0:00

Hey everybody,

0:00

this is Paul Moravsky, one of

0:05

your hosts of the fat pitch

0:05

podcast. As always, I'm joined

0:09

by Clint Sorenson. Good morning,

0:09

Clint.

0:11

Hey, how are you, Paul?

0:12

I'm wonderful.

0:12

Thanks back in action finally

0:15

with two eyes instead of one.

0:15

And today we're joined by a good

0:18

friend of mine, Nick Rosenthal

0:18

from Griffin. MC, it's great to

0:21

have you with us on the fat pits

0:21

today.

0:23

Great to be on

0:23

the podcast. I'm a fan and great

0:26

to be a guest.

0:27

Well, we're happy

0:27

we're rolling again, Nick, and

0:30

what better way to get cranked

0:30

up in January than to talk

0:33

about, you know, multifamily.

0:33

That's I always work in the

0:38

other half sheds right now. But

0:38

I came from the bedside. And

0:41

certainly over the last five

0:41

years, if you were involved in

0:44

industrial multifamily, had had

0:44

a heck of a run. So I just had a

0:48

chance to talk to the Chair of

0:48

Cushman and Wakefield the other

0:51

day about the sector that I work

0:51

in. And I know Clint is excited

0:54

to talk about the sector urine.

0:54

Before we get there, though, how

0:57

about a little origin story,

0:57

your background, that's where

1:00

we'd like to start? Sure. So

1:02

I would be

1:02

remiss if I didn't say I grew up

1:04

in Boston, you can't leave

1:04

Boston and pretend like you're

1:09

not from there. So I grew up in

1:09

Boston, I went to school in

1:12

Washington, DC, and then I moved

1:12

west. So I'm now in Newport

1:16

Beach, California, but really,

1:16

from sort of a young point, my

1:20

life, all of the people that I

1:20

was around that had really

1:24

accumulated wealth, and in my

1:24

view, as a young person success

1:28

were in the real estate space.

1:28

And so I always felt like, that

1:32

was something that I wanted to

1:32

do. So when I graduated from

1:35

George Washington University, I

1:35

had an opportunity to work for a

1:39

developer and we were developing

1:39

an industrial park, actually,

1:42

your world now in Jiangsu

1:42

Province, China. So as back and

1:47

forth between LA and China, that

1:47

was a formative experience, I

1:52

learned a lot over those couple

1:52

of years. And then I went to

1:55

work on the acquisition side of

1:55

the business, doing deal

1:57

structure work. So we were

1:57

buying multifamily, multi

2:00

tenant, office and industrial.

2:00

And then I had an opportunity to

2:03

move over to the capital

2:03

formation side of the business,

2:06

which was totally new to me

2:06

didn't know really had existed,

2:09

it was the GFC. And sort of a

2:09

mentor in the business said, We

2:14

want you to come over to this

2:14

side of the business and help us

2:17

raise capital. So I did that.

2:17

And then in 2015, as Griffin

2:22

capital was launching our

2:22

registered fund business, which

2:25

was really a standalone business

2:25

that we were standing up to

2:29

offer investors an opportunity

2:29

to get into what at the time was

2:33

a different investment vehicle

2:33

structure to get sort of the

2:36

return characteristics that they

2:36

were looking for. In a more

2:39

operational, I would say, easy

2:39

way to gain access to 99. Access

2:46

to large institutional funds.

2:46

You guys know this space? Well,

2:49

I joined that effort, we raised

2:49

about six and a half billion

2:52

dollars in that space. And then

2:52

in May of 2,000.2, we sold that

2:56

to Apollo. So the business that

2:56

we're focused on today, I'm a co

3:01

CEO, that businesses all sort of

3:01

the original DNA of the firm,

3:05

which is the direct real estate

3:05

business. And inside of that

3:08

business, we're exclusively

3:08

focused on the multifamily

3:11

sector today.

3:12

That's fantastic.

3:12

And by the way, I'd be remiss if

3:15

I didn't tell you, I'm having

3:15

dinner with your former

3:17

Portfolio Manager in Orlando

3:17

next month. I'll be sure to send

3:22

your regards, please do? You

3:22

betcha. So, Clint, what do you

3:25

have for Nick here today?

