Key Concepts In OZ Underwriting, With Jill Homan

Due diligence and underwriting are important skills when evaluating any private placement offering, but too often, LPs are at a disadvantage when it comes to these key steps in the investment selection process.

Jill Homan, president at Javelin 19, joins the show to discuss some keys to successful underwriting, and how LPs can approach any offering (but especially OZ projects) with a more critical eye.

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Episode Highlights

  • Key details on the Opportunity Zones program, and why it is so appealing for HNW investors.
  • Jill’s philosophy and approach to underwriting, and how it might differ from the approach taken by others.
  • An important metric that LPs and financial advisors should consider when evaluating any private placement offering’s pro forma.
  • The economics behind ground-up development real estate, and the risk premia that investors should generally expect to receive.
  • The MSAs that Pinnacle Partners has focused on, and why the MSAs represent appealing opportunities for investment.

Today’s Guest: Jill Homan, Javelin 19

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 Hagans: Welcome to the Alternative Investment podcast, I am your host Andy Hagans and today we’re talking about underwriting and investments selection, due diligence all sorts of interesting topics. And with me here today, I have Jill Homan who is President at Javelin 19. Jill welcome to the show.

Jill Homan: Great thanks for having me.

Andy Hagans: And Jill I want to dive right in and talk about your experience and javelin 19 because I think it’s very relevant to our discussion ski could you tell us a little bit of your background and what your company does.

Jill Homan: Sure, so my background is really 15 plus years of real estate acquisitions in development, primarily, working with institutional capital and institutional size deals.

We’ve been focusing the last four years on utilizing the opportunities own tax instead of so I can get into that in just a moment minute.

And so, with rob do that, right now, so with the opportunity, so in tax incentive.

That’s a series of tax incentives for investors to invest in decimated low and moderate income areas and by investing in these areas investors receive a series of tax benefits.

The you know, the first of which is deferral of your capital gains taxes, who take a capital gain you invested into a qualified opportunity fun.

You for paying capital gains taxes until texture 2026 and then, if you hold that investment if that fund holds an investment for 10 years.

All of the appreciation that you invest in is tax free so that’s kind of the punch line of the two main benefits.

But if you remember, nothing else, an investor from my calculations other accounting firms calculations and they have an opportunity to earn between 40 to 50% higher after tax returns on then compared to normal and designated opportunities in so that’s something that we’ve been utilizing for the last four years.

And that’s taking the form of really we we focus in three verticals of the first of which is we’re working with qualified opportunity funds.

So we’re working with a sports anchored fun call for today’s partners and they’re building a soccer stadium bring a professional soccer team and building the real estate around.

A site in Rhode Island and then secondly we’re working in spending a lot of time with pinnacle partners, one of the key members of their team.

And we’re at pinnacle a boutique fund of four to five high quality multifamily institutional deals in really fast growing markets so to the markets that we’ve unlocked in deals with are in Denver and in Nashville.

So we’re working on securing two more development deals multifamily to round out that fund.

And then that’s in one vertical the second vertical is we do do some real estate development and that hasn’t been a focus of late because of all the time we’re spending with our funds.

But we have developed co developed in opportunities ends on the project delivered last year.

And then, thirdly i’m a registered investment advisor representative so i’ve provided investment advice to individuals and family offices.

And that’s centered around utilizing the opportunities in tax incentive and so i’ve advised individual investors on.

which deals to invest in on an individual deal basis on and then we’ve also advised.

individuals and families on which opportunity fund to invest in and that’s something that we can talk more about.

Because there’s some uniqueness about qualified opportunity funds as compared to traditional real estate private equity funds but that’s really what we do and again this is all kind of under the umbrella of utilizing this tax incentive.

Andy Hagans: You know that’s interesting that you mentioned, you work with family offices and advising them on opportunities on investing we had DJ Vancouver and on the show.

a while back and he mentioned that a lot of family offices are not even taking advantage of the program hardly at all, or even necessarily a lot of family offices.

aren’t necessarily you know doing their real estate transactions in as tax advantaged of a way as they could you know if they were to optimize their transactions.

For tax mitigation in your experience you know with with our a’s with family offices, you know how many of them are really aware of the benefits of opportunities zones, you know.

