But, you know, land has gotten really expensive too in some deals, you know, the southern deals where that needs to cool down a little bit itself. But yeah, I would say that is [inaudible] Carolina, it’s down to Florida across and Texas as you think about it.

And then on the industrial side, like you said, it’s really MSAs and ports. You know, we have a number of different deals we’re doing now but, you know, we have some deals in Savannah, we have Dallas Fort Worth, Atlanta, we have a half million square feet facility, Milan is one of the largest DCs in the nation. And just, you know, these, you know, Jersey work on a couple of deals, Chicago, again, it’s not rocket science, you can pull up the top MSAs, look at the top 10 ports, and you’ll see where industrial buildings are.

Right. And that’s the thing. It’s just, if anything, the pandemic has really shined a huge flashlight on the necessity and the importance of the supply chain and having an efficiently run supply chain, and that is not going away. If anything, it just becomes more valuable.

Andy: Yeah, absolutely. And, you know, I really respect the philosophy that you detailed there. It’s essentially opportunistic, right, and so different sponsors have different approaches to lining up projects. And, you know, showing them to investors. But I think it is a solid approach, though, when a sponsor has a track record, and investors can get to know the sponsor or invest with them and build that trust and reputation over time and allow them to be opportunistic, you know, because I wouldn’t have necessarily guessed that there would be opportunity outside New York in an opportunity zone, especially to build any kind of multifamily.

But on the other hand, you know, true diversification, it’s going to need to be more than just multifamily at Phoenix, right, you’re going to need to think a little bit broader to have a truly diversified fund. So, I really liked that approach that you’re taking. And so, Saxum, I understand you do ground-up construction. I mean, as a developer, obviously, opportunity zones would be in your sweet spot, right?

That development first approach. Do you all do projects that are not in opportunity zones?

Chad: Yeah, yeah, absolutely. But like I said, though, it’s still the same strategies. So we firmly believe in multifamily. Again, I say multifamily, but it’s really housing, right, because again, we have student housing in there. But housing, people got to live somewhere. And industrial, you know, whether people got to eat, people got to store their supplies close to where they need it.

Those are high utility businesses. And I’m really proud to say, if we go to the exact stats, I was looking on one of the websites, I think the most recent update was that we…I think we tipped over 30 billion or so in money that’s been raised for opportunity zones. And that’s I think over 1000 funds are being tracked. But I think that’s, you know, again, I think it’s probably double or triple that, frankly, because a lot of people…

Andy: That’s a wild underestimate. Yeah, I was talking with Jimmy, my partner, and he thinks it’s at least triple that, if not more.

Chad: Yeah, I think it’s 100 billion if you made me guess, I mean, when the program started, there was supposedly 6 trillion unrealized gains. So, you know, it’s still really, really small when you’re really looking at that, you’re talking a few percent to get to those type of numbers.

When you think about it, I think it’s like 2% would get you 120 billion, right? So it’s very low. If 2% of the gains went to opportunity zones , it’d be 120. Right. And this is today, that’s since the program started. That’s not annually, like these… you know, that’s the total number. So, I think it’s extremely low.

And that’s not a knock on the program. I think it’s just that people still learning about the program. That’s why it’s great that you guys are doing podcasts like this. I think it’s most historic tax incentive program in the last 50 years. So, but to answer your question, I think that I’m very proud to say that most opportunity zone deals are multifamily deals, because that’s the kind of on the fairway most people do.

You know, like I said, we have an office deal in Austin. Again, first deal to break ground in Austin was an office deal. We’re in the process, we’ve already delivered two cold storage industrial built to suit OZ deals. And that’s a mouthful, but so we had a tenant, cold storage, industrial building in opportunity zones. We have one in San Antonio, one in Michigan, I don’t know anyone that has done an opportunity zone cold storage deal, frankly.

So, it’s pretty unique. And we have another two dry industrial opportunity zone deals up in Hazleton, PA, which were also, we’ve already fully funded those. But that we’re also doing. And I would tell you, this is getting a little more in the weeds. But again, to educate your investors, and LPs on the call, one of the biggest advantages of opportunity zones, I hate to say tricks, because it’s not a trick, it’s completely on the fairway, is a refinance, you know, and there’s a lot of financial advisors out there, and I’m not picking on financial advisors, they’ve been great with us.

But I think a lot are not as informed on the program. And some that are maybe scared of alternative assets will just say you don’t have any liquidity and your money’s locked up 10 years. And that’s a complete lie. The liquidity is you do give up some liquidity. But what I mean by the locked up 10 years is once these assets are built, which is typically for industrial much faster, 12 months, you can build these buildings, 9 months, right, multi, 2 years to build, you know, and then lease up another year.

If you’re talking a couple 100 unit deal. Once they’re fully leased, you refi your money out. And typically you would refi about 30% to 50% of your money out, and a refi is not a sale in any business, real estate, if you refi in companies, anything in the tax code, it’s a return. It’s a non-taxable event and it’s not a sale. So what we’ve done and there’s a lot of debates out there but for opportunity zones, we just recommend you don’t get a negative basis.

That’s when you refi more money out than you initially put in. That’s where you could potentially have some tax issues. But if you just refi all your money, now you’ve just created after-tax money that you can invest in stocks or bonds or more real estate, whatever you want. And you still have your same exposure in opportunity zones. And that’s wild because and I’ll give you a data point, one, those two cold storage deals I told you about, we built them in 9 months, month 15, we reified 70% of money out.