3:27

Yeah, Nick. So you know, one of the things we always hear about is this

3:29

affordable housing crisis in the

3:32

United States. And, you know,

3:32

we've seen all the charts I'm

3:35

sure you guys have, where it's

3:35

better to rent now than to buy

3:40

just do the cost of capital due

3:40

to the way prices have

3:42

increased, especially post

3:42

COVID. Really a hockey stick?

3:46

How do you view that? Or how do

3:46

you view that right now? And

3:49

then how are you trying to solve that? Or how do you think multifamily plays a role in

3:50

potentially solving that crisis?

3:55

Sure.

3:55

So I think the

3:55

best place to start is sort of

3:58

the origin of this issue. And

3:58

then we can kind of work our way

4:00

through to what's going on right

4:00

now. Because this is something

4:03

that has been systemically no

4:03

pun intended building for a long

4:06

time. So 90% of counties in the

4:06

US, it is more affordable to

4:12

rent than it is to own, which is

4:12

obviously problematic. And this

4:17

is primarily driven by a couple

4:17

of different things. But I would

4:20

trace the origin, really to the

4:20

financial crisis when

4:24

homebuilding effectively just

4:24

stopped. And homebuilding as you

4:27

can imagine, takes time. It's a

4:27

production business. And so when

4:31

he stopped the production line,

4:31

it sets you back several years,

4:34

but effectively coming out of

4:34

the GFC. Builders never

4:39

recovered the volume of single

4:39

family home production that they

4:43

were producing prior to the GFC.

4:43

And it was a very, very slow

4:47

recovery through 2009, really

4:47

through about 2017. And during

4:53

that time, a lot of skilled

4:53

labor left the market, labor

4:57

costs increased. And so the

4:57

product Shouldn't that was

5:00

taking place wasn't on the

5:00

affordable sort of entry level

5:04

home side of the spectrum, if

5:04

you think about entry level

5:07

homes that are 1400 square feet

5:07

or less, really allows somebody

5:11

to get into the single family

5:11

market, start building equity,

5:14

and then eventually, they're

5:14

going to potentially trade up

5:17

out of that that type of product

5:17

just wasn't getting built, it

5:19

didn't make sense for home

5:19

builders. So if you look back

5:23

into the 80s, about 40%, of home

5:23

production was in that segment.

