Core vs. Core Plus vs. Value-Add vs. Opportunistic, With Chris Loeffler

Even as many HNWIs invest in real estate via direct investments or private placement offerings, not all are aware of the nuanced differences between the major risk/return profiles.

Chris Loeffler, co-founder and CEO at Caliber, joins the show to discuss the true differences between Core, Core Plus, Value-Add and Opportunitistic strategies.

Watch On YouTube

Episode Highlights

  • Background on Caliber, and Chris’s experience across a variety of real estate investment assets and strategies.
  • How Chris defines the Core strategy based on the type of investor, rather than a simple risk/return profile.
  • Why some assets may be considered Core Plus based on the amount of leverage used in a deal.
  • What kind of return investors should expect for Value-Add and Opportunistic deals.
  • Why opportunity zones represent an attractive Opportunistic strategy for investors who have a significant capital gain.
  • A special offer from Chris Loeffler for listeners of The Alternative Investment Podcast.

Today’s Guest: Chris Loeffler, Caliber

About The Alternative Investment Podcast

The Alternative Investment Podcast is a leading voice in the alternatives industry, covering private equity, venture capital, and real estate. Host Andy Hagans interviews asset managers, family offices, and industry thought leaders, as they discuss the most effective strategies to grow generational wealth.

Listen Now

Show Transcript

Andy: Core, core plus, value add, and opportunistic. What are the differences between these four real estate investment strategies and which strategy is the most appropriate for a high-net-worth investor? We’ll cover all of this and more coming right up. ♪ [music] ♪ Welcome to “The Alternative Investment Podcast.” I am your host, Andy Hagans.

And today, we’re talking about the major real estate risk-return profiles, you know, the big four strategies, core, core plus, value add, and opportunistic. Which of these strategies might be the best fit for the moment we’re in right now? Which one might be the best fit for high-net-worth investors? And joining me is Chris Loeffler, who’s co-founder and CEO at Caliber. Chris, welcome to the show.

Chris: Thanks, Andy. Great to see you. And hello to the audience, and thank you for taking an interest in this awesome topic.

Andy: Sure. And I’m guessing in our audience, we already have some LPs who are invested with Caliber. But for those of our audience who are not familiar with Caliber, could you tell us a little bit about you, your background, and about Caliber?

Chris: Sure, yeah. So, to your point, we do have investment advisors, high-net-worth investors, ultra-high-net-worth investors, family offices, small institutions, lots of folks investing with Caliber. We’re about a 15-year-old company. Started in Scottsdale, Arizona, and we’re now a regional investor across Arizona, Colorado, Texas, Nevada, Utah, Idaho, what we call the Southwest and Mountain West region combined.

My business is essentially an alternative asset management platform that creates different types of investments and funds, forms those offerings, raises capital, manages the capital, and then we have a real estate services platform associated with our business where we do acquisitions, we do developments, we do construction management, and basically in a vertically integrated way, take each project or each investment that do invest with us full cycle through your process from start to finish.

So when I talk to you about what I think or what I’m doing, it’s all based on the experiences I’ve had in the last 15 years managing a couple billion dollars now in assets under management and assets under development across multiple project types and many of the strategies we’re going to discuss today.

Andy: Okay, that’s interesting. So essentially, you have that broad perspective on these strategies. I mean, frankly, even the larger sponsors and issuers that I talk to, most of them do specialize in one of these strategies.

And, you know, our audience, you know, the show, “Alternative Investment Podcast,” we’re mainly targeted at RIAs, at family offices, self-directed, very high-net-worth investors. So I think most of our viewership, most of our listenership, you know, is familiar with these four strategies. But I think maybe some of the nuance can be a little bit more subtle, a little bit more complicated or surprising than you might realize at first blush.

Would you agree with that?

Chris: Yeah, I think so. And Caliber specifically focuses on middle-market investing. So our fund sizes are middle market size, the investments we invest in are middle market size, kind of $5 to $50 million projects, couple hundred million dollar fund offerings, which is actually pretty rare in the community of investment advisors and family offices. And so they may have heard about these strategies, they may have seen them in the institutional world, but they may not have seen them applied into the middle market and in the different spaces.

So hopefully I’ll be able to show not only my take on the strategies themselves and how they might apply to you as an investor but also how to think about that between institutional investment and middle market investment.

Andy: You know, that’s a really interesting point. So I had DJ Van Keuren, who’s the founder of the Family Office Real Estate Institute. He was on the show several episodes back, so listeners can check our show notes to find that episode. But an interesting point that he made, they publish a survey every year with data from family offices, and those secondary markets are very popular with family.

