Multifamily Investor Expo - Feb 15th
Cbus OZ Funds was a presenting partner at Alts Expo 2022, a one-day virtual event hosted by AltsDb. In this webinar Chris Knoppe presents Cbus OZ Fund III, an Opportunity Zone fund with assets located in Columbus, Ohio.
Interested In Learning More About This Opportunity?
- The unique advantage of Ohio’s OZ tax credit, offering a 10% kicker.
- The investment thesis for urban redevelopment in Columbus, Ohio, including the growth potential brought on by Intel’s new chipmaking hub.
- How Cbus OZ Funds approaches value-add real estate opportunities.
- A walkthrough of Opportunity Zones located in Columbus, Ohio.
- An overview of the Opportunity Zone program tax benefits.
- An outline of the Cbus OZ Funds team and track record.
- How Cbus OZ Fund I and OZ Fund II have performed.
- Live Q&A with webinar attendees.
Connect With Cbus OZ Funds
Jimmy: Fantastic. Well, thanks for joining us today. Cbus OZ Fund III. Is that right?
Chris: That is right.
Jimmy: Go ahead and give us a break.
Chris: Okay. Well, thanks so much for having me, Jimmy. It’s great to be here. And hello, everybody. My name is Chris Knoppe. I’m president and co-founder of Cbus OZ Funds. Cbus stands for Columbus, as in Columbus, Ohio. That’s where we’re located. And OZ, of course, stands for Opportunity Zones. We are a qualified Opportunity Zone fund specializing in urban redevelopment in Columbus, Ohio. We focus more on the smaller assets within the neighborhoods, so houses, duplexes, small apartment buildings, mixed-use properties, and things like that. A little bit of housekeeping. We are a Reg D Rule 506(c) offering open to accredited investors only. This presentation will contain some forward-looking statements that make certain assumptions and contain risks. Past results are not always indicative of future results. For anybody interested in more details on our offering, please request a copy of our private placement memorandum for full details.
All right. So, let’s jump into it. Here’s today’s agenda. I’m gonna start off by highlighting a really unique advantage that our fund offers, and that’s a state of Ohio OZ tax credit. It’s actually open to any type of investor, whether that be capital gains or otherwise into a OZ fund that invests exclusively in Ohio Opportunity Zones. And I’m gonna explain how that can give you a 10% bonus right out of the gate on your investment in Year 1. Then we’re gonna jump into our target returns for our fund. After that, we’ll go through our management team, the Columbus market, and why that provides a great backdrop for our investment strategy. From there, I’m gonna explain exactly how we execute that strategy, and then we will go over the overview of our fund and end with some questions from the audience.
So, first off, the Ohio Opportunity Zone tax credit. A really unique incentive that the state of Ohio offers. They’re the only state in the country doing this. And they’re just really backing the OZ program and doing what they can to entice investors from all over the country to invest in Ohio projects. So, the way that this works is, 10% of your investment amount, the state will issue to you in the form of a tax credit certificate for those investing before the end of the year. So, in this month, December, the paperwork submitted in January for your tax credit, and the tax credits typically issued in late March or early April. So, within 120 days of your investment, you’ll receive this tax credit equaled a 10% of your investment amount. If you happen to be a state of Ohio taxpayer, you can use the tax credit to pay your state income tax, and that tax credit can carry forward for an additional five years. For those that don’t have a large Ohio tax burden, the certificate can be sold.
And so, over the past three years, we’re on our third Opportunity Zone fund. So, we have a little bit of experience doing this. Over the past three years, we’ve had 100% success rate in our investors receiving this tax credit, and we’ve also had 100% success rate selling the tax credits for our investors who didn’t have a need for them themselves. So, mainly out-of-state investors can sell it and they typically net between 80% and 85% of face value. So, you know, of course, every investment should be evaluated based on its own merits. But when you have an opportunity to start off with 8% to 10% kicker right out of the gate, that’s definitely a good thing.
