Alts Expo May 2023 Presentation, With 29th Street Capital

29th Street Capital was the presenting partner at Alts Expo May 2023, a one-day virtual event hosted by WealthChannel. In this webinar, Zach Shulruff presents an Opportunity Zone deal in Sacramento.

Interested In Learning More About This Opportunity?

Click here to visit the 29th Street Capital website.

Webinar Presenters

• Zach Shulruff, 29th Street Capital
• Nikola Krcmarevic, 29th Street Capital

Webinar Highlights

• Background of 29th Street Capital, which was founded in 2009.
• Review of the company’s track record raising and deploying capital.
• Overview of the 200 key hotel that 29th Street is developing in downtown Sacramento.
• Live Q&A with webinar attendees.

Connect With 29th Street Capital

• 29th Street Capital – Official Website
• 29th Street Capital on LinkedIn
• Zach Shulruff on LinkedIn
• Nikola Krcmarevic on LinkedIn

Webinar Transcript

Jimmy: Move along with the next presentation, which is Zach Shulruff. So, Zach, I’m promoting you to panelist right now, and then we’re gonna hear from Zach at 29th Street Capital.

Zach: All right, thank you, Jimmy. Thank you WealthChannel for putting on this event. We’re excited to tell you about 29th Street Capital, and the 200 key Caption by Hyatt Hotel that we’re developing in Sacramento. My name is Zach Shulruff. I’m responsible for underwriting our development deals nationally, as well as sourcing debt and equity for those deals.

Nikola: My name is Nikola Krcmarevic, and I’m responsible for planning, entitlement, and design coordination.

Zach: Quick background on 29th Street before we discuss the Hyatt Caption deal. 29th Street was started in San Francisco by Stan Beraznik in 2009. Stan did wealth management in Palo Alto for 20 years and started buying up single-family homes during the great financial crisis. After scaling to about 20,000 homes, he took that platform public with Tricon in 2012. Robb Bollhoffer, the other managing principal, joined in 2013, and they pivoted to value-add multi-family and teamed up with local acquisition managers. The firm became a decentralized platform with a local acquisition manager focused on one or two markets, along with an asset manager and a CapEx project manager. Fast forward 10 years and there are 16 or so of these offices, or of these teams across the country, all sourcing deals, and executing business plans in their respective markets.

Scroll down. So, to date, the value-add side of 29th Street Capital has purchased 157 deals, and currently owns and manages about 15,000 units. We’ve made 87 dispositions to date, yielding an average IRR of 39.4%, and an average equity multiple of 2.5X. 29th Street Capital has never done a fund or been forced to sell in a down market and has capitalized all 157 deals on a one-off base basis. Since inception, 29th Street Capital has done about $5 billion worth of deals and raised over $1.8 billion of equity. In addition to the value-add, core plus, and development, 29th Street Capital also has PropTech platform and in-house property management. We’ve got about 75 corporate employees, and another 500 onsite.

The development arm of 29th Street Capital, which Nikola and I work in, was started in 2019 after the rise in popularity of opportunity zone investments. Since starting the development business in 2019, we’ve delivered one project totaling 408 units in Sacramento. We’re currently under construction on two more projects totaling 573 units, and we’ll be starting construction on another seven projects totaling about 1,800 units over the next six months. Total project cost for these deals is about $1.1 billion, and we’ve raised equity for seven of the 10 so far. So, in 2019, we realized there was a large appetite for OZ deals, which led us to purchase a 60-acre site in Sacramento, known as Township 9. This master plan development has three phases with phase A and B zoned for multi-family and phase C zoned for commercial, which is where the Hyatt Caption will be developed that Nikola’s gonna speak about now.

Nikola: Now, Township 9 is located one mile north of downtown Sacramento, and just south of the American River, with two major new developments on the way, the rail yards and the state office building in filling the gap between our site and downtown Sacramento. Across the street from the proposed hotel is a new 1.25 million square foot state office building delivering spring of ’24, which will bring 5,200 state employees to the area. The rail yards have a long-term plan that will add thousands of residential units, Kaiser Permanente Hospital, 5 million square foot of office space, 500,000 square feet of retail space, and hopefully a major league soccer stadium to the area. The 60 acres we own at Township 9 will eventually have nearly 2,000 units, multi-family units, and a life science office building in this hotel. Phase A1 of the development is under construction and will bring 372 units online prior to the completion of the hotel.

And adjacent to our site and immediately south of the hotel site there is a new light rail station that takes you directly to downtown and has future plans to extend and connect all the way to the airport. Caption by Hyatt at Township 9 will be the cornerstone of the development at Richards and 7th Street. The new upscale select services lifestyle brand from Hyatt is similar to the Moxy from Marriott, with an emphasis on the F&D rather than check-in services in the lobby. On the 2.5-acre site, we will build a five-story, 4 over 1, 200 key hotel that wraps a two-story parking structure. Ground floor consists of an open lobby with food and beverage service branded as the Talk Shop. It is a community-oriented amenity with outdoor beer garden featuring games and fire pits. It informalizes [SP] the check-in process, and adjacent to the restaurant is a multipurpose flexible meeting space totaling up to 3,000 square feet, and it’s facing the recreational easement to the west.