It’s kind of finding that, I don’t know if you want to call a white space or in design, you know, web design, you call it the gutter, you know, maybe I’m showing my age. But the kind of that little sweet spot between maybe where some of the larger institutional players are buying assets, are investing in assets but where you still have that, you know, scale that you can really deploy a significant amount of capital.

Chris: Yeah, that’s exactly what we look for. I call it a mismatch between, hey, this is actually a really complicated project to execute on, but because it’s only a $30 million project instead of a $300 million project, it’s not going to attract institutional capital. But for a family office, you might be now the only potential source or one of the few potential sources that could execute on a project.

And the project return profile could be frankly, much better than the $300 million project. And so this is a way for that family office investor or that high-net-worth investor to win at the game of buying right, buying global market hopefully, getting certain incentives to make the project even more profitable, and winning because they have an ability to execute where the, what I would call the entrepreneurial market, which is sort of like your local developer or a couple of doctors throw some money into an LLC, that crowd can’t execute on these more complicated projects as well.

So there’s almost like a new curve between the amount of competition you’ll see to buy an asset or to do a development when it’s institutional sized in the right primary market, there’s tons of competition. On the other side, if it’s a, you know, smaller deal or relatively easy to execute on and it’s in that entrepreneurial market, you’ll see a ton of competition.

Where you don’t see nearly as much competition as in the bottom of U-curve, which is in these, you know, mismatched type assets between the market, the strategy, or the complexity of execution. And that’s where I’m not bidding against 30 people, I’m bidding against 2. And of the two that I’m bidding against, maybe only one can perform because the other one’s on vacation.

So it’s a much different space and I consider it to be kind of an all-weather, all-season market because whether real estate’s going up or down, these opportunities continue to exist in these markets. And it’s a good space to learn if you haven’t learned it yet as an investor.

Andy: Absolutely. So let’s start with core. What is core real estate? I guess, is there a technical definition? I mean, we know it’s kind of a lower-risk segment, but what’s the technical definition of core real estate?

Chris: Yeah, I kind of look at it backwards from who buys core real estate. They define the market really. And it’s basically your pension fund. So your pension fund needs to hit an 8% annualized return with very little risk. That is their goal. So everything is designed in core real estate around designing a real estate investment that’s large. They can accept large amounts of capital that can generate that 8% annualized return or better for the pension fund.

And that basically gives the investor an experience where their capital itself is not at risk or is at as low of risk as possible. And so when you think about that, think of, you know, if you drive through your average city and you see a 10-story glass office building with credit tenants, that’s going to be a core asset. If you see, you know, the beautiful luxury apartment building in the center of town and the perfect location, again, going to be a core asset.

And everything that drives that 8% annualized return is based on buying those assets at a price that delivers net 8% and probably no better. And so…

Andy: So, sorry, sorry. To just put a pin in the return target of 8%, would you consider that to be a pretty low return target, like, in the context of these four strategies?

Chris: Yeah. In the context of illiquid of real estate investing, 8% is a pretty low target. It’s a combination of rents and annual appreciation. And so to think about…

Andy: And is that even, I mean, looking at core right now, you know, I understand that these institution, you know, especially pension funds, they have that 8% return target. And I’m thinking, okay, well, their bond portfolio yields three and a half percent with cap rates, wherever they were in the twos or threes. How in the heck are you going to hit 8%?

That’s probably a different podcast that we could record, but…

Chris: Yeah, that’s a whole podcast we could record, but I’ll answer that question by saying not a lot of pension fund managers are hitting their targets. So that’s one component of it. But two is that if you think about the rents, a lot of these are, you know, 3, 4, 5 cap deals, so you’re getting 3%, 4%, or 5% on the investment through the rent, and there’s an expectation of annual appreciation.

So in the next couple years, there may not be an annual appreciation, there may be cap rate, you know, deterioration essentially, and you may actually lose money in the value, but over a 10 or a 20-year investment window, these guys can underwrite and say, “Yeah, we’re going to get 3% a year.” So if I get 5% with the rents and 3% a year in appreciation, I’m getting my 8%.

And that is with or without debt. They just apply debt to these properties when they see an arbitrage in the debt costs. And if there’s no arbitrage, then they just do all cash.

Andy: Yeah. I mean, I suppose if you’re only looking at 3% appreciation, if this is nominal, you can safely assume you’re going to get 3% inflation I suppose to bake an appreciation right there.

Chris: That’s probably where it comes from. That’s right. And by setting the floor at 8% per year through rents and appreciation, that kind of sets the floor for all real estate investing that then, you know, the expectation is if I’m going to take more risk than buying a choice Class A asset in a Class A location, I need to get a better than 8% annualized return.