5:26

Today, it's about eight. And at

5:26

the same time, as you have this

5:30

sort of this pipeline challenge

5:30

on the single family side, from

5:35

home builders, you had a

5:35

situation where home prices went

5:40

up, and most pronounced during

5:40

the pandemic, but home prices

5:43

went up. And at the same time,

5:43

wages did not grow at parity. So

5:48

now we have a real challenge in

5:48

terms of accessing the single

5:52

family market for a larger

5:52

segment of the country. So every

5:56

population cohort that we track

5:56

is increasing their propensity

6:00

to rent today, as home prices

6:00

went up, a couple of things

6:04

happened, I would tell you, the

6:04

first thing that happened is

6:08

obviously the downpayment

6:08

required to acquire that home

6:12

has gone up at the same time,

6:12

personal savings rates are going

6:14

down. So that's challenging. And

6:14

then the monthly cash flow

6:17

component has increased pretty

6:17

dramatically as not only the

6:22

size of that mortgage has

6:22

increased, but mortgage rates

6:24

have gone up. So that becomes a

6:24

gating issue. And after the

6:28

financial crisis, we put in some

6:28

more stringent lending

6:32

standards, so it's harder for

6:32

people to get credit. So the

6:35

confluence of all of these

6:35

things puts us in a position

6:38

today where most pundits will

6:38

tell you we're somewhere between

6:41

three and a half million and 4

6:41

million homes short. And housing

6:45

is a binary choice. If you're

6:45

lucky enough to choose to own

6:48

then you can potentially own but

6:48

most people don't have that

6:51

choice. So they rent or if

6:51

they're lucky enough, they can

6:54

live at home. But effectively,

6:54

we have a massive housing

6:57

challenge in this country. And

6:57

part of this is also driven by

7:00

nimbyism. So as you can imagine,

7:00

people don't want a lot of new

7:06

housing production in their

7:06

backyard, it's not great for

7:09

their values, in terms of their

7:09

homes and those people. So you

7:14

know, we hear a lot about the

7:14

need for housing. And we see a

7:17

lot of inaction in terms of

7:17

creating housing, it actually

7:20

takes more time now to get

7:20

housing built than it has

7:24

before. Even though everybody

7:24

acknowledges that we need more

7:28

supply, you know,

7:29

you talk about

7:29

the confluence of events, you

7:31

add to all that that higher

7:31

interest rate effect is lowered

7:35

inventory because people are

7:35

going to choose to stay put

7:38

versus move. Some of those

7:38

people are the newer homeowner

7:41

that just bought that would have

7:41

been aspirational before, to go

7:45

from 1400 feet to maybe

7:45

2200 2400 to get the second

7:49

story. And now they said due to

7:49

rates, I can't move which on a

7:54

personal basis, Clint you and

7:54

I've talked about and I

7:56

completely missed the

7:56

homebuilder stocks thinking,

7:59

okay, they're gonna keep going

7:59

because the choice will be build

8:02

new. And there's still a

8:02

shortage there even when two by

8:06

fours were nine bucks at peak

8:06

inflation. So I'm curious, with

8:10

this commodity supercycle

8:10

lending curious costs of land,

8:14

labor and commodities, as well

8:14

as entitlement being difficult,

8:18

is that further exacerbating the

8:18

supply of multifamily? And if

8:21

so, where and what type?

8:23

Yeah, let me go

8:23

back to real quick, short of

8:26

your comment about mobility

8:26

within the housing market,

8:29

because I think that's an

8:29

important one. Last year, we

8:32

sold fewer houses in this

8:32

country than any time since

8:35

1995. And the reason why, as you

8:35

articulated is not just the

8:40

affordability issue, which

8:40

creates a deeper and stickier

8:43

rental pool because people are

8:43

gated, but there's no mobility

8:46

within the single family market

8:46

because people are locked in

8:49

below current market rates. So

8:49

do I want to effectively change

8:53

out my three and a half percent

8:53

cost of capital for six and a

8:56

half? Or seven and a half

8:56

percent? And the answer is sort

8:59

of resoundingly No. And so when

8:59

you actually look at sort of

9:02

what Millennials are saying,

9:02

they're saying the house that I

9:05

expect to buy, I'm going to stay

9:05

in for the next 15 to 20 years,

9:09

that was never the situation as

9:09

you articulated before. You

9:13

know, there's just not enough of

9:13

these entry level homes for

9:16

people to get into, and there's

9:16

massively gating issues to get

9:19

into them. And then within the

9:19

single family market itself,

9:22

there's just no mobility. So

9:22

inventory is extraordinarily

9:26

low. So when we look at the cost

9:26

of build the challenges to

9:29

build, I think we should take a

9:29

step back at what's happening in

9:32

the multifamily market today as

9:32

well. And that's you have a

9:36

tremendous amount of deliveries

9:36

in 2023 and 2024, little over

9:42

400,000 deliveries and 23 over

9:42

600,000 deliveries coming in in

9:46

2024. And these pipelines are

9:46

very transparent. You know, it's

9:50

very easy to track this stuff.

9:50

Now, the census data differs a

9:54

little bit from sort of the

9:54

forecasters that we think are

9:57

more accurate but effectively

9:57

those are the numbers. So if you

10:01

look back three years or four

10:01

years, because that's when the

10:06

shovels went into the ground to

10:06

start those developments, we

10:09

were in a very different credit

10:09

environment than we're in today.

10:12

Obviously, very accommodative

10:12

fed for a variety of reasons

10:15

trying to stimulate a post

10:15

pandemic economy, we saw a

10:19

access to capital at a very low

10:19

cost that we had never seen

10:23

before. And as a function of

10:23

that not only were larger

10:26

investors very active because

10:26

they see the tailwinds for

10:30

rental demand. But the country

10:30

club circuit was very active as

10:34

well. And when I talked about

10:34

the country club circuit, I'm

10:36

talking about the folks that

10:36

would finance 70 or 80% of the

10:40

cost of a development, maybe

10:40

they started off with eight

10:43

units, or 12 units, or 40 units,

10:43

and now they're building 150

10:47

units, all of a sudden, they can

10:47

finance that with a regional

10:50

bank loan at 70 or 80% of the

10:50

cost, they can pass the hat at

10:54

the country club to their house.

