Big projects, big risk (too big)
Beware: short and easy.
Raise a ton of money, invest in a handful of ground-up luxury apartment developments, and collect your fee.
Since 2017, 105 Opportunity Zone Funds have raised over $44B in equity, according to the National Council of State Housing Agencies (ncsha.org). The vast majority of these funds all have a very similar target investment thesis with a common thread: 200+ unit Multi-Family new development. As more and more capital gains are being poured into new funds OZ Fund every year, it is estimated that $600B to $700B worth of luxury high-rise apartment buildings will be created over the next 7 years.
We see some major flaws with this model:
Everyone is reading the same report: LOCUS National Opportunity Zone Ranking Report
The Opportunity Zone Premium: In the top 10 markets, land value has increased 79% since 2016 (before OZF) and Cap Rate Sales at 4.2-5.9% (great for the sellers, awful for the buyers)
Substantial Improvement Fallacy: The premium described above has many falsely believing that building ground up is the only way to satisfy the 100% substantial improvement requirement.
Urban Flight: The data is too early to tell if the coronavirus and recent protest are actually going to cause residence to move from urban areas, but one thing I can share from personal experience, 950sf became really small, really fast. Are we moving to the suburbs? We are not sure yet, but we are definitely looking at larger spaces, farther from the urban center… and we are not alone.
Multi-Family, Student Housing Bubble: The regulations have set strict timelines on deploying capital within 31 months and the capital gain elimination is after the asset is held for 10 years. Can the US Markets absorb close to a Trillion dollars in Multi-Family purchases at the modeled 5% Cap Rate, all at the same time?
PVone: long and steady.
Maximize investor returns by raising a modest amount and build a portfolio of single family and small multi-family (30 units or less) though a low-basis acquisition strategy.
PVone Capital is taking a different approach, one that is more data driven to acquire existing assets at a low-basis with high rent/basis income streams.
Divergence from the Pack: Since our acquisition strategy is based on low basis REOs, our models and available inventory typically keep us from many of the dangerously overpriced opportunity zones.
Tax Lien/REO = No Premiums: Our typical acquisition cost from a Tax Lien or REO is around 40% of the assessed value.
Low Basis = Low Substantial Improvement: With our acquisition cost at 40% of assessed value we are able to meet the substantial improvement requirements while still having a basis of 75-85% of assessed value.
Flight to Urban Edges: Like we said above, the data is too early to speculate, but we are seeing the number of rehabs and sales increase in typically blue collar neighborhoods are the edges of major cities.
Blue Collar Strong: Even before the pandemic, our model was always strongest in the neighborhoods immediately outside major US cities. Working class neighborhoods with brick, single family bungalow on tree lined streets, in the town with an average house-hold income of $60k and 3% unemployment.
Acquisition Strategy:
Tax Liens: A $60M tax lien portfolio will produce ~$2M of qualifying assets each year ($4.5M - $5M after improvements)
REOs: REOs or Real Estate Owned are assets owned by a bank, government agency, or government loan insurer after a foreclosure. PVone is tapped into a number of REO networks that help fill our acquisition pipeline.
Mortgage Notes: Another source of low basis acquisitions are from the direct investment of mortgage notes. This asset class is very similar to Tax Liens and pair well with PVone’s current acquisition models and portfolio servicing.