And are poised to even you know, look at investments and potentially take advantage of them, and you know we have we done our job in educating the market about them and their advantages, or is there still a lot of work to do there.

Jill Homan: I think you know I i’d like to say that I think a lot of particularly the larger.

era, the larger the family office you know it’s correlated but they have are much more well versed and have most likely made those investments, but you know, sometimes I come across investors that are really not.

focus on it, or have really made those investments on, I would say generally interact with family offices or investors once they’ve made the decision to.

Either explore or to look at an oC investment because my focus is really you know, a subcategory of olds, which is real estate and tax advantage investing.

You know that being said, most you know most families and high net worth individuals have an old strategy or you know, or at least thinking about i’m going to allocate this amount to real estate and then have that.

You know this is a long term hold, which is sometimes can be a you know, a challenge for some to think about you know I need to.

invest in hold this for long term and that’s sometimes what me might be a sticking point.

But because of the how significant that tax advantages are and we didn’t even get into on when you hold an investment, you know part of the benefit of owning real estate is depreciation.

And so, with oC you can depreciate the asset and then, when you go to sell you mark your basis up to fair market value so there’s no depreciation recapture and so there’s significant benefits.

But I think sometimes you know, particularly if you know my dad’s in his 80s and you know this probably isn’t a good fit for him to realize all the benefits.

You know, we fall submit other investors who are giving away their all their money so it’s not a good fit so really you want to find someone that.

can take advantage, on the other side of the 10 year hold and then it’s part of their overall.

Real Estate portfolio on but because I think this is what is perhaps a once in a generation tax incentive.

And it’s also doing some good, but because of how significant, I think it is that’s why I leaned in and focus the business on it and that’s why i’m.

I would say evangelize and recommend that investors, at least consider it within their portfolio and think about how this might fit in so that that’s you know what we talked a lot about it.

Andy Hagans: So you saw the once in a lifetime opportunity and you’re seeing a pun intended.

Well let’s shift to macro just for a moment, I want to dive into a lot of your experience with underwriting and everything but.

I also want to talk about the moment we’re in it’s Thursday July 28 I don’t know the exact date that this episode will air, but it should be within a few weeks.

And we just got the report today that we’ve now had two consecutive quarters of negative GDP growth so Is it safe to say that we’re in a recession or should be changed the definition of the word recession, so that we’re technically, not in a recession what’s your take on that Joe.

Jill Homan: um I think it’s silly to be talking about the nomenclature, I think, if you were to walk down the street and ask people you know, are you better off.

Today than you were a year ago, and I think most people you know with a must absent health concerns I think people would say you know, while my my 401k or my portfolios down.

gases, you know so much more expensive and my wages, I feel like you know I may have gotten a little bit of a of a.

Increase in my income, but my dollars not going further, and so I think it’s you know to me it’s silly to try to disguise what I think most people feel, which is we’re in a recession and we’re also dealing with.

Some of the most significant inflation that we’ve had in decades, and I think it’s really constraining the population, the average.

Average folks and we’re also seeing it play out in projects where the costs are up and and then you know rents are up to some degree as well it’s just it’s squeezing returns.

So you know, the question is, as we think about long term what’s the impact, you know I can speak to you have some thoughts on what the impact on opportunities, and so are given.

we’re in this down market and also a volatile market on, and so what i’d say is just first that with the this tax incentive on opportunities and investments their long term holds.

And, and so we’re focused and and also the advice, and you know with pinnacle and other funds that we work with we’re focused on.

markets that have demonstrated over the years, strong population growth, strong wage growth and resiliency, especially during the pandemic.

And also cities that are properly appropriately well capitalized So these are cities, you know whose pension liabilities are not out of whack and that they’re appropriately capitalized.

And, and so what that translates to is our you know our expectation that these are cities that can whether a downturn and with the long term hold you might have a dip, but you can come back on the other end and so.

And so that’s you know that’s first of all, as as we think about the benefit of opportunities there, and this this small component.

And then, secondly on real estate can be a hedge against a recession and is less correlated with the stock market.

So I think there’s an opportunity to diversify diversify away from some more volatile assets and then you know factoring in the long term hold it’s an opportunity to get control of an asset.