10:54

And that was a very easy way to

10:58

get deals capitalized. That

10:58

market has since reversed

11:02

dramatically. So tighter credit

11:02

environment, only large market

11:07

participants have access to

11:07

capital. Just anecdotally, we

11:11

financed 10 deals last year,

11:11

about 650 million of total loan

11:14

proceeds. So we have access to

11:14

capital, which is phenomenal for

11:19

our business. But a lot of the

11:19

market participants that we

11:21

talked to, they don't have the

11:21

capital markets, relationships,

11:24

they can't put in 50 to 60% of

11:24

the equity to finance a deal.

11:28

And so they're totally

11:28

sidelined. So the small and mid

11:31

sized developers that are out of

11:31

the market. So the stuff you're

11:34

seeing delivered today is stuff

11:34

that started three and four

11:37

years ago. Our view is really

11:37

that if you can lean into the

11:42

market right now, when other

11:42

people can't get things

11:45

capitalized, then you're going

11:45

to have a very advantageous

11:48

leasing cycle as you get out

11:48

until late 2526 and 27. And

11:53

developing is a lot like the

11:53

business I would say of the

11:56

cliff divers and Alka poco.

11:56

Right, those guys are standing

11:59

up 115 feet, and they're diving

11:59

into the water as the tide is

12:04

going out knowing that when they

12:04

land, the tide is coming in. And

12:07

development, you really want to

12:07

be most active when other people

12:10

can't get stuff capitalized.

12:10

Because if you look out three to

12:12

four years, you know you're

12:12

going to be delivering into an

12:15

environment.

12:16

Absolutely. I

12:16

mentioned Clint not to steal

12:20

your thunder. There's a lot of

12:20

let's call it bifurcation. A lot

12:25

of sectors multifamily included,

12:25

you know, how do you view

12:29

markets? How do you view garden

12:29

versus, you know, luxury condo

12:33

type finishes? Can you educate

12:33

us in our audience? Sure,

12:37

the part of the

12:37

market where we're most active

12:39

is really the belly of the

12:39

market where you have the

12:41

largest potential tenant

12:41

demographics. So I think of

12:44

incomes of 60,000 to 120,000. So

12:44

if it's in a urban environment,

12:50

it's mid rapper podium, if it's

12:50

suburban, first or second ring,

12:54

it's garden style. Our view of

12:54

luxury, high rise housing is

12:58

that it's phenomenal when it

12:58

works, but when it doesn't work,

13:02

you've got large challenges. And

13:02

you're really marketing to a

13:07

very small segment of the

13:07

market. And that part of the

13:11

market is generally renting by

13:11

choice. And so, you know, they

13:15

might like a community because

13:15

it's the hot new community in

13:18

that market. And it's opening up

13:18

to a lot of fanfare and so they

13:22

stay for a year or two years,

13:22

then they move to the next one

13:25

potentially, or they buy their

13:26

concession to

13:26

Yeah, yeah. When

13:29

the economy contracts, I want to have a tenant when the economy expands,

13:31

I want to have a tech, I want to

13:34

be in the largest part of the

13:34

market, because that's the most

13:38

resilient part of the market.