So, I’ll get into a lot about our management team, our market, and our investment strategy. But just so a high-level overview of what we’re seeking to do for our investors. I talked about the state tax credit, but the fund itself has a target return of tripling your money over 10 years. 3.1x over exactly 10 years. You can stay in our fund longer than that and your return will continue to compound at a rate of 12% annually. The reason it’s a 10-year fund is because one of the largest Opportunity Zone incentives requires a 10-year hold. And so, of course, being an Opportunity Zone fund, it’s designed to maximize those incentives. However, you don’t have to be investing capital gains to invest in our fund. If you like our strategy, if you like, you know, our return profile, and you like the state tax credit, you can still receive all those things just investing in ordinary money into the fund. If you happen to have capital gains and invest those, then you receive those additional tax incentives both federally and at the state level. So, real quick what those are, you would defer your current capital gain tax. The current deferral period is slated through tax year 2026. So, when you file your 2026 tax return, your gain would be recognized and you would pay that tax at some point in 2027 when that return is filed. So, what the deferral is it’s not the biggest incentive, but it’s often understated. And I’d like to just explain how powerful that is.
So, if you have a large capital gain, your capital gain tax is gonna be 20%. In our example, we’re using $100,001 investment amount because that happens to be our minimum. So, if you had a 20% tax on that, it would be $20,000. So, rather than pay the $20,000 tax today, you invest the full $100,000 gain. And over four years if you’re earning a 12% annually compounded return, that amount that you would’ve paid in tax, the $20,000, after four years, grows to over $31,000. So, your deferred tax is yielding you a 57% return prior to paying that tax. So, in other words, you’re essentially cutting your tax bill in half once that tax comes due. And the other benefit, which is by far the largest, is if you hold your investment for 10 years, you exit the fund investment tax-free. So, whatever gain you have on your fund investment over a 10-year period, and, in our case, we’re looking to triple your money, that’s the tax-free exit. So, that’s the return profile, that’s what we’re looking to do. Another benefit is that our fund acquires, renovates, and also builds rental housing and mixed-use properties that are rented. And so, those spit off a lot of depreciation. And we look to maximize that over your 10-year hold period. So, we are doing cost segregation and accelerating it. And you get the benefit of that over the 10-year period. And once you exit, there’s no recapture on that depreciation. Because it’s a tax-free exit, there’s no recapture, which is a huge benefit.
Okay. So, now a little bit about us management team. So, Cbus OZ Funds is managed by myself and also my two brothers, Brian and Sean. We’ve been business partners since 2005. We co-founded a home building and property management company called New City Homes. We also have a construction arm that does the renovation. We participated in over a thousand real estate transactions. I stopped counting a long time ago. But we have extensive experience in acquisitions, new construction, renovation, financing, and property management. So, we cover all those verticals with our in-house management team that allows us to operate extremely efficiently. And we specialize in residential and mixed-use redevelopment within an urban neighborhood surrounding downtown Columbus. Also important to note if you’re looking at a 10-year investment horizon. While we’ve been at this a long time, we’re still relatively young and we have a long way to go with our investment management careers. So, we will be in place, and we will be here doing the work for you.
We’re a nationally recognized OZ fund. Proud to say earlier this year, we were honored with a Top 25 fund managers award by “Opportunity Zone Magazine.” We frequently travel and speak at different Opportunity Zone conferences and other real estate conferences around the country. And locally, we’re also recognized. We’ve been featured in a number of publications. The Columbus Dispatch was awarded the “40 Under 40” award by our “Business First.” And, you know, our projects are definitely noted and they’re noticeable and they make great impact in our local market. We also like to get involved in the community. Both the partners and our staff, we volunteer frequently. Habitat for Humanity is a great program we like to participate in. We do food drives, we host monthly litter cleanups in the neighborhood. And we get involved however we can. Community roundtable discussions and other community giveback events, that’s important to us.