And that pathway of growth and if it’s appropriately lover, then you know you have an opportunity to get some get some cash flow and so there’s a lot of caveats caveats have you got that’s how we.

Think about it, and you know you have influence over the fun can decide, you know what the leverage is the location of where they.

select the deals and the whole period and so it’s a matter then of you know, are we coming in at the right basis.

And costs are what they are, but sometimes it means you know skipping over some deals if you feel your basis is you know, is too high, the returns are going to be.

To compressed because right now my sense is that the investors in the capital, are the ones that are getting squeezed.

Because the landowners don’t want to reduce their costs the general contractors and all the service providers are passing along the cost increases.

On and the lenders are decreasing their leverage and so it’s really you know the one where your go the returns might be to the deal 15 now there you know 13 or 14 and everybody’s looking to the capital to just say well you know I guess you got except the low return.


Andy Hagans: If I could just interrupt for a moment please.

I mean I Okay, two things I want to unpack first I totally agree with you, the the whole are we technically in a recession Well, yes, we are but.

it’s almost like it doesn’t matter if the average man or woman on the street believes that we are.

that’s going to be a self fulfilling prophecy however you define it, but even if you want to define a differently.

Instead of you know, two consecutive quarters of negative GDP growth, you know okay how about several consecutive quarters of negative real wage growth.

Where wages aren’t keeping pace with inflation, so you know I think it’s almost beside the point you know everyone kind of knows where we are and however you want to verbalize it.

that’s fine but shifting to the institutional real estate market, it feels to me, and I know these are ground up development almost exclusively.

But it feels to me that assets haven’t really been totally repriced to account for where we are in the you know investment market cycle like.

You know, sellers of of assets are kind of crossing their fingers and hold on, and you know not not quite willing to make that price adjustment.

Do you think that that we have just a couple more months of kind of reality check.

It maybe maybe this is more pertinent to the value add world you know, then ground up development, but I feel like you know it’s like everyone kind of knows we’re in a recession, but some market participants aren’t willing to totally.

reflect that at least with asset pricing.

Jill Homan: yeah well, so what we’re trying to focus on our projects where we you know somebody’s been under contract for a while i’m to you know as the markets appreciated we kind of got last year’s price.

On the project went through a rezoning are the projects gone through some pre development.

And while you know the construction costs have gone up some of that’s been offset by you know we really like her land basis and then also you know these are really high rate growth markets.

And so we’re seeing you know rents in the market today that justify new construction.

So that’s how we’re really looking at added on but to your point, as you say, you know as as we project forward what I really expect is that deals are not.

A number of deals or some deals are not going to move forward, because you know you’re going to land appreciated so you’re going to be at a higher land value because.

Land sellers and a lot of sellers you anchor on what you saw previously, and you know all this appreciation.

And then you’re not willing to accept less so it’s either the land trades or doesn’t trade and so, if it trades then you’re at a higher basis, and then the costs are even higher.

And so, when it kind of comes out the other end the capital at a certain point is going to say I can’t accept this return for this risk, and so that’s what I think is going to start to happen.

And then you would think that you know either the land would be retreated some of the projects that don’t move forward, that means the construction will slow down, which means.

there’s might be some relief on construction pricing to all of that should work its way through, but also having been someone who experienced you know 2006 through 2008 and seeing what happened in the market and in the illiquidity in the capital markets.

In all the stuff that was supposed to happen it just took a long time, or you know some of what you know these assets, there were supposed to be restructured just never were.

never came back to the market so i’m just skeptical that there’s going to be such a significant kind of repricing in the market, and what I expect.

Is that some land will be retreated some projects will be restructured on and I just think everything will take longer and then what it does, because it always does, and.

I suppose.

Andy Hagans: If you’re anchored on a price as as as a seller of an asset in inflation is 10% a year just just wait 18 months or you know it’ll replay inflation to whatever price you’re anchored on.

But, but I think I agree it’s it’s going to take some time to digest i’m you know i’m not that patient.

Jill Homan: I want to, I want to see all these assets just go on sale like tomorrow oh that’s the that’s the challenge because capital, a lot of capital.