Andy: So then, Chris, could I ask you this just as, like, a rule of thumb, I don’t know that I’ve ever heard anyone state this, like, explicitly before, but I’m thinking, okay, if I’m a pension fund and I’m limited to really the lowest risk assets, which are definitionally should be the lowest return assets, and I need to hit 8%, then really almost any other investor should be insisting on a double-digit return, right?

I mean, I think at least, like, a 200 basis point, you know, premium to take on more risk than a pension fund would.

Chris: Yeah. You would think that, especially if you’re looking at illiquid investments. Making less than a double-digit return on illiquid investment for an individual doesn’t make a lot of sense because you can get, there’s enough liquid investments that will generate, you know, 5% to 8% or better return for you and you could sell it whenever you want. And that liquidity has a value.

So in the world of pension fund investing, there’s the illiquidity premium, which is you’re making a better return in the investment for theoretically the same risk because it’s illiquid. And so you as an individual could expect that too.

Andy: So then let’s move on to core plus. You defined core by really the investor, which the investor is typically going to be that institutional investor or pension fund. So who’s investing in core plus or, you know, what are the differences between core and core plus? To me, that’s a little bit of a blur. It’s just like core plus is just a little bit more risky. That’s kind of how I would define it.

Chris: Core plus is a magical place for individual investors, family offices, you know, smaller institutions that don’t have to maybe meet certain rigid standards of pension fund investing because in my opinion as an investor and as a developer, you’re actually taking a very similar level to risk in the core strategy, or maybe even less sometimes depending on the asset, but you’re getting a better return.

And the reason why is because that project doesn’t fit within that core bucket. And so what does the bucket look like? Well, you have classes of an asset. So you have an A asset, a B asset, a C asset, you have an A-minus, B-plus. It all works all the way through, right? You have the same thing with a location. You have a class A location, B, C, and, you know, all the pluses all the way through.

So a great example of a core asset would be… or a core plus asset would be Class A location, best corner in the city, but a tired 1970s building. So it’s a C-plus, B building in an A location. The location’s going to drive a rent that’s significantly better than what that building should enjoy.

And yet it’s not a Class A building, not in a class A location, it’s not core. And so it doesn’t fit the core box and yet you’re generating a pretty good return from that. Another example of that would be if you’re looking at size. So you could have as I’ll give you an example of the deal Caliber did. We had an opportunity to build a behavioral health hospital, 96-bed, brand-new behavioral health hospital in an opportunity zone.

Well, no, that one was not an opportunity zone. It was across the street from the largest hospital system in Phoenix. We had a tenant willing to sign a 20-year lease and we’re into the project for about 11% yield on our cost. So with leverage, we’re making over 15% a year on rents and the asset is worth 10 million more than we’re into it for.

So our equity is already expecting more than a double on its return. Well, how did we get this asset? Well, we got it because the CFO, one of the largest healthcare REITs in the country said, “Hey, it’s only a 25 million deal. We do 200 million hospitals and the tenant’s not one of the largest healthcare systems in the country. They’re more of a mid-range middle-market doctor group. So we can’t do this deal and we think you guys should do it because it’s a great deal.”

And we did a $25 million deal making that kind of return versus an institutional deal, which would’ve been like a $200 million hospital, which would’ve been core. So this would be more of a, at this stage, now that it’s built and it’s cash flowing, it’s a core plus deal. It’s still a cash-flowing lease project that is something that you can underwrite and find to be reliable as an investor, but it’s only at this point in time about a $35 million asset versus a $200 million asset.

Andy: So sounds to me like… So that definition of core plus, it’s almost like these are crumbs falling from the core table where the institutional investors are dining and they’re letting these crumbs drop and they’re like, “I don’t even want to pick up that crumb. You can have it.” And then the investors, the family offices can come in and say, “Well, this crumb is delicious. I’ll happily…”

You know, $30 million, it’s not small. Even to most family offices, that’s not a small amount of equity, but to a pension fund, it might be a rounding error, right?

Chris: It is. And, to be clear, these should all be income-producing properties, well leased. The tenant base may not be Class A credit, it may be Class B credit, you know, or Class C credit, but there’s still credit there in some way, shape, or form or some value to that lease. And there’s probably going to be history of leasing the property successfully.

And so you’re coming into a pretty stable project where the risk of having to retain the project or deal with, like, a major renovation is very low. And it’s probably pretty simple for the investor that’s coming in to buy that asset as a core plus asset to underwrite and bring into their portfolio. So these are not properties that need, you know, touchups and need a lot of work, or they’re only 50% occupied and you’ve got to figure it out.