13:38

And so that's why we build the

13:41

type of product that I

13:41

articulated, which is rapper

13:44

podium in an urban environment

13:44

or garden garden historically

13:47

has been just a phenomenal

13:47

performer. Very consistent, very

13:51

resilient, you know, takes a lot

13:51

of land and want to be in the

13:54

right location. But obviously

13:54

close to major employment knows

13:57

but the way we think about

13:57

markets are educated workforces

14:02

markets where you have both a

14:02

local and a state government

14:06

that are pro growth that are

14:06

tracking industries trying to

14:09

attract specific industries to

14:09

those markets to obviously

14:12

catalyze job creation. You need

14:12

to have transportation

14:16

infrastructure north south east

14:16

west proximity to other major

14:19

metro markets, and then

14:19

employers that are moving into

14:23

those markets. So I think about

14:23

the growth markets in the

14:27

Sunbelt, which are seeing the

14:27

most Supply today. They're also

14:31

seeing the most demand. And so

14:31

if you have sustainable growth,

14:36

that's a place where you want to

14:36

be an investor, short term

14:39

growth. I look at some of the

14:39

markets that saw kind of a post

14:42

COVID Boom, that are now seeing

14:42

a fizzle, right. Those were

14:46

small, secondary, tertiary

14:46

markets that are going to be

14:51

secondary and tertiary markets.

14:51

But there's new primary markets

14:54

that have been created just by

14:54

population migration, relative

14:57

affordability and good planning.

14:57

From local and state

15:01

governments, so I think about

15:01

markets like Tampa, Florida,

15:04

where you just were, I think, Paul,

15:07

the cranes

15:07

downtown It's bananas.

15:09

I think about a

15:09

Nashville right markets in

15:12

Texas, I think about that Tempe

15:12

Mesa corridor in Arizona. I

15:18

think about a market like

15:18

Denver. In our view, these are

15:21

sustainable growth markets.

15:21

People want to live in these

15:23

places. The amenity base is now

15:23

there. It's a much better cost

15:27

of living proposition than some

15:27

of the coastal markets and the

15:31

jobs have moved there. Yeah.

15:31

Yeah.

15:34

I mean, you'd

15:34

look at Nashville and you'd look

15:36

at the Financial Services jobs

15:36

that have moved there you look

15:38

at isn't Larry Ellison building

15:38

a huge campus, Clint in East

15:42

Nashville? Yeah,

15:44

great migration.

15:44

We've seen this great migration,

15:48

which has been pretty amazing.

15:48

And I think Nicky nailed it when

15:50

he said it was kind of spurred

15:50

by COVID. But you did kind of

15:54

get this fast board out of major

15:54

traditional city center

15:58

marketplaces into more of the

15:58

national Zoroaster. City Center

16:02

now, but one of my questions,

16:02

Nick, is are you seeing still

16:05

the growth in you mentioned

16:05

secondary, tertiary markets,

16:08

very still seeing growth in like

16:08

suburban marketplaces, and

16:11

provide and supply and demand

16:11

growth in those areas where you

16:14

have? That was really a big

16:14

COVID move with the work at home

16:18

and remote work opportunities?

