Opportunities In Distressed Real Estate Assets, With Caliber Funds

Caliber was a presenting partner at Alts Expo 2022, a one-day virtual event hosted by AltsDb. In this webinar, Greg Talcott presents Caliber Opportunistic Growth Fund III.

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Webinar Presenters

Webinar Highlights

  • An overview of the investment strategy for Caliber Opportunistic Growth Fund III.
  • How acquiring distressed assets can create opportunity for experienced real estate investors.
  • Caliber’s unique approach to asset and market diversification.
  • Which MSAs are currently targeted by Caliber (and why).
  • Fund investment terms, including fee structure and share classifications.
  • Live Q&A with webinar attendees.

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Webinar Transcript

Jimmy: Greg, how are you doing this morning?

Greg: Great, Jimmy. Good to see you again, as always. All right. Well, I appreciate the opportunity, Jimmy, to speak to your audience. You know, I know a lot of people might know us from the Opportunity Zone space and the number of Pitch Day events that our CEO, Chris Loeffler, you know, has done for OpportunityDb. I’m excited to join you today, actually, in Chris’s place. He had a conflict, and so I was, I guess, lucky enough to be drawn as next man up in the presentation scale. So, I’m gonna talk today about our newest fund which is the Opportunistic Growth Fund III. There are some similarities between this fund and our Opportunity Zone Fund when it comes to strategies and the work that we’re looking to do. The differences, of course, this is not a tax-advantaged fund, but oftentimes we have gotten questions from people who just really liked the portfolios and what we were doing within the Opportunity Zone space, and whether or not they could put cash into that fund. That was never really an option. But this is a way for people to get exposure to the same types of strategies and work that we’re doing across the Opportunity Zone space. Bear with me here. Don’t wanna skip over the disclaimers.

So everything that Caliber has to offer, we are regulated by FINRA and the SEC. These are all limited partnership structures. For the most part, they’re private placements and as such, they are illiquid security, so investors should be aware of their own risk tolerance, need for liquidity, and income when considering any kind of investment.

So, a little bit about the fund…I mean, Caliber, historically has had a number of multi-asset funds and a slew of syndications that we’ve done over our 14-year history, and we’re really leveraging that historical experience here with what we’re doing with Growth Fund III. So you’re looking at primarily a combination of development as well as value add properties but also participation within distressed asset purchases, which is something I’ll touch on here in a little bit. This is a growth-focused portfolio, so investors with a growth focus or aggressive growth focus, this could be a particularly good fit. You’re gonna want to have a time horizon of five to seven years on that investment. Interestingly enough, if you were to pair this investment within a self-directed IRA, you’d essentially be achieving all the same benefits that we look to get out of the Opportunity Zone Fund, including the tax-free return at the end. You just don’t obviously have any tax deferral upfront.

And since this is a more aggressive fund, we do have a slightly higher use of leverage than we do within the OZ space where we’re a little bit more conservative. Here we’ll go as high as 60% to 75% of portfolio value properties. So, the fund is gonna be diversified into multiple markets. Your target markets are gonna be Colorado, Arizona, and Texas, where I am at. We have a total fund cap size at $250 million. There are four share classes. Don’t wanna muddy the waters too much with this. Two of those share classes are direct sale to retail, so most of the individuals watching this presentation would fall into that group. And there’s two share classes that are specifically distributed through the broker-dealer community. But, ultimately, we’re looking for shovel-ready projects that’ll generate cash flow in the next 24 to 36 months. Again, a development and value add focus for the most part, but also a keen eye on distressed asset opportunities that are going to emerge. And if Chris were here, I am sure he would do a much more eloquent job than I of explaining that strategy, but I will do my darnedest here to convey that same message. And that is that with the challenges that the economy is facing and what we’re forecasting, as we move into the new year, we’re likely to start seeing more and more distress come into the real estate market, which of course opens tremendous opportunity for investors.

I mean, the best opportunity, probably any of us saw in real estate in our lifetimes to invest, was coming out of the financial crisis. And, of course, that is where Caliber was born was within that distressed asset market with a particular focus within the single-family residential area at the time that later evolved into multi-family and taking advantage of a number of distressed asset opportunities that we saw there. So the fund is positioned to be nimble and to react. I think the thing that you see that’s different about today’s environment versus 2008 is infrastructure and the ability to capitalize on the distressed assets. Essentially, in 2008, the volume was too significant and the financial institutions did not have the bandwidth or the infrastructure to properly work through that efficiently. And that has changed. And now, as opposed to basically everybody being able to pile in and take advantage of opportunities like we saw coming out of the financial crisis, it’s gonna be much more of an insider’s game. And these deals, all highly localized, it’s a matter of who you know and the ability to act fast when these deals come to market. And so Caliber does look to capitalize on that.