You know I fully expect and we saw this in the pandemic is that capital will be raised to do distressed deals and then you have so much capital that needs to go out the door, and that also has upward pressure on pricing.

And so I saw that in during the pandemic actually I had some friends that work in distress and they said we.

know this is our business, and we know that the pricing doesn’t make any sense, because there have been additional capital that had been raised.

So my kind of my punch line with all of this is, you know what I try to do is is really focus on and step back.

On so focus on deals look at just the fundamentals and the elements of the deal.

And just make sure, without financial engineering or without you know, a series of all these things going right that the deal will work but, rather, you know the deal, fundamentally, you know, a return a cost for that deal fundamentally makes sense.

And then you can you know get into more.

You know more of the elaborate underwriting.

Andy Hagans: Interesting why that’s a great juncture, then, to talk about underwriting and you know this, this question, I suppose, in reference to the moment we’re in but also just in general, what are some of the underwriting mistakes that you see.


Jill Homan: yeah no, and so I i’ll give you a little backstory, and so what I would just I don’t characterize it as underwriting mistakes on I just think it depends on the style.

So i’ll just give you a situation, so if you’re selling you know if you’re selling a multifamily property.

you’re gonna you’re going to be really aggressive in how you underwrite it and what you show to the marketplace look, you can make all this money, and you know all the rents, are going to go up by 8%.

versus if you buy you’re going to have a different perspective on how you under right um so rather than you know, describing it as mistakes I would describe it as.

You know, as styles and what I tend to do is I tend to underwrite a bit on the more conservative side and then kind of start to turn up the you know turn up the dial to see how you know how it can look.

But really settle in on a base case that says, you know, this is what I you know, I think, is likely your could happen.

But if you know if this was to happen this way in this, then we really you know we’d really be excited about the returns and so for settled in on a Conservative or fairly conservative base case then we’re feeling good about it and that’s how I tend to underwrite.

And it was funny when I was thinking back i’ve been thinking a lot about 2008 and, as I was in.

Thinking about how crazy the marketplace was in 2006 and leading up to on the downturn I started joking, with some friends that you know I should characterize.

The deals that we didn’t do because you know a lot of brokers were laughing at us, you know they said Oh, this is, you know you’re not gonna you’re not going to get the steel, if you don’t underwrite this way we’re like you can’t.

And so it’s shocking with a friend, I said we should start keeping a metric about money saved for all the deals that we didn’t invest in on that ended up going sideways but.

It was then there’s a lot of deals that you know as you’re it’s hard to look through a downturn and I just remember some folks that got early back in the market.

And I thought, how on earth are they you know, are they going to do this deal and they just ended up.

You know, doing it and the market was coming back and they were you know it’s like the one on a surfboard they were the first ones that kind of caught the edge of the wave and.

Then phenomenally well so i’m not saying my way is right that’s just you know how i’ve tended to underwrite.

And then you know I could speak more to individual deals, but, on the one unique thing and I alluded to this previously is that with opportunity zones, because there’s a short amount of time.

that the fund has to invest in a deal on there as a result, the funds are have a short time period that they fundraise they put the capital out and on and that they close the fund.

And that all has to do with this kind of short period, but as a result of that.

What you see is that funds are quickly on you know fun one fun to fun three their on their second you know, third and fourth fun and as you’re.

You know if you’re an ra or you’re an LP and you’re looking at a multi asset fun, particularly with opportunity zones, you can have visibility into the underlying assets.

Because these funds aren’t out for a long period of time, and as soon as the capital comes in the capitalists being deployed.

i’m just like what we’re doing at pinnacle and you know if you were to call us up, we can talk at length sure underwriting about these underlying assets that we’re investing in.

And if you Contrast that with traditional real estate private equity, which traditionally has been.

You know, invest in a strategy, maybe we’ll maybe we’ll have one anchor deal, but overall you’re investing in a strategy versus with those ease, you can actually start to see.

On the beginnings of a portfolio or a half of a portfolio or depending on when you come in, you could even see almost all of the portfolio.

And so that is pretty exciting considering you have an ability to dig into the deals and look at their underwriting and see how you feel about it and how you feel about the.