So, a quick overview of fund performance. So, Opportunity Zones have been around for a few years now. Governors of each state selected the zones in 2018, and then treasury, at the same time, was finalizing the rules. So, we were on the early end of that. Our first fund opened in mid-2019. We had our own capital gains that we were looking to invest, and we were also forming, you know, this whole opportunity zone framework and the fund management side of it, trying to layer that with our business model of doing a whole lot of small projects. And so, we were able to figure that out with the help of, you know, our excellent legal and tax team that specializes in Opportunity Zones. And once we got comfortable with that, we rolled out our second fund and opened it up to outside investors shortly thereafter. So, Fund I, a little bit over 900 in equity was contributed, $900,000. It’s completed 12 projects to date. And NAV growth on that. So, equity growth in the fund has been 43% over that three-year period, which is a little over 14% annualized.
Fund II. So, a little younger. Over $4 million in equity raised for that. That was raised during COVID, and completed over 40 projects to date in that fund. NAV growth of 32% in about two and a half years. So, that’s almost 13% annualized. I will note NAV growth accelerates in about Year 3. And the reason for that is the first year is almost…it’s basically zero growth because you’re deploying the money by acquiring the properties and you’re starting the renovation process. But the growth in asset value is not recognized until the projects are completed and stabilized. So, that starts happening in Year 2. And as those projects are refinanced and the cash is recycled into additional projects, that NAV growth starts to compound. And over time, as the portfolio gets larger and larger, the mortgages on those properties are being amortized down. And so, the equity continues to grow that way in addition to the value that we create through our renovation and construction projects.
So, now we’re onto Fund III. Fund III was contemplated as investing in similar assets, but at a slightly larger scale. So, whereas Funds I and Funds II are buying and renovating houses and duplexes, Fund III is purchasing small and mid-size apartment buildings. We’re also building clusters of homes for rent and doing some small commercial and mixed-use properties that are strategically located on the business corridors that run through our residential neighborhoods around downtown. We’ve raised over $8 million to date for Fund III. It’s gonna be open for multiple years. We’ll raise up to $15 million. And we are actively deploying that $8 million that’s raised so far, and the pipeline is looking good.
So, real quick, why Columbus? For those that aren’t aware, Columbus is the number one growing city in the mid-west. And nationally, it was one of only 14 cities that added at least 100,000 residents since 2010. So, we’re mid-west, but we’re also high-growth, which is a unique combination. We’re gonna continue growing. The region is expected to add 1 million residents by the year 2050, which is pretty significant considering the metro has about 2 million today. Why are people moving here? It’s a low cost of living. There’s a lot of companies setting up second headquarters because there’s a lot of colleges and there’s highly educated young workforce. And that workforce can afford to live here. And so, it’s a great fit for companies looking to grow. There’s been some notable projects and corporate locations here, most recent being Intel. They’re building a mega factory for their chip fabrication. $100 billion projected spend over the coming years that’s outside of Columbus. They’re joining Google, Facebook, and Amazon who all have presence here. We have a rising startup and venture capital scene. Just a lot of really good things going on.
So, growth is good, but you also need to counter growth with the inventory of housing. And so, despite all that growth, the housing units have not kept up. So, you might have a city that is growing very quickly, but if everybody is recognizing that and rushing to build there, you can be in an overbuilt situation. And we’re seeing that in Austin, in Phoenix, cities like that, that have been very popular and very well performing over the past five years. But now they appear a little saturated. Columbus is the opposite. It’s growing, but the housing units have been underbuilt. Job creation and population creation is significantly more than what the housing unit production has been. So, for example, in 2020, that was the most housing units that we as a city built in 15 years, but it was still well short. We built less than 12,000 housing units, and the projected need is 14 to 21,000 per year. So, whenever you have demand that’s greater than supply, that’s a good thing for prices. It’s also a great insulator in any sort of economic turmoil.