Within this fund, we think you’ll see distress in a number of areas, including the most, you know, what’s been the most bulletproof area for a few years, which is multi-family. Certainly, your larger sponsors do a great job, generally, of managing leverage and liquidity. Some smaller sponsors that are out there that we’ve seen have significant amounts of leverage and oftentimes that is in short-term notes, many of which are resetting in the coming years to what would likely be a substantially higher interest rate, which certainly could cause issues. And so that’s what we’re ultimately looking to step into. We’ve gotten a lot of questions in the last few years as far as, you know, “Why aren’t you just going out and, you know, buying these various multi-family deals for investors?” And that’s because we were busy selling deals. In the last two years, we’ve been able to get some fantastic exits on multi-family deals that we had bought several years ago that were distressed, that we went through all the remodeling and the lease-up, and all the work to bring that value. And, I think most, if not all, of those exceeded any of the underwriting standards we had, and that was just a product of being at the top of the market. Now we want to position to get in when things are, ultimately on sale.

A little bit about our history, our co-founders are Chris Loeffler and Jennifer Schrader. Chris’s background is in public accounting he was far too much of an entrepreneur to kind of keep himself working in that space. He met Jennifer Schrader, whose background is in architecture and design and they started Caliber with a single investor. And really over the majority of Caliber’s history grew that largely on word of mouth to 1,000 LPs. leading up to the creation of the Opportunity Zone program, where we became more of a thought leader and a presence online. We now sit at around 1500 LPs. Chris and Jen, ultimately, merged their company with Roy Bade’s Development Company. Roy’s been doing development in the Southwest for over 30 years. I don’t want to date him too much there, but, you know, he’s building a small city in Colorado. He’s done a tremendous amount of work in Arizona. So an excellent team that we’ve put together. Our legal partners, Snell & Wilmer, and our auditor is Deloitte.

The fund is gonna fall into the right side of the risk-return spectrum. So, again, opportunistic and value add focus. So here you’re generally, you know, targeting mid to high teens returns, you know, within your targeted return profile. Those who review our offering documents, this fund is geared to equal, or surpass, a 15% fund level, IRR as our target. Little bit about Opportunity Fund II. So we had brought out Diversified Opportunity Fund before you had the creation of the Opportunity Zone program. So then we had this overlap that was taking place within our naming conventions of funds. And that leads to the Opportunistic Growth Fund III naming that we have now. So that’s why it’s not just Diversified Opportunity Fund III. That legacy fund had 10 different assets. Primary focus was land development Northern Colorado, up in Johnstown. Those who are not familiar, Johnstown is 45 minutes due north of Denver. It sits at the intersection of the I-25 and I-35 Interstate in between Loveland and Greeley, where you have essentially these cities. These towns are really growing together into Johnstown. So we are doing every form of development there is up in Johnstown from single family to all levels of commercial that you’ll ultimately see go in there.

The legacy fund, aside from land, has positions in hospitality, storage, and multi-family. And this is a snapshot of those assets, just a few of them, anyway. The self-storage, the Eclipse Townhomes in Scottsdale, The Ridge at Johnstown, the Hilton Phoenix Airport Hotel, which has been a tremendous win for us, and the Holiday Inn Ocotillo, which is located near the Intel Campus in the Eastern Valley of Phoenix out in Chandler. And then the Four Points by Sheraton located in Ahwatukee, which we are actually just wrapping up and offering this week to help convert that hotel into a multi-family project, which is a really exciting deal that we put together a couple months ago.

So, on Growth Fund III, as I mentioned, a combination of value add and development opportunities. So you do have exposure, ultimately, to Johnstown, which I’ll talk about in a moment. Arizona and Texas, in fact, the other day, two days ago, I had lunch with the mayor of Navasota and his team. That town is immediately south here of us in College Station and found some pretty interesting historic opportunities, distressed assets that we could participate in, conversion projects of office to multi-family. So I think we’ll be able to uncover some pretty good things out here in the eastern side of Texas.