Or how you think about the the portfolio construction and so that’s kind of one of the unique uniqueness with it and.

So I would just say that’s kind of how I think about you know underwriting and concerning versus.

You know versus aggressive and just one example that I can get into is it’s just We talked a lot now about CAP rate.

And, and if I knew what the CAP rate would be in 10 years than you know I probably wouldn’t be on this call, I would be you know betting on the CAP rate and 10 years and.

And I would know exactly what it would be but but that’s a challenge and what you’re really trying to do is directionally get it right.

And then also sensitize it if you’re wrong and that’s you know i’ve seen a lot of deals recently where you know.

folks are just continue to underwrite you know today’s CAP rate or CAP rate with just a little more escalation.

And you know and it’s it’s a challenge, because when you look at the interest rate environment your you know your CAP rates logically would go up as interest rates are going up, but you know, sometimes the market doesn’t follow the logic and so that’s something that we’ve been.

Andy Hagans: Thinking a lot about well and i’m sorry to interrupt but.

It seems to me the market is pricing in that you know the Fed has done a couple interest rate raises.

But they’re not going to be able to do too many more, it seems like a lot of their moves are like nine months too late, so.

Like i’ve heard one theory basically like the market is pricing in we’re already in a recession when they should have been raising you know rates because of inflation, nine months ago, and then now obviously we’re in a recession that’s going to tamp down inflation.

But you know I don’t think the recession is going to be too popular across society so they’re not going to be able to keep.

Rates elevated for very long and never mind that you know the whole political policy discussion about national debt and being able to pay higher you know, interest rates, we have to essentially have a low interest rate to function as a country.

Jill Homan: yeah it’s I mean to your point and even today, it came out that there’s potentially another trillion dollar bill that’s being spent in the name of you know, inflation and you just ask yourself really what.

So um I mean that’s it’s one of these things that if you name a bill anything you know, maybe, maybe, people will believe it but it’s just you know we’re.

Like with the the government spending as much money as they’re spending and then coupled with you know are fed Chairman finally getting on board that there is inflation it’s.

And we don’t we can’t really expect that leadership is going to come from the top.

And so that’s why you know as we think about you know, think about these things it’s you know I go back to one of the benefits of oC is a longer term hold and you kind of the fundamentals of real estate and.

You know, and then we think a lot about you know, is this do we want to own this asset for 10 years and is this a location, we want to be in for 10 years and so we’re finding that when we say you know overwhelmingly yes, those are the deals that we really dig in on.

Andy Hagans: So it sounds like pinnacle partners is focusing on the smile States or the sun belt.

Jill Homan: yeah yeah.

And then, and then that’s similar to for the investment advice and the investors that i’ve i’ve worked with.

You know we’re similarly focused in these high growth market so we’ve made invested investments in Richmond and Austin and Huntsville and and then you know Denver and nashville so so absolutely.

Andy Hagans: yeah and it, you know, the thing about those real estate markets or you know it seems crazy to me like when I look at rent statistics in Florida, maybe to a slightly lesser degree in Texas.

it’s just crazy rent growth.

But people keep moving to the states, I mean for variety of reasons, and I had totally understand why.

And so that trend is not likely to I mean, as long as people keep moving to nashville and people keep moving.

To Florida and people get moving to Texas those trends aren’t going to reverse, and you know, the thing about multifamily and you alluded to this is it’s very resilient as an inflation hedge because.

You know the the asset owner can reprice rents on an annual basis, or you know a lot lot more quickly than you know various other sectors of commercial real estate so.

Especially with ground up construction where you know you don’t necessarily have to pay the the going CAP rate, you know.


Andy Hagans: It does seem like a great you know 10 year long term bet.

Jill Homan: yeah and I would I agree with you about the rent growth, you know one thing that i’ve observed is these and i’ve had debates with you know, with some folks.

You know, particularly folks who are in California on the west coast, and you know talking about you know, secondary and tertiary cities and.

Is what i’ve seen is the wages and salaries that people are making.

I think the discount you know, compared to if you were living in New York City compared to living in nashville I think the discount that someone would have to accept for living in national, I think that has is and has, and will continue to shrink.