On level two, along with the rooms we have a fitness center, and a branded destination-based rooftop bar and restaurant. Levels three through five feature an efficient hotel, double-loaded corridor floor plan with a good mix of Queen, King en suite rooms. We have partnered with Presidio Companies for their expertise in hotel development. To date, they have developed 18 hotels, currently own nine, and have five more in the pipeline. We have also signed a franchise agreement with Hyatt. They’re excited to make this location the flagship for the Caption brand. And we have also signed a management agreement with Concord Hospitality as a day-to-day manager. And they currently operate 144 upscale select service, lifestyle, and full-service hotels representing 22,000 rooms. The project timeline shown here on the screen, at the moment, we are heavily involved in the design stages of the project.

The drawings are in with the City of Sacramento for site plan approvals, and we are anticipating full approvals in the next couple of weeks. We will submit for permit end of June of this year, and anticipate starting construction in November of this year. A 24-month construction schedule will put us in November of ’25 for delivering and grand opening of the hotel.

Zach: All right, here we have our investment summary slide. So, assuming a 50% loan to cost construction loan, this $63.4 million project will require about $28.5 million. 29th Street Capital already owns the land and will allow the venture to purchase it for $1.5 million per acre, versus its true market value of around $2.5 million an acre. Rather than taking a profit on the land, 29th Street prefers to have the overall Township 9 community be successful, and have this project come to fruition. Hard cost pricing is from the general contractor DesCor and includes 7% hard cost owners, hard cost contingency, and 3% annual escalation to take into account any potential pricing increases prior to starting construction in November. Most of our soft costs are either contracts or permanent impact fees directly from the city.

So, we feel very comfortable with our budget. Since this is an OZ, we would hold this deal for 10 years to take advantage of the Opportunity Zone tax benefits, and then plan on refinancing following stable operations and returning about 64% of investors’ initial equity at refinance. After the 10-year hold, we’re expecting a gross IRR of 20.5%, a gross equity multiple of 3.3X. I know it’s previously come up, but for those unfamiliar with Opportunity Zones, none of the cash generated from operations or sale will be subject to federal capital gains taxed. Downtown Sacramento has historically had an average occupancy of 82%. And with only 1,284 rooms built since 2000 in the upscale class, we feel that this is a severely underserved market for hospitality, especially after the 5,200 state employees take occupancy across the street, and the 2,000 units we’re developing come online.

There’s also only one hotel currently under construction in downtown Sacramento. Over the last few years, population growth has been the biggest demand driver for economic expansion in Sacramento. Migration from San Francisco has been a major factor as people look to capitalize on their employer’s work-from-home policies and relocate to Sacramento. The city’s portability has remained one of its biggest draws for residents and employers. So, in summary, we feel that the hospitality industry will benefit from the continued economic and population growth throughout Greater Sacramento, and we look forward to starting construction of this hotel in the fall. Thank you, WealthChannel, for giving us the opportunity to discuss. And our contact information is here if you have any interest, or any questions or any interest in investing.

Jimmy: Yeah, thank you, gentlemen. Looks like a really good opportunity. As I told Taylor a little while ago, Taylor Trot was one of our previous presenters. I love the Opportunity Zone program. I think it’s the greatest tax incentive ever created. We have a question here from Marty, he asks, what are your minimums?

Zach: Minimums for this one are 50,000.

Jimmy: And then another question is, I get this question oftentimes from potential LP investors who might not have capital gains. Do you accept non-capital gains dollars, and how are those treated?

Zach: You know, I’d have to check with our CFO, but I think in order to get the tax benefits, you would have to contribute it or mark it off as a Opportunity Zone and capital tax gain contribution. So, I think you are able, and someone can correct me if I’m wrong, you can invest, and there’ll be a 10-year hold, but I don’t think you’ll have those tax benefits.

Jimmy: No. Yeah, I think that’s accurate. The tax benefits are only available on qualifying gains.

Zach: Correct, correct.

Jimmy: But you can oftentimes, and it kind of depends on the sponsor. You can oftentimes put in non-capital gain dollars, but the sponsor typically doesn’t, I don’t think really cares where your money came from. It’s kind of up to you and your personal tax return, how you report the gains on your 1040, and on your form, 8997 is the form that LP investors fill out. Two questions about IRA funds. I don’t know if you guys accept IRA funds, or even what purpose that might hold for a tax-free type of investment like this, but what are your thoughts on working with IRAs?

Zach: I would have to check with our CFO. It’s a good question. I dunno the answer to that. But feel free to shoot an email to one of us, and we’ll be sure to answer that.

Jimmy: Yep. Fantastic. I think that is it. I don’t see any more questions here. I think we’ve run out of time. But please do reach out to these two gentlemen at 29th Street Development, 29th Street Capital. Gentlemen, really appreciate your time today. Thank you for joining us on Alts Expo. Thanks.

Zach: Thanks, Jimmy. Appreciate it.