And, you know, the great thing about core plus investing is that every time you talk to a broker in real estate, they will tell you, “Oh, the last guy didn’t manage it well, but you will.” That’s not always true. And with a core plus investment, you’ll know, hey, the last guy’s managing it great. It’s running really well and you’re going to come in and buy it and take over what they’ve already learned.

So, you know, it’s a great strategy for long-term investment. You’re going to get a lot of your returns through the cash flow, but you’re also going to get some decent appreciation.

Andy: So, you know, I guess thinking of, like, Class B, Class A, and I’m even thinking of, like, workforce housing, I mean, it would seem to me that Class B workforce housing, some of these other types of housing, to me, they almost feel safer, right? Like, for instance, middle-class-type housing in New York City, like you can’t build enough…

like, there’s never enough, you know, reasonably priced multi-family housing available. So is it necessarily the case that that, you know, more premium, more luxury type… I mean, I feel like that high-end of housing could actually potentially be more volatile in terms of rents or asset prices.

Like, I lived in Chicago in the last, you know, downturn, and the higher-end stuff like in the loop, it seemed like it was really the most volatile.

Chris: Yeah. That is a component to it. And, of course, the strategy is always in the eye of the beholder and the investor. So you might see workforce housing as core, whereas someone else sees that as core plus and therefore expects or demands a different return. But it really depends on what your investors view your asset as, as to what return profile they’re willing to demand and therefore what price they’re willing to pay you.

But you also have to think about the experience of ownership for that asset. If it’s a core asset, it’s probably new or very close to new, it’s going to have very little maintenance, very little CapEx spend on an annualized basis, a lot less surprises, and things like that.

If it’s that workforce housing, sometimes that stuff gets beat up a little bit more. It takes a lot more time and effort to constantly turn units and manage it. Sometimes you’re dealing with subsidized rents. There are things like that that would cause that ownership experience to dip into a core plus ownership experience instead of a core.

And some investors are just not wanting to deal with that

Andy: More active management. Got it. So it is a little bit of a lifestyle thing where, you know, the core strategy is more like buying a bond and, you know, clipping coupons month after month.

Chris: The core plus is more of your muni bond and, you know, maybe you might want to pay attention to what’s going on with that local municipality, whether or not they can afford to pay their bonds. You know, it’s a little bit like that. And it’s an 8% to 12% annualized return range that you should be targeting. So, you know, 8% is at the low end, but you’re probably going to be in the double digits between rents and appreciation.

Andy: Okay. Well, let’s move on then to value add. So now we’re getting more into the riskier side of that risk-return profile where presumably investors are also demanding a significantly higher rate of return.

Chris: Right, yeah. So one thing I forgot to mention for core and core plus that I want to add in so we can get into the value add discussion is use of debt. So in core investing, you have no debt up to like maybe 40% loan to value. Core plus, you could have a core asset Class A location, Class A asset, all the things that I mentioned that were core, but if you’re using 65% or 70% leverage to buy that asset, you’re in a core plus category because your risk is higher.

And so one way you can take your portfolio from core plus to core over time is to buy it with more leverage and then deleverage over time. And so leverage and debt is an important component to whether or not what level of return you should be expecting relative to the risk that you’re taking. So it’s kind of an interesting moment in our country because debt costs are rapidly heading to 7% or 8% annualized costs.

Not interest rates, but the cost to us as a borrower because there’s a spread between the interest rate and the cost. And if you’re paying 7% or 8% for money, then you can no longer lever yourself into a great return on a mediocre asset. So it’s really going to change the investment strategies for a lot of people and whether they use debt at all or if they use debt, how much they use.

Because if they could make 8% a year without using debt, maybe they’d rather take the 8% instead of paying the bank 8%.

Andy: I mean, it seems like what you just said, if I’m reading between the lines, that sounds to me like we need to reprice some assets because if debt is now not totally closed off, but it’s just a much less attractive component of investing in illiquid real estate, it just seems like the demand for investment in real estate would go down so much that assets need to reprice.

Do you expect assets to reprice in the next 12 to 18 months?

Chris: Yeah, our view is about three months ago, we started to see a 2008 financial crisis occur in China. And China is one of the largest producers of materials in the world. And what’s going to happen is in order for them to manage their way through this process of about 25% to 33% of their economy is driven by real estate and their domestic market just evaporated.

And so what I expect is that a lot of these manufacturers who are building materials and generating labor for construction are going to try to go into the international market and flood the international market with frankly cheap materials because nobody wants to shut down their factory making drywall, even though the domestic market has evaporated.

And so what I think that’s going to translate to roughly three to six months from now is a sharp change in what it costs to get construction materials, which combined with potentially a recession or expected recession which will affect labor pricing…

Andy: I would say a recognized recession.