16:18

Are you still seeing that kind

16:21

of play out? Because I felt like

16:21

that was a huge gap in the

16:24

marketplace? Yeah,

16:26

I mean, you have

16:26

a lot of supply coming online,

16:28

still, because this stuff was

16:28

started four years ago, but you

16:31

have less migration, because the

16:31

jobs are not growing at the same

16:35

rate. Right. I think one of the

16:35

things that you are also seeing,

16:39

which is kind of interesting

16:39

about the housing market is

16:42

everything that I've talked

16:42

about. And intuitively you would

16:44

think that the rental market

16:44

does well when it's very hard to

16:48

get into the single family

16:48

market. And the data actually

16:52

shows that when people are

16:52

buying homes, because there's a

16:56

lot of household formation

16:56

that's also good for the rental

16:58

market. So what you don't see in

16:58

periods like we're going through

17:02

right now is sort of the

17:02

elevated household formation

17:05

that you saw post COVID. Just

17:05

because people are worried about

17:09

the broader economy, there's

17:09

pressures mean, consumer debt is

17:12

growing delinquencies are

17:12

growing across almost all major

17:15

categories. But you're starting

17:15

to see some layoffs as people

17:19

realize 24 is probably going to

17:19

be slower than 23. So as a

17:24

function of that just migration

17:24

slows in general. But a market

17:28

like Nashville is the perfect

17:28

example where you've got north

17:32

south east west good

17:32

infrastructure, you're close to

17:35

Dallas, you're close to Atlanta,

17:35

a local government and state

17:39

government that very friendly

17:39

tracking industries, purely high

17:45

tech, trying to get those large

17:45

companies to invest in large

17:49

scale projects and being

17:49

successful at it. So markets

17:53

like that, you know, an RV will

17:53

continue to grow. I think about

17:56

a market like Boise, where a lot

17:56

of people move to as a market

18:00

that is slowing down. It's

18:00

unbelievable,

18:03

you said it, I

18:03

was gonna say not to pick on

18:05

him. But I remembered the

18:05

journal, you remember, Boise

18:08

suddenly was it must have had a

18:08

good PR agent. It was hot,

18:12

you're hearing about build and

18:12

move there. And I'm like, this

18:14

isn't sustainable. There's just

18:14

not enough big business that's

18:18

gonna fight getting into the

18:18

mountains in the snow and

18:21

getting the major hubs. On the

18:21

other hand, everybody can use

18:25

san francisco, you look at

18:25

service providers, and you look

18:30

at people fleeing downtown where

18:30

it used to be the hottest rental

18:34

market going right and going to

18:34

Marin County in the sky and down

18:39

south. That's probably a perfect

18:39

example of cleanse question, I

18:42

would assume.

18:43

I think it's

18:43

also in a market like that

18:45

driven by policy, right. And

18:45

folks saying, you know, there's

18:49

certain reasons I don't want to

18:49

live here anymore, which is

18:53

different than affordability,

18:53

although San Francisco was

18:57

unaffordable, and continues to

18:57

be challenged. But a lot of

19:01

business has left that market

19:01

where as we think about where we

19:05

want to be investing, we want to

19:05

be investing where job creation

19:08

is taking place. And our view is

19:08

the growth markets that are

19:12

sustainable growth markets, even

19:12

if they're seeing short term

19:15

shocks and supply, that supply

19:15

is really being driven by a

19:18

credit environment that we're

19:18

probably not going to see again

19:21

anytime soon. Yeah,

19:24

not so bad. So

19:24

let's shift gears. Clint, you

19:26

want to talk about opportunity

19:26

zones? Right. We have an expert

19:29

which we are both most certainly

19:29

not.

19:34

Short. Yeah. You know, we always get a lot of questions about opportunity

19:36

zones, a lot of folks that are

19:38

looking for tax mitigation

19:38

strategies, tax management being

19:41

a big, important piece of wealth

19:41

management, overall wealth

19:45

management. So a lot of people I

19:45

work with on the day to day or

19:48

financial advisors, we get a lot

19:48

of questions on how it works. A

19:51

lot of people kind of think,

19:51

probably believe something

19:54

that's not true believe the myth

19:54

that maybe the benefits are

19:57

gone. So walk us through maybe a

19:57

hypothetical because ample of

20:00

how an opportunity zone works

20:00

got a hypothetical family, they

20:04

sell a business or a property or

20:04

whatever, they have this

20:07

potential tax liability? How

20:07

would they leverage in

20:10

opportunities to benefit them? The

20:12

first thing I'll

20:12

say is this is a really exciting

20:15

part of the market. For us. It's

20:15

sort of the intersection of

20:18

where capital formation and

20:18

social good collide. So we're

20:22

excited about it, we've raised

20:22

about 1,000,000,005 of equity in

20:26

this space for our investors.

20:26

And we've got about three and a

20:29

half billion dollars of project

20:29

cost across various vintage

20:33

investment vehicles all

20:33

developing multifamily. Here's

20:37

the way it works, it was ushered

20:37

into the tax code under the tax

20:39

cuts and Jobs Act, great,

20:39

bicameral, bipartisan support.