The other great reason Columbus is a market we like is because it’s very resilient. We have a diverse employment base. No one industry represents more than 18% of employment. And those largest sectors are government jobs, we’re at state capital. And those tend to be very stable jobs. We also have education. You know, Ohio State universities here. It’s the third largest college in the country, and we have 50 other college campuses located here. We have 16 Fortune 1000 headquarters. Pretty stable. We’re a logistics hub. 60% of the U.S. population lives within 600 miles of Columbus. So, companies love being here because they can reach a lot of the country. So, that’s the geographic location, and now let’s talk about the strategy of urban redevelopment.
So, I noted that our city is growing. What’s growing even faster than the city as a whole is the downtown population. There’s a demand for people moving to walkable neighborhoods. They wanna be close to the job centers. The problem though is that the existing housing stock is old. It’s old and it’s obsolete. And so, you know, many of these neighborhoods were built 60 to 100 years ago and they require full renovation. So, that pairs very well with the opportunity zone incentives because those require significant improvement. There’s also been a number of old houses over the decades that have been torn down, leaving urban infill lots. And us as a homebuilder have an opportunity to build new housing there. So, our strategy is twofold. One is renovation of existing units, and the second is building new housing units. We love single-family homes because they’re very adaptable. After 10 years, we can sell them to homeowners or we can continue to rent them. We can refinance them as needed. They tend to be very flexible. They’re also equipped to build. So, unlike larger development projects, a house can go up in six or seven months. And the same thing with the renovation project. We’re in that from beginning to end very quickly. And through that process, we’re creating value. We’re not just buying turnkey properties and hoping that they go up in value, we’re creating value through our project. And so, typically, our cost of purchase or cost of construction is going to be 70% to 80% of what the finished value is. So, we’re looking to create at least 20% equity with every project that we do.
Here is a overview of the downtown market. The circle represents where the actual high-rise buildings are. And, you know, all the neighborhoods that we invest in are within about a two-mile radius of that. The shaded areas on the map are the Opportunity Zones census tracks, and the stars represent different neighborhoods that we invest in. Our company, the homebuilding business, New City Homes, is mentioned on the map there. We’re on one of the main corridor doors going through the city and in the heart of an opportunity zone neighborhood. I don’t have much time here and I do wanna leave a few minutes for questions, so I’m gonna quickly go through some of these example projects to give you a little flavor for the type of work that we’ve done.
This was urban infill. We built five homes in a row on a key corridor of a urban neighborhood. It was vacant lots and boarded-up houses prior to our project. This was a city condemned for unit building, it was vacant, and we did a full renovation, solved the city’s issues. They’re very happy when we step in and do that. It’s now fully rented. It’s a great cash flow and rental property. Same thing with this four-unit building. This one was a former medical clinic that we purchased. It was operated by a non-profit. They relocated somewhere else and we turned it into private office spaces. So, bringing small businesses into the neighborhood. This was a vacant warehouse. We purchased here, replaced the roof, fixed a lot of the issues, upgraded the electrical, the lighting. It’s now home to a maker space. There’s a blacksmith, a coppersmith, a jewelry maker, and a leather worker there. This is our office building. So, it’s on a commercial corridor. We renovated both sides and rented out the downstairs to a salon business.
This is the pipeline for Fund III. Just a sampling of it. There’s the rendering here of four homes. These are the type of homes that we are building as rental properties. And so, we find infill lots or a few lots together and we build clusters of homes. Those are great because they’re pretty quick projects and they create terrific value for the fund right out of the gate. And then over time, the mortgages will pay down, the properties will cash flow. And we’re not relying on it, but we fully expect there will be some appreciation as well. We also have purchased an 18-unit building, a 20-unit building. Those are partially occupied, and we’re renovating each unit as it turns over. And all sorts of mixed-use commercial properties.