So, if you were an investor and gave us say $5 million, and it’s actually more than that, there was almost 75%, you would literally have gotten back $4 million in 15 months, and you still don’t have to pay your taxes on the 5 million to the end of ’26. And that 4 million is now…it’s not to say tax-free, but you don’t pay taxes on it right then.

Andy: Yeah, that’s going to weigh more than cover your deferred tax liability.

Chad: Not even close. Yeah, and you never sold the deal. I mean, that’s one argument like industrial opportunity zones are so valuable and unique because you can build them so fast. And it might be 1 or 2 tenants, you can be stabilized in a year, build it in 9 months to 12 months, you have your tenant until, you know, a couple of months later, and you could be selling it in under 2 years, or not even selling it, again, refi it, and ripping all your money out.

Which is, again, perfectly allowable per the tax code. A lot of people don’t really understand that. So it’s, you know, and then you still have a cash-flowing building, like you didn’t sell your ownership, you just refied the asset, you just changed the capital stack, that’s all. So, it’s really powerful. And like I said, not to go down a rabbit hole on that.

But I think it’s really important. A lot of people don’t understand that. I think it’s important to understand that. And then, like I said, if you could find investments that are just not… and again, I love multifamily, but again, that’s something unique we do here at Saxum, you can invest in multi-housing or industrial and opportunity zones, or like I said, or office, we’ve done some office deals, so it’s kind of unique.

Andy: So, Chad, speaking of Saxum, and your unique projects, do you have any open funds right now for opportunity zone investors or any other private placement offerings?

Chad: Sure. And I appreciate the explanation you just gave too, you know, I think a lot people get confused. When they hear funds, they think of multi-asset funds, most of our deals we’ve done as private placements. And that’s typically because we don’t really do a deal with equity checks under 10 million. So a $10 million equity check would be like a $30 million deal, give or take in terms of total capitalization.

So, when you get to large enough numbers, you don’t arguably need a fund where if you’re doing a bunch of smaller, you know, 500K, million dollar type equity checks, then it makes more sense. But we’ve done all of our deals a single asset, we’re actually on our 12th deal. And again, it’s something we’re excited about. [inaudible] they’ve done 12 opportunity zone deals. You know, when the program came out, we were the third in the nation to launch, first on the East Coast to launch an OZ fund.

But again, even though they’re called funds, they’re single asset deals. [crosstalk]

Andy: So, each of your projects has its own private placement offering?

Chad: That’s right.

Andy: Oh, I see. Okay.

Chad: Yeah, you get one…it’s still called an opportunity zone fund, though QOZ is a legal definition, qualified opportunity zone fund. But again, it’s a misnomer. It’s not a fund. It’s a single asset. It’s like buying a stock, right?

Andy: Understood.

Chad: So… But yeah, we’ve been…you know, typically we won’t do too many deals at once because we like to focus on the deals we’re doing. But you know, we do have this one deal in Port Chester, New York, which I mentioned, you know, very unique 12-story mid-rise, use of the water, a 42-minute train to Grand Central, 50 yards from the train station, so literally walk to the train direct to the city. Mario Batali has a restaurant in Port Chester.

It’s another…like the downtown is actually, it has a happening downtown. And like I said, you’re sandwiched between two of the most affluent zip codes in the nation, being Rye and Greenwich. So it’s really unique. And again, there’s been no supply in Port Chester due to arcane zoning. So that’s been something that’s, you know, been unique that, you know, we’re working on, and we’re pretty excited about, but you know, there definitely will be other deals as well.

We are big proponents of the program. We expect to keep playing in the space, you know, to the end of ’26. We really hope the government will like how well the space is done and extend that time and investment horizon by two to three years, which…

Andy: I think anyone who’s listening or watching this, I think is going to agree with that. Absolutely. It should be, you know, reformed maybe, but definitely extended. I mean, it’s a huge bipartisan success largely, you know, maybe not totally perfect, but there’s been so many success stories that absolutely deserves to be extended. And again, I think anybody who’s listening to this probably agrees with that.

But is there a way that investors or advisors could connect with Saxum to learn about upcoming projects that might be coming in the pipeline?

Chad: Absolutely, just go to our website,, and Saxum is spelled You can look me up on LinkedIn as well, we’re on LinkedIn, you know, we’re on our website. Our website has our portfolio there, there’s an investor relations link. So you can just click that, and I’ll get that email along with our team.

And, again, you know, all of our investors are accredited investors, just to put that disclaimer out there, but we’d be happy, you know, to talk to anyone who’d potentially be interested in learning more about Saxum and what we have going on.

Andy: Absolutely. And for our listeners and viewers, if you want links to anything that Chad just mentioned, if you’re an accredited investor, or an RAA, or advisor who’s interested, we’ll make sure to link to the website as well as link to Chad’s LinkedIn page. Another reminder to our listeners and viewers, don’t forget to subscribe to the show on your favorite podcast listening platform, so you can be sure to receive our new episodes as we release them.

Chad, I can’t thank you enough for coming on the show today and really getting in depth to, you know, construction development, and all the challenges, but also opportunities right now. I really appreciate your time coming on the show.

Chad: Anytime. I really appreciate you having me, Andy. It’s been a pleasure and always looking forward and excited to talk about opportunity zones. As you said, it’s probably…I think might be the only bipartisan program that’s been successful over the last handful of years. So, we’re happy to be involved in it.

Andy: Thanks again.

Andy Hagans
Andy Hagans

Andy Hagans is co-founder and CEO at AltsDb, and host of The Alternative Investment Podcast. He resides in Michigan.