20:43

It is now subchapter Z of the

20:43

tax code. And it was written

20:48

really in a way that focused on

20:48

investors with capital gains of

20:52

any kind, short or long term

20:52

from the sale of anything so

20:55

incredibly versatile in that

20:55

regard. And the benefit that you

20:59

get as an opportunity zone fund

20:59

investor is you can take a

21:03

capital gain, and you can take

21:03

part of the capital gain, which

21:06

is important for liquidity

21:06

planning, because most folks

21:09

that have capital gains events

21:09

want to take some of that

21:12

capital and have it in a liquid

21:12

way for lifestyle, but the

21:17

portion that they put into the

21:17

opportunity's own fund, they get

21:20

to defer recognition of the gain

21:20

on until the end of 2026. So

21:25

effectively, you're saying,

21:25

Yeah, I realized again today,

21:27

but I'm going to defer

21:27

recognizing that gain for tax

21:29

purposes until 1231 26. It's

21:29

going to be due in April of

21:33

2027. So that's the first

21:33

benefit, which is deferral. And

21:36

I think the way to think about

21:36

that is twofold. One, you can

21:39

spread tax liability over

21:39

multiple periods. So you can

21:43

take some of your medicine

21:43

today, you can invest part of

21:45

the gain into the opportunity's

21:45

own fund and take some of your

21:48

medicine and taxpayer 2026

21:48

Because the opportunity's own

21:52

fund investment is going to be

21:52

just a portion of the portfolio.

21:55

I think the other big benefit

21:55

here is now you're buying

21:57

yourself time to plan for that

21:57

future liability, you know, is

22:02

going to happen in taxpayer

22:02

2026. So today, I've got

22:06

taxpayer 2024 25 and 26 to

22:06

accumulate losses in my core

22:12

portfolio, which I can then

22:12

carry forwards that when I

22:15

recognize this gain in 2026, I

22:15

can minimize it. So I think

22:19

that's really beneficial as

22:19

well, for somebody who's

22:22

thinking holistically about

22:22

planning. The biggest benefit of

22:26

this structure by far is that as

22:26

long as you hold your interest

22:29

in that opportunity's own fund

22:29

for 10 years, when you exit, you

22:34

get a full fair market value

22:34

basis step up. So effectively,

22:38

you eliminate the capital gain

22:38

on the investment in the

22:41

opportunity's own fund itself.

22:41

So your funding a bucket of

22:44

capital, that's going to grow

22:44

long term tax free to which

22:48

you're actually going to have

22:48

access to and be able to

22:50

reposition.

22:51

I want to

22:51

clarify, because you get a lot

22:53

of misinformation about the

22:53

seven point you know what I'm

22:57

talking about seven years, 10

22:57

years, has any of that changed?

23:00

Or is that still, you know, I

23:00

bet you get these questions all

23:03

the time.

23:04

No, it's 10 years from the date of investment once you exit after

23:06

that point between that point

23:09

and 2047. So you could continue

23:09

to grow tax free if you wanted

23:13

to. But after 10 years of having

23:13

your interest in the fund, when

23:16

you exit, you get a full fair

23:16

market value bases step up

23:19

election at your discretion. So

23:19

the benefits here are deferral

23:23

and tax free growth. But there's

23:23

a third benefit, which I think

23:26

is important in this structure,

23:26

which is that these funds have

23:29

to do development or substantial

23:29

redevelopment. So as you think

23:34

about sort of the cycle here,

23:34

you're building an asset, you're

23:37

recapitalizing it, and now you

23:37

have a core asset that's

23:40

producing cash flow or in our

23:40

case portfolio. So now you're

23:43

generating income, kind of your

23:43

four, four and a half for that

23:47

income is going to be sheltered

23:47

by depreciation pass through

23:50

just like any other real estate

23:50

investment. The difference here

23:53

is that when you exit because

23:53

you get a fair market value

23:56

basis, step up, there's no

23:56

recapture of your depreciated

23:59

basis, so the income is tax

23:59

free. So as we think about this,

24:02

Paul, I want to ask you three

24:02

questions, because I know you

24:05

have capital gains all the time,

24:05

I'm sure. So you sell something

24:10

and you realize, again, it's a

24:10

large gain. Would you like the

24:14

idea of being able to defer part

24:14

of it working with your

24:16

financial professional over the

24:16

next several years to minimize

24:19

it? Well, of course, would you

24:19

like the opportunity to grow

24:22

more of your capital tax free

24:22

long term, but have the ability

24:25

to reposition it down the road?

24:25

Another winning idea? And then

24:29

would you like to generate tax

24:29

free income from that part of

24:31

the portfolio? Absolutely.