Chris: Yeah, a recognized. I think that’s right. I called it a recession a couple of months ago, so I don’t know why I’m hedging. Maybe I’m just hopeful. The labor prices are coming down, materials prices are going to come down. When you do that, the cost to construct a piece of real estate’s coming down. With that and the increase in the cost of debt, you’re going to have a situation where something I built for a 350,000 unit six months ago could now be built for 250,000 a unit.

And so that’s the ceiling to its value, and the floor is really driven by rents. And so I don’t see rents falling off a cliff, but I don’t see them continuing to rise. And all of this creates a dynamic where, to your point, existing assets shouldn’t reprice and new construction shouldn’t reprice.

And if new construction is X, then existing assets are going to be Y, you know? And right now if existing assets are up here and the new construction’s up here, then it’s all going to come down. And so as an investor, one of the best strategies you could possibly pursue is to sell assets that are still appreciated from the last economy, get to cash as quickly as you can and then wait to redeploy until I would say roughly three to six months from now.

Because we’re already starting to see distress projects come through and I think it’s going to get more compelling.

Andy: Yeah, for what it’s worth, I agree with that.

Chris: Well, good.

Andy: I think I wouldn’t counsel investors to like go to all cash or, you know, if someone is buying hold with a 60/40 or 50/30/20 or whatever, stick to the plan, you know, don’t sell in a downturn. But that being said, if you have an ability to get some cash free, whether you’re an institutional or just an individual investor or a family, right now, to me, it’s like this air pocket of time where we’ve seen all of these headlines and I’m like, well, assets need to reprice.

But I’m not really seeing them reprice and it’s a reminder, the real estate market, it’s kind of like this slow-moving thing where it’s not like the stock market where news comes out and everything just reprices immediately. I feel like it’s going to take 6 or 9 or 12 months for buyers and sellers and everyone in the industry to kind of fully, you know, recognize the new normal as well as, you know, sometimes you have sellers who are just in Lala land, but time has a way of like forcing their hand where sooner or later, they have to face reality, right?

Chris: It’s not just time, you’ve got, since COVID, it’s now been almost two years since COVID hit the country, or I guess it’s been more than two years, and for two years, banks and financial institutions have been holding off from forcing their borrowers into foreclosure or into some sort of special situation because of the pandemic.

And that made a lot of sense. And everyone was kicking the can down the road towards the ultimate recovery, but the ultimate recovery is being blasted by these increasing interest rates. And so to make a long story short, the banks have run out of time to be able to kick the can down the road, the borrower, and they’re saying, “Nope, we need these things refinanced and paid off, but to refinance and pay them off now, my cost of debt is now double what it was, but I couldn’t get a financing done in the last two years because I had no trailing 12, I had no history of profitability.”

And the way the banking industry works is they need that in order to give you a new round of permanent financing. And so what has happened is a bunch of debt funds have stepped in, lent a bunch of money in the last two years on three-year terms, and those three-year terms are coming due or will be coming due. And just the ability to refinance is not really there.

And so a lot of people who got to overextend are going to lose assets and for those who didn’t are going to have to put more and more equity into their existing assets to defend their equity. So it’s just a really good time if you’re an investor to think strategically about, how can I sell today? This is one of, obviously, our pitches for the opportunity zone fund is sell today, invest in an opportunity zone fund to avoid the capital games.

But as an opportunity zone fund manager, I’ve got 6 to 18 months to deploy your capital versus in a 1031 exchange, you’re trying to redeploy within 45 days of sale. So if you sell in a good market, redeploy while the market’s falling, it’s just not a great timing effect there.

Andy: Yeah. You’re not going to get too much, I would presume, too much arbitrage or price differential within that, you know, 45 day, you know, to identify a replacement property with a 1031. So then moving on to value add, I liked that you mentioned, you know, the difference in leverage between core and core plus, you’re using more leverage. So obviously with the value add asset, typically, these assets need very active management, a lot of times putting a lot of capital into the asset to improve it, right?

Not only just direct equity in the asset but also to improve it. And I also presume that there’s just a lot more leverage on average in a value add deal.

Chris: Yeah. Typically, value add is a leverage play and what you’re doing is you’re trying to buy the asset for as little going in equity as you can, borrow as much as you can, which in a good environment can be up to 80% limited value or many better, and then do the work to transform one of two things or both, either management or the physical asset or a combination of both.

And so some value add plays are pure management plays. It’s just a really bad manager and you replace the manager and you readjust the management of the property and you don’t change a thing to it physically. Some are pure, you know, great manager, just tired property. Typically, the property needs 20% to 35% of the purchase price in renovations.