So what you’re finding is is that there’s this, and this has been written about for number of years is that there’s this arbitrage.

where you have these corporate relocations and people are making a salary that’s competitive with New York City, you know, maybe not as high, but you know much, much higher than.

than the nashville mean and and then the cost of living is is much less and so people were spending less than 30%.

of their wages on housing and so when you think about these cities and all of the growth on there’s you know theoretically some catching up and some room and that arbitrage.

And for the rents, to increase and people to continue to say it’s still you know, while it’s it’s getting really, really expensive, I still can afford to live here.

On and you know my hope is that these cities kind of don’t.

surpassed what the what the wages and the way to growth is because I think that would be where the danger would be is you know concern that’s when people are going to start moving out of these high growth to other you know other markets.

And you know what I just say, is when you look at the corporate relocations and you take you know ilan musk companies in in their relocation to Austin.

And what I say is you know, once a corporate relocation has taken place, I just I just don’t see them going back on.

And so I think some of these secondary cities have now become primary are just going to continue to grow and that’s really what we think about for the 10 year whole.

If I could just make a quick comment as it relates to underwriting you know we talked a lot about the rapid rent growth in these areas, and we see a lot of you know models and a lot of.

You know pitch decks and everything and what we do in a rule is is that and I see this a lot, you know, the way to make every deal work is to grow rents by 4% or 5% or and and grow expenses by 1% or 2% and you know just carry that for 10 years and then it makes any deal work.

On so that’s a little bit of my number one pet peeve when I see a deal.

Because it just doesn’t make any sense on, you know how runs could grow at such a different pace forever.

And so that’s something that you know, but you know, even though being in these high rent growth markets we’re still keeping our rent growth.

underwriting assumptions at 3% and at the same time keeping our expense growth underwriting at 3% will play around with that maybe we’ll move into for for for both of them.

Just to you know see how that impacts, but what we want to do is kind of you know I think there’s a sense that you know, at some point there’ll be a reversion to the mean and what we’d like to do is kind of solve for the mean and see how the deal works.

Andy Hagans: Interesting yeah no I think you’re right, I mean conceptually speaking, if I have an expense structure for like let’s say my Labor costs to run an asset.

The growth in the cost of that Labor should probably roughly match the rent growth right because you know.

People who work in that location, are also going to live in that location and you can’t have a situation where rate, well, I guess, we have had it in the past year, but you can’t indefinitely.

Have a sandwich and we’re wages are growing 2% and rents are growing by 6% you can only do that.

So many years until we’re a homeless right and to your point about the wage arbitrage I mean you see my Green screen behind me, I have these beautiful skyscrapers.

And meanwhile, you know I run the show from semi rural Michigan but I don’t think it’s even purely about economics obviously economics are huge factor, but I also think.

You know, with with the lockdowns and the pandemic, a lot of people, you know want a different lifestyle and I think that trend is likely to continue.

as well, so I wanted to ask about to just push on underwriting just a little bit more, so we have a lot of lps and iras and advisors who listened to the show and.

You know I guess just speaking for myself, but probably on behalf of some some of the audience, you know we’re not all experts on underwriting on due diligence, for you know investment grade real estate.

But you know we know enough to look over a pro forma to look over a deck you know, realistically speaking, what’s an approach that we can take to you know get a little better at that get a little more, you know street smart when we’re evaluating projects and pro forma.

Jill Homan: yeah I would say, one of the easiest things and i’ll just i’ll speak about evaluating a single deal if that’s all right.

So I think one of the easiest things is is to calculate a return on costs, and so this is for.

You i’m going to speak about development deals, but on you know, and it would be a different conversation if I was to speak about value add but.

Then that type of thing but i’m a return on cost is your your net operating income, so your noi as if the project was here today.

So its current rents current expenses your current noi divided by your all in project costs and so on, that will produce a yield you know, maybe it’s 5% if it’s 6% call me.

But but we’re seeing projects really in kind of the fives.

Right now, and i’d have to say, you know a number of year, you know, a couple years ago, it had to be in the sixes and years out, you know earlier, it had to be in the 70s, but.

Right now, you know it’s really in the fives but that doesn’t tell you enough information, because what what that really tells you is that’s that’s also on the calculation for a Capri.