And again, the fund is meant to be nimble and adjust based on changes to in inflation and fluctuations in interest rates. Fund structure, as I mentioned, $250 million total cap on the fund. Your A units are retail. Your C unit is broker-dealer that’s at $100,000 minimum. B is retail, D is broker-dealer on the million-dollar minimum. And the only difference on those two is the profit split. Your A & C shares is a 65/35 split over a six pref. B & D at 75/25 over a six pref. 1.5% annual management fee is on your committed capital. So we don’t bill on leverage or appreciation of NAV.

Then I’m gonna wrap up with the most exciting part of the presentation, which is, of course, the pipeline where we putting the money. So to talk a little bit more about Johnstown, the two areas where we’re going vertical near term will be on retail as well as industrial. Your industrial is more the structure of a retail front-facing business with your bays and back five to 10,000 square feet. Absolutely massive demand for this product within market. And, of course, we need retail up there. People are living up there. There’s thousands of single-family homes that are being built right now, and those people need all the same retail needs that the rest of us have. So we’ll be bringing that to market in the new year.

And then the one asset that we don’t actually build ourselves is on the single-family side. We basically prepare the land, we sell it off to single-family home builders like DR Horton, Journey Homes. We do have many single-family homes that have already come out of the ground this year within this completed horizontal development that we’ve been working on for the last few years. And the real benefit to investors when they’re looking at this, aside from location, is the fact that we’ve acquired just under 1,000 acres for an average of 27 cents a square foot. It’s gonna be very, very hard to find better value in land anywhere in Colorado than what you find right here.

And then on the shovel-ready side as well, two projects that we’re really excited about, on the medical side, Caliber had a tremendous amount of success and publicity for Behavioral Health Hospital that we did in our first Opportunity Zone Fund. This was an abandoned senior living facility. It was covered in spray paint and, you know, all the traditional signs of blight. We turned it into a 96-bed state-of-the-art Behavioral Health Hospital, which is across the street from the largest hospital in downtown Phoenix. This is specifically for patients who are dealing with some kind of psychiatric issue, but one or more multiple medical conditions as well.

So during COVID, you could have a situation where somebody was schizophrenic, diabetic, and suffering from COVID. The hospital is just simply not equipped to deal with a patient like that, so they come over to the Behavioral Health Hospital. The pros and the cons of that, the pros for investors is it’s basically 100% occupied every night. The cons of that is it’s ideally not a place you wanna find yourself having to stay. But the project has been a tremendous success. We’re doing 25 of them across the Southwest. The next one will break ground in the new year in Fort Worth, Texas. And all of these deals are basically anchored by a large family office out of Dallas. So we will be leaving the Opportunity Growth Fund III equity right alongside that institutional partner.

On the single-family side, we’re working with American Resort Communities to do 30 projects across the Southwest. Our first two are in Arizona. One is in Casa Grande, which is immediately south of the city, about 40 minutes or so from downtown Phoenix. And then the next one is in southern Arizona, just south of Tucson.

These are beautiful gate-guarded communities with all the amenities, pools, tennis courts, pickleball, meeting, and business centers. You also have ballrooms. You have food truck areas that they bring in food trucks on the weekends. You have event venues where you can have some live music. So it’s a very community-centric development which is ideal, generally, for your retirees and your young families because these are manufactured homes. They have every bit the look and the feel of a traditional stick build. They are manufactured and then they are pit set and finished on site with two car garages, patios at an incredibly attractive price point, which is roughly a third less than what you would pay for a stick build within the exact same market. And that is the conclusion of my discussion as it pertains to the portfolio. And I’ll toss it over to you, Jimmy, and we’ll see if we have any questions.

Jimmy: Fantastic. Yeah, we do have a handful of questions here and it looks like, let’s see, we’ve got about four or five minutes to get to them before our morning panel begins. So stay tuned after Greg is done here in a few minutes, we’re gonna get underway with our morning panel, Investment Strategies for High Inflation, starting in just a few minutes. But, Greg, back to you. A first question that came in asks, you target distressed assets for this fund, what factors are you looking for that makes an asset an ideal target?