Anything more than that really falls into the opportunistic bucket, which we’ll talk about next. But you’re just going in and maybe adding in new washer dryers in every unit, or you’re doing brand new appliances plus paint and carpet, or you’re doing, you know, a ti refresh across the building to bring in better lighting and better, you know, you name it.

So there’s always a different kind of combined strategy there in value add, but you’re buying something existing, it’s probably operating at 50% to 90% occupancy. And you’re just doing some sort of cleanup of either management or physical or both trying to maintain occupancy while you do that so you don’t lose the cash flow, but then you exit.

When you exit, you’ve got this sort of beautiful core or core plus stream of income that’s really, you know, clean and simple that the next buyer can buy without having to do any of that work. And by using a lot of leverage going in and putting your equity in and the renovation component, when you come out, you come out with a nice return.

Andy: So with a value add deal, you know, once the asset has been renovated and stabilized and let’s say, you know, fully leased up, it could actually be a core asset? I was presuming it would be like a core plus, you know?

Chris: Yeah. It could be a core or could be a core plus depending on the asset going in. So the strategy is the value add strategy, but it just depends on what that asset actually is at the outset. Every single asset that you invest in, in real estate, eventually will end up as a core or core plus asset depending on the characteristics of that asset.

Andy: Okay. All right. And finally, let’s move on to opportunistic. So again, we’re further out now, I guess to the extremity of the return risk profile. So what’s the difference between opportunistic and value-add? You know, you mentioned I think 50% and 90% occupancy for like a typical value-add? So would opportunistic be below 50% occupancy or would it be…

I don’t know, I’m also thinking of like ground-up deals where maybe you’re not totally certain that, you know, the project is even going to be approved. So there’s just a lot of risk. So, like, what kinds of risks make a project opportunistic?

Chris: Yeah, so it’s a catchall bucket for pretty much everything else. Value-add return profiles, you’re looking at an investor IRR of like 13% typically to the high teens. So 18%, 19%. Anything over 20% IRR in your underwriting is likely going to be an opportunistic deal. And that’s what you’re expecting.

In an opportunistic deal, you want to try to double your money every five years or so, or better, you’re looking to make it around a 20% annualized return or better. And that’s what you’re looking to make in exchange for the risks that you take on in the strategy itself. So what types of things could exist? But just like you said, existing buildings that are either sub 50% occupancy or that you’re going to crash the occupancy, kick all the tenants out, and replace the entire building in terms of renovations, and then bring in a new class of tenant that’s an opportunistic…

Andy: So you’re actually going to… you’re going to drive the occupancy below 50, you know, purposefully, essentially.

Chris: Yeah, hopefully on purpose. And hopefully, that was your strategy, but, yes, that’s my plan. A lot of things that will be hyper-relevant in the current environment are going to be adaptive reuse strategies. So taking an office building, turning it into housing, taking a hotel, and turning it into housing, taking a, you know, medical office, and turning it into assisted living.

You know, lots of things like that will happen where you’re transforming the asset from one use to a new use. And when you do that, you should expect to get paid for that because it’s a very risky and difficult thing to do. And you typically have to go through the zoning process, maybe get new approvals, you have to go through a really complicated renovation of the existing asset. Sometimes you’re building new on a part of it and renovating a part of it.

So it’s a more higher complexity in terms of strategy. And then all ground-up development is by nature opportunistic. Nobody builds ground up with an expectation to make less than high teens or 20% or better on their money. Because it is a lot of work to do, there’s a lot of risk that you could invest in and lose all of your pre-development dollars based on a city not approving your plan or whatever the case may be.

So ground-up development is opportunistic in nature.

Andy: Got it. So this is interesting to me because, you know, as we’ve talked about these four strategies, it’s like, you know, we’ve talked about blue chip stocks and then maybe growth stocks all the way down to like the pink sheets, or we’ve talked about treasury bonds and the muni bonds all the way to, you know, junk bonds that are trading at 40 cents, 30 cents on the dollar.

And, you know, when you talk with RIAs and a lot of families, it seems like a lot of advisors, wealth managers, really have moved on from the old 60/40 portfolio. I don’t know that it’s like officially the 50/30/20, but it sort of feels like that’s where the energy is definitely moving to that there being… you know, the allocation to alternatives, the allocation of private real estate is becoming a little bit more, you know, mainstream.

Not quite standardized, but mainstream. But, that being said, you know, if you’re an RIA or a family office and you’re looking at that 20 and the major, you know, the largest slice of that 20 is private real estate, illiquid real estate, it feels like it’s such a big broad world just with the four strategies we mentioned, you know, what do you think is…

You know, is there a default, I guess, allocation within that 20? I mean, should it mostly be going into core and core plus with maybe… you know, or does this all just depend on the investor? You know, some investors just have more appetite for risk.