And, and so that return on cost gives you a comparison to what the current CAP rates are in the marketplace and so that should also spell out what the development premium you’re getting paid for the deal.

Andy Hagans: So do those do those do those costs like that that CAP rate conceptually.

we’re comparing that for ground up project to a CAP rate do those moves like one to one or you know, are they a little more disjointed than than you might think.

Jill Homan: You mean the current CAP rates to to your return on costs.

Yes, oh they’re more disjointed.

Okay, so yeah so.

Because you’ll see you know.

And i’ll just take a quick on so, for example, a value add CAP rate could be a four Okay, and in a.

Core CAP rate could be a four and you’re going to end up with two completely deals your expectation for a for CAP rate for a core deal is that you’re buying almost a bond bubble project it’s just a steady stream cash flow cash flow cash flow.

Sure okay it’s like new vintage probably you know 2022 you know it’s something that’s new that you’re not gonna have to put much money in.

A value add CAP rate of a for the reason you’re paying for, and you can think about like tech stocks reason you’re paying for is it’s like the future potential.

And so you can turn that for you put in, you know 8000 10,000 a unit 1520 whatever.

And you turn that for into three years from now, it becomes you know, a six and then you know another year it’s you season, the noi with and then it’s a seven.

And two that’s why you’re paying is is there’s a lot of meat on the bone and future potential for that i’m with the way to think about a development costs, I think about it, as the development premium to current CAP rates.

Because you’re going you’re essentially you’re not going to be building the same product as a value add you’re going to be building the same product is something closer to a core deal.

Andy Hagans: And a roof, and a brand new brand new everything.

Jill Homan: up and i’ll flashy and you know, the latest and coolest amenities, and so you know, assuming it’s you know classy or you know, maybe it’s you know, a nice kind of pocket parks, but nonetheless.

And what you want to think about is if this building was sitting here today, what will my CAP rate be, and so, if if the building standing here today.

would be a CAP rate of five in your building to a 5.4 you only have a 40 basis point premium.

For the development and I think that’s not enough, I think you need between 100 to 150 basis point premium.

And that’s really sensitized to the market, so in Austin you know I you know, maybe it’s 100 but into pika maybe you want, you know something closer to 200.

And then, with the ideas when you lever that then that’s when you can you know you look at getting you know.

Positive cash on cash and you know in great returns, but the simplest thing to do is to kind of strip away all of the elements of.

kind of irr and just think about you know what will my no I be not.

Because a lot of people will trend their return on costs they’ll throw in some rent growth and everything but no, you want to say Okay, if my rents, you know we’re here that building was here what’s my return on cost.

And then, what would the CAP rate, be that I can compare it to and if it’s like oh CAP rates here are four and i’m at a 5.4 that’s 140 basis points Fred you know that is really a market appropriate.

returned and then that’s when you get into the next step, which is, you know how real are these rents and how real are these expenses and you know you kind of you can start to dig in.

one step further, but I would even just start with the project sponsors own numbers and calculate a return a cost, and then you can do.

one step further and say Okay, you know, do I believe in these reds and expenses and if that all seems to check out, then you can kind of dig in.

even further, but that to me you can’t financially engineer return on costs.

And, and so that’s why i’ve i’ve seen a number of you know, some deals all the time that you know they showed me a 20 irr.

And I go to calculate a return on cost and it’s you know it doesn’t work because you’re able to financially engineer a good ir so there’s a lot of ways, you know lots of ways to do that so.

Andy Hagans: that’s lovely yeah just talking through the less the less game mobile aspects of the deck that we can dive into you, you mentioned, I know we’re running short on time but.

I want to bring this back to opportunities zones, because you mentioned that there might be like 100 or 140 basis point premium.

That I would demand for investing in ground up development so in your experience with family offices or you know ultra high net worth investors.

Are they demanding that sort of or maybe insisting, are they insisting on.

That much of a premium for opportunities own projects, because I know that the opportunities on tax incentive, you know juices.

and investors triple net returns so much because that tax incentive is worth so much.

Or is it the case that you know it would basically a lot of these projects would probably be pretty good projects, even without the incentive and then the incentive is just going to juice, the returns way more, if all goes according to plan.