Greg: Yeah, that’s a great question. I mean, as a general rule, we’re looking at getting any project that we get involved with at a minimum of a 20% discount to current market values. So we’d like to start with, you know, some level of equity and built-in value there. So we’re looking at, you know, probably roughly double that, you know, 30%, 40% discount below what current market value would be. Ultimately, on the development side of things, we’re targeting, two, 3x returns. On the distress side, you could see 4x or better, assuming you get a substantial enough discount. We might also find some broken construction deals that are coming which, generally, offer an even better discount. Ultimately, sponsors who maybe ran out of money or the cost of the project became prohibitive because what you’ve seen with materials costs and labor shortages.

Jimmy: We’ve got a hospitality bear here who asks the next question. Sorry if I mischaracterized you, but I’m just poking fun. He asks, though, how have hospitality assets performed over the last year? Obviously, those were hit hard during COVID, but curious how the rebound has been.

Greg: The rebound has been fantastic. We’re actually well ahead of what the Bearish predictions were in 2020. At that time, people were spitballing around the year, 2025, before you saw recovery. We are pretty much at pre-pandemic levels, and we’ll exceed that in the new year. And we’re seeing that broadly across the industry. All of our hotels this year, at least, the recent reports that I have seen that just came out in the last week, basically, everything is ahead of budget that was forecasted for 2022. We had a particular home run with a hospitality project in Opportunity Zone Fund I, which was the DoubleTree by Hilton in Tucson connected to the convention center. We were fortunate enough that was under construction in 2020. It opened in March of 2021. It won the Hilton Development Award in 2020 this year, for last year, which is an incredible accomplishment, and has been number one in market ever since it opened. So hospitality is certainly rebounding and looking strong.

Jimmy: Good. Now we’ve got a couple more minutes here. Patrick asks…Patrick’s got a few questions here, will your fund look at California investments? Any workforce housing in California?

Greg: We are looking at projects in California. I mean, we basically will look at projects anywhere. It’s got to be the exact right fit. We don’t want to take on the development risk that exists within California. So I think that would be probably a better example of where we would look for a distressed asset or a broken construction deal, so we’re not in a situation where we’re going through the development phase and we encountered an endangered snail and the entire project is off, or something of that nature.

Jimmy: And then the second part of Patrick’s question, he asks that, do you co-develop next to shovel-ready developments?

Greg: We do. Caliber historically has done most of its own development work, but as we’ve grown, especially in the last few years, we’ve been doing more and more co-development JV deals. We have one out here in Texas where I’m at, and there will actually be several that we’re doing out here. We also have some in Arizona that are currently under construction as well.

Jimmy: And then a final question here, we’re sorry, we didn’t get to your question, but final question, I’ll give to Richard here. Richard asks, what’s the amount of time that it takes a property to become shovel-ready for home builders?

Greg: So in the case of Johnstown, you know, we’ve been working on that land for the last, you know, five-ish years, roughly speaking, that was all farmland that needed to be converted to use land. So you got to bring in your utilities, your water, your sewer, you got to build roads, you got to create metro districts for tax dollars to reimburse a lot of that work. So that was a very heavy lift. At this point, those are shovel-ready projects. I mean, those lots are currently being sold off as we speak. We have purchase contracts that are already lined up for basically all of that, not just on the single-family side, but also on the multi-family side. The industrial and the retail, large parts of that already have LOIs in place. So a lot of that construction, as it pertains to this one, will be seen starting in the new year.

Jimmy: Very good. You got a chuckle out of one of us, by the way, with the endangered snail comment a moment ago. So that was hilarious. Before we go, before we let you go, Greg, can you tell our listeners and viewers where they can go, one more time, to learn more about Caliber? And if they wanna reach out and request subscription documents, what’s the best way for them to do that?

Greg: Sure. The website is caliberco.com, caliberco.com. Just click on the investments tab and that will route you to the Caliber Funds side of the business, which is where all the investments are held. You can contact me directly. Feel free to call me on my cell phone if you’d like, (206) 930-8608. Don’t let that area code fool you. I don’t live in Seattle. And you can also email me directly, [email protected].

Jimmy: Okay. And I’ve just posted all that information in the chat in case anybody missed it, copy and paste and figure out how to get in touch with Greg and his team. Greg, I got to let you loose, but thanks so much for joining me today. Always a pleasure to partner with Caliber on Alts Expo and all the other events that we do together. Thank you so much.

Greg: Thanks, Jimmy. Have a wonderful day.

Andy Hagans
Andy Hagans

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