Chris: Yeah, I mean, I think that’s incumbent on my industry to help solve for the investment advisor. You know, Caliber spent the last couple of years building infrastructure for investment advisors, like getting our funds on, show ups could still yield platform and building out reporting infrastructure for them to keep their clients up to speed and that kind of stuff so that it makes it easy for them to allocate their customer towards one of our funds.

There’s not a lot of Calibers out there right now, and there’s a lot of great real estate investors out there and real estate development companies out there. So I think one thing that our industry needs to do is to sort of grow up from a financial sophistication standpoint to make it easy and simple for an advisor to find you, create an appropriate portfolio for their client, do annual due diligence on you, have your investment show up on their statement for their client, all the things that make their life a little easier so they can charge their fee and everything else.

So I think what I would advise an advisor is since I’m not a… I mean, they’re more of an expert in terms of portfolio management than I am certainly is to think of it similar to what you just described, is my investor in a stage where they’re trying to grow their wealth? If they are, then they’re probably going to be more interested in the opportunistic and the value-add strategies.

And, in that case, I need to design this so that the last thing they ever sell is one of those two deals. Because as long as they hold those investments through the cycle and come out the other end, they’ll likely make money and not lose their capital. If they’re forced to sell these types of investments at the wrong time, that’s when they take real capital risk I think that most advisors are trying to avoid.

So if they structure the portfolio so we can sell these other things, if something happens in their life, but we can hold onto these illiquid pieces, then that’s good. If they’re more in retirement and they’re trying to perfect their passive income streams, then that’s where you’re going to want to look at core or core plus or even a private lending strategy, which is another option we haven’t discussed.

And what’s most appropriate for most investors is a blend. What you’ll find is most investors will come into an opportunistic strategy. They’ll know all the risks. You’ll explain to them, “Hey, you’re not going to see cashflow for three to five years. We’re developing something. It’ll take time.” And they’ll say, “Oh, great.”

And then at the end of year one, they’ll say, “Where’s my dividend? This investment sucks.” And you’re like, “Remember that conversation we said no distributions for three to five years?” So what’s better is if you say, “Okay, I’m going to put you into a million dollars worth of caliber, and a piece of that is cash flowing right away, then they can see, oh, okay, I’m getting distributions off my caliber.

And then the distributions grow over time as the opportunistic stuff starts to produce distributions. So I think it’s combined allocation in a portfolio that fits an investor’s psychology that makes them feel comfortable that the investment you made for them doesn’t just sit around and clock fees.

Andy: Absolutely, yeah. And I mean, I would argue for a lot of family offices, there might be that sweet spot in kind of, you know, the middle between core plus and value add. I mean, I’m thinking of the three rules for family offices. You know, don’t lose money, don’t lose money, and don’t lose money. But at the same time, you know, the challenge there is preserving wealth over multiple generations, right?

So you kind of want that blend or that sweet spot because you do want your capital to grow to outrun inflation, right? So I think maybe venturing a little bit further than just that straight core.

Chris: Well, yeah, and to be honest, the family office management team exists to show alpha above throwing your money into Northern Trust, right? So if I’m going to hire a management team to run a family office, I’m expecting as an investor to see a better access to opportunities, better returns, something more exclusive than what I can get at, like I said, a Northern Trust or something like that.

And it’s not just finding the opportunities, but it’s also leveraging the power that the family office balance sheet brings to the table to those deals to negotiate a better deal. So in most private equity real estate, if you’re a family office and you’re willing to come in with 90% of the equity and only make the sponsor put in 10, you’re going to get better returns, you’re going to get better split on profits, you’re going to get reduced fees.

All of those things create an enhanced return for that family office investor with the same level risk, right, that they were going to take on in any way, shape, or form. So that’s what…

Andy: So GPLP economics or, you know, those sorts of things. But on that note though, one other question I had, from that, you know, standpoint of a family office or very high-net-worth, ultra-high-net-worth investor, are any of these strategies more tax efficient? You know, are any of them more appealing from that, you know, triple net perspective of investors who need to be very aware of tax efficiency?

Chris: Yeah, all of these strategies are certainly more tax efficient than your average stock investment as an example. They all produce typically pass through depreciation in various forms. If you’re working with a sophisticated sponsor, the sponsor will do more advanced tax planning in the partnership itself.

So Caliber will do like a [inaudible] study that will use an engineering firm and an accountancy firm to come in, take a $30 million project, and instead of saying it’s 30 million and over 39 and a half-year property or whatever the depreciation table is, we’ll say, “Well, it’s a $30 million project, but it’s got $3 million light bulbs and we depreciate those immediately with bonused depreciation, and it’s got this much in carpet.”