Jill Homan: yeah so what i’m saying is that investors are open to looking at markets and deals that they otherwise wouldn’t have looked at.

So perfect example we’ve invested in several projects in Huntsville and that wouldn’t have been a target market and then, as I, you know learn more about the market, I got excited about you know toward the market on and really saw the fundamentals.

So I would say that that’s one of the benefits is you know attracting capital to areas that may not have been on the radar screen for traditional real estate private equity.

But then, you know, also to answer your question the 100 150 basis point.

Is an appropriate premium, because these are you know the capital should be compensated for the development risk, and I think keep in mind, you know some folks and you know there’s been situations where.

Somebody spent 20 years building a company, and then they they made what is really a life changing event for them, which is they sold their company, you know for $50 million and they you know they have a $30 million capital gain, which is life changing for them.

So I don’t think that capital should accept the lower return compared to you know you know something else.

And so that you know i’m finding that the capital once and appropriate risk adjusted return on.

And, and even though it’s an oC capital but i’m also seeing that folks are willing to go into other markets than you know what had been you know here to for New York City San Francisco la.

In DC and you know that’s why I think some of the growth happening in nashville and their opportunities and it’s just is remarkable because of you know, it was great timing, with their zones and also with the growth that city.

Andy Hagans: Yes, it’s it’s interesting even hear about opportunity zones in nashville because you know speaking now in 2022 verses when the opportunity zones were actually drawn.

i’m like well nashville’s one of the hottest best real estate markets in the United States right but, but obviously it had some census tracts that met the criteria to be zoned as an opportunity zone.

Jill Homan: yeah and the governor’s were the ones who designated zones and so, if someone has complained about you know folks in New York, had a complaint about you know the.

The zones and they should you know go to the governor who left a little early.

But that’s and that’s what you find is the governor’s with the one in charge, and they also use the most recent data to that this made the zones and that was data from the census on.

And they take a mid year census of those data from 2016 2017 and this bill was passed and made into lot the end of 2017.

But since his tracks are kind of funky shapes on and it looks almost like little shapes that you take, for your eye test, you know what shape is this.

And so, sometimes you end up with like a long where you know part of the developments really been happening, but not over here and it ends up it’s all kind of stuck into a census tract.

And so there is, you know just to make the folks listening aware and there’s a bill on that’s been introduced it’s bipartisan and by Cameron, meaning both houses have no house and Senate.

have introduced legislation that would extend the oC tax benefit from 2026 to 2028 as well as include some really terrific.

Incentives as well, and we won’t get into those but it’s something that you know be mindful of, as you know, we come to an end, you know, and we have yet another election.

But I think it’s something to be mindful of because there’s a real opportunity, no pun intended on that this could be extended and we’ll continue the conversation about it at you know, at the end of the year.

Andy Hagans: yeah and I know our partners that opportunity db and my sometimes co host Jimmy atkinson they recently hosted a policy webinar and also submitted petition that I believe had a couple hundred sign nice, but you know i’m very hopeful that.

You know, given that it’s bipartisan and there’s there’s so little Washington that is bipartisan these days i’m an optimist I choose to be hopeful, I think.

The program will be reformed and improved and extended but we’re running short on time so before we cut you loose Jill I want to ask where can our viewers and listeners go to learn more about your consulting company javelin as well as pinnacle partners.

Jill Homan: um yeah thanks for asking, so I can be reached at my website javelin 19 that’s jv l I n number one that number or you can always just shoot me an email on Jill at javelin 19 calm so welcome hear from y’all.

Andy Hagans: sounds good, and for our listeners, if you want links to all the resources that we talked about in today’s show.

You can go to ultra db comm slash podcast to get all those links there and don’t forget to subscribe to the show on YouTube and your favorite podcast listening platform, so you can be sure to receive our new episodes as we release them Jill thanks again for coming on the show today.

Jill Homan: yeah thanks Andy and just congrats you know I continue to be impressed by your old growth what Jimmy and you all have created so congrats on that and look forward to continue to see you guys flourish so congrats.

Andy Hagans: Thanks that’s very kind.

Andy Hagans
Andy Hagans

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