So, quick overview of the fund. I mentioned accredited investors only, Columbus, Ohio, we’re residential and mixed-use. It’s 10-year hold, minimum of $100,000. And we’re targeting to more than triple your money over that 10-year period. For those investing capital gains, that gain over 10 years is tax-free. All investors are eligible to receive the state of Ohio tax credit equal to 10% of the investment amount. A few important dates. Next week on the 14th, we’re having a webinar. So, if you like what you hear, but you wanna learn more, please tune in at 10:30 Eastern. I’ll have my contact info on the screen here in a moment. If you’d like an invitation to that webinar, please reach out to me. December 31st is significant because, if you wanna receive the next round of OZ tax credits, you’d wanna invest before the end of the year. If your investment goes into next year, that’s fine. It’s just you’ll wait a little longer to get that tax credit. Okay. I wanted to keep it brief today. So, that’s what I have. And Jimmy, if we have any time remaining, I’d be happy to answer some questions.
Jimmy: We do. We’ve got time for a couple of questions here. So, let’s get started off with Steven’s questions. Steven asks, “Will you be holding for 10 years and making distributions? Will you sell and reinvest proceeds to compound gains or both?”
Chris: Yeah. Great question, Steven. So, this fund is designed to take advantage of the opportunity zone incentives. And the largest of those incentives is that tax-free exit after 10 years. So, with that in mind, what we design the fund to do is to grow your equity within the fund as much as possible over that 10-year period so that you’re receiving a large gain on the back end and that gain is tax-free. So, it’s not meant to be an income fund. Our distributions… So, you would receive cash from the Ohio tax credit certificate if you chose to sell that. And then if you do have a deferred capital gain, we offer an optional distribution when that tax comes due in tax year 2026, payable in ’27. And so, there would be an optional distribution at that time to cover your tax. Most of our investors will choose to pay that with non-fund money because they want the fund money to continue compounding tax-free for them. The other thing is with the amount of depreciation we spit off, most investors are gonna have accumulated passive loss. And so, if their capital gain that went into the fund was a passive gain, they will be able to use the accumulated passive loss to more or less void out their deferred gain. So, that’s a nice incentive too. But to answer your question, it’s not a regular distribution. It’s meant to…we reinvest the proceeds in more and more projects and grow that equity over time.
Jimmy: Yeah. Good answer there. A related question. Are you able to cycle your assets within the fund or are you gonna hold all the houses for 10 years?
Chris: Our plan is to hold, but we recycle the cash. So, when we purchase a project, you know, using round numbers, let’s just say $50,000, we purchase something, we renovate it for $20,000, we’re in it for $70,000 and it’s worth $100,000. So, we would then refinance it to pool our $70,000 back out. We hold the property, we’ve created 30% equity. That property is now going to be a performing rental. The mortgage is gonna pay down over time, but we’ve freed up the cash from the fund to go buy another project. And so, that’s how we’re able to compound the equity over time to provide over a 3x return.
Jimmy: Very good. A couple of more questions here and then we’ll cut you loose, Chris. Is the Ohio tax credit limited? ie., does the state only issue so many credits in a year? Is it capped and then the amount resets, or how does that work exactly?
Chris: Yes. So, this past summer, they actually expanded it. So, they made it bigger. But to date, they’ve never run out of money. There is some cap on it, but they’ve never run out of money. And then they just expanded it even more this year. So, we wouldn’t expect that any of the caps would come into play. We also work with our securities attorneys to get all the paperwork. It’s a first come, first serve. And again, they’ve never run out of money. So, anyone that’s applied for it has got it. But just to put our investors at the front of the pack, the minute the portal opens, we already have your paperwork pre-submitted and we hit go on it. And so, your applications are highly prioritized.
Jimmy: Fantastic. Well, I’ve just posted your email address in the chat. Chris, if anybody wants to get in touch with you to learn more to schedule a call with you or to request subscription documents, you can reach out to [email protected] or hit up their website at cbusozfunds.com. Chris, thank you so much for being here today. We’re running out of time, but I appreciate you joining us on Alts Expo 2022.
Chris: Perfect, Jimmy.