And, you know, you kind of go through that. There’s a concept of ghost depreciation, which is like, I go into a… if I’m in an opportunistic deal or even sometimes a value-add deal, and I’m going to go in and like demo out 80% of project, well, first, I’m going to value what exists now, then when I demo out, I’m going to write it all off and that’s the ghost depreciation component. Then I’m going to put up new walls that are going to produce new levels of depreciation, then I’m going to be able to manage.

So all of that creates this really great pass-through loss example where as long as that family office or that investor has other passive gains in their portfolio where may be able to better offset their entire tax burden in their entire portfolio…

Andy: So it sounds to me then like the sponsor, that’s an opportunity for the sponsor to essentially add alpha or net alpha.

Chris: Totally, yeah. And any sophisticated investor should seek that sponsor out and ask them those questions because it’s not just depreciation, it’s also historic tax credits and other types of tax credits that you can obtain, you can pass through to investors. Or in the case of opportunity zones, avoiding capital gains taxes by structuring your investment through an opportunity zone fund .

And managing that appropriately is also important. And I think the opportunity zone fund, you didn’t ask the question, but it gives you a great example of how do you twin these strategies? So the strategy of an opportunity zone fund in my world is it’s an opportunistic strategy because the law requires you to build new or to do adaptive reuse. That’s what I have to do.

So I’m forced into a specific style of investing, which generates a 20% annualized return. We’ve listed a 13% return in our fund because we’re using 50% debt or less. So we’re using the core level of debt in our opportunity zone fund twinned with a real estate investment strategy in the opportunistic bucket to produce a synthesized return. And the reason why we’re doing that is a lot of investors who are investing in opportunity zone are putting a large chunk of the sale of their business or something that’s meaningful to them and they want that benefit of capital appreciation.

So you can pair these strategies together when it comes to things like location, the strategy itself, use of leverage, etc., to create the type of return you’re looking for.

Andy: Interesting. That’s almost like a barbell strategy. Like, inherently riskier ground-up development in an opportunity zone, but then on the other end of that barbell, using less debt, sounds to me like you probably could use more debt. It’s not like that, you know?

Chris: Yeah, we could. You know, but like, it’s kinda like, okay, I’m going to build it for cash. So even if we go into a recession, if I’m into it for cash, I can get it leased up, I can have the time I need to make sure it’s performing, then I’ll add the debt later. That’s basically what we’re doing.

Andy: Absolutely. So, Chris, this has been a really good conversation. I just love that we had time to get into some of the nuances of these different strategies. because like I said, I think people generally know them, but there’s some subtlety in there. And, you know, throughout this episode, I’m definitely intrigued about the different products and projects you have going on at Caliber.

So where can our viewers and listeners go to learn more about not only Caliber but also your offerings for accredited investors?

Chris: Yeah, great. So easiest way is to go to the website, it’s, which is If you go there, you see something you like, you put in an inquiry, you’re going to get a direct connection to one of our live team members. If you’re a direct investor, they’re going to work with you on a private client basis. If you’re an investment advisor or family office, we’ll bring you through the institutional channel and make sure you have people working with you that are used to helping you manage your way through this process.

Andy: Awesome. And so for our listeners and viewers, I’ll make sure to link that in our show notes, the Caliber website. I also want to link to this blog post or webpage that talks about the different return profiles. I actually got some of the stuff we discussed today from Caliber’s website. And, Chris, I’ll also make sure to link to your page on Opportunity Zones investing because I know Caliber has a huge name and is one of the leaders in the opportunity zone space.

So I’ll make sure to put all of those in the show notes. Chris, thanks so much for coming on the show today.

Chris: Thanks, Andy. Can I throw one offer out to your listeners?

Andy: Please, by all means.

Chris: So Caliber started as a business in late 2008 during a distressed market. We know distress really well. What you may find and what your listeners may have going on is that they actually may be the victims of some of these distress situations right now. So to the extent that you have anything going on or you have a hard real estate problem you need to be solved, give us a call.

For free, we’ll come in, we’ll look at it, we’ll try to help guide you and help you see the process. When we had no track record and we had no backing, the way that we built our business was solving really hard problems for people in the world of real estate and investment. And we’re happy to do that again considering the cycle that we’re going into. So if anyone needs any help, feel free to reach out. We can’t solve all the problems, but maybe we’ll be able to help you.

Andy: And that’s a great way to start a relationship, so Chris, really appreciate that offer to our listeners. Thanks again for coming on the show today.

Chris: Thanks, Andy.

Andy Hagans
Andy Hagans

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