24:33

So that's what I was going to get at. You're using that tax free income

24:34

currently also that we all enjoy

24:38

in most of our real estate

24:38

programs through aim and

24:41

depreciation, amortization. So

24:41

you don't get it recaptured at

24:45

the end, which coming off of

24:45

cost basis is something a lot of

24:49

experienced investors still

24:49

forget about, you know that 6%

24:53

or 5%, or for whatever you got

24:53

for last seven years. The tax

24:57

man's come in for it. Now. You

24:57

didn't Normally converted right

25:01

ordinary income to long term

25:01

gains if you're in a successful

25:04

program. But now to mitigate

25:04

that recapture at the end,

25:08

Clint, that's a powerful

25:08

statement when planning a

25:10

portfolio, I guess, Nick, the

25:10

pitfalls would be who you given

25:15

your money to? And what kind of

25:15

project is it going into?

25:18

Because going back to when we

25:18

were all much younger man, we

25:22

all knew about failed

25:22

partnerships where the tax tech

25:24

we heard stories about we were

25:24

too young to be in the business

25:27

where the tax tail wag the

25:27

investment dog. So as an expert,

25:31

you know, what do you see as the

25:31

things to watch out for? Because

25:35

you're talking about a longer

25:35

term vehicle, if you're going to

25:38

actualize all of its benefits?

25:38

Yeah. So

25:41

let me make a

25:41

couple statements. The first is

25:43

that I think one of the

25:43

misconceptions is that

25:46

opportunity zones themselves are

25:46

places where you would not want

25:49

to invest capital. And I think

25:49

the framework for that thought

25:53

process is that, in order to

25:53

qualify as an opportunity to own

25:57

census tract, that census track

25:57

had to manifest a couple

26:00

characteristics poverty rate

26:00

greater than 20%, median

26:03

household income, 80% of that,

26:03

or lower than the metropolitan

26:07

areas. And then they could

26:07

governors of their respective

26:09

states could select up to 5% of

26:09

adjacent census tracts to census

26:13

tracts that manifested those

26:13

characteristics to drive,

26:17

effectively investment into the

26:17

path of these zones. And so the

26:21

governor's in the summer of

26:21

2018, designated the census

26:25

tracts in their states as

26:25

opportunity zones, using that

26:28

framework, the last census that

26:28

had been done prior to the

26:32

summer of 2018, was 2010, coming

26:32

out of the financial crisis. So

26:37

governors that were thoughtful

26:37

about wanting to get private

26:41

sector capital formation to

26:41

their state, were, I would say

26:45

creative in their thought

26:45

process in terms of which census

26:48

tracts they designated. And so

26:48

we see a lot of census tracts

26:52

that also have institutional

26:52

investment that are not getting

26:55

the benefit of this tax

26:55

structure to invest in those

26:58

markets. So that's first and

26:58

foremost, secondarily, the

27:02

investment strategy has to make

27:02

sense. I mean, why grow your

27:06

capital tax free if it's not

27:06

going to grow? Right. So, you

27:10

know, this is a tax structure

27:10

that allows you a lot of

27:13

financial planning and tax

27:13

mitigation benefit. But the

27:18

biggest benefit here is long

27:18

term tax free growth. So if your

27:20

money is not going to grow, you

27:20

shouldn't be thinking about it.

27:24

So the investment strategy has

27:24

to make sense. And so to me,

27:27

this is typical investment, due

27:27

diligence that you would do on

27:30

any other investment. Is the

27:30

manager aligned is the structure

27:34

of the investment vehicle, you

27:34

know, does it make sense? Does

27:38

the underlying strategy make

27:38

sense? Does the manager have

27:41

experience executing that

27:41

strategy? You know, are they

27:44

going to be around long term are

27:44

they well capitalized, I mean,

27:47

these are 10 plus year

27:47

commitments, so you need to have

27:49

a manager that's there. So I

27:49

would tell you sort of the top

27:52

of the market is dominated by

27:52

three or four large fund

27:56

managers, and we're fortunate

27:56

enough to be one of them. But we

28:00

do see a lot of things that come

28:00

our way from prospective

28:03

investors on projects that

28:03

they're looking at. And you

28:06

know, to your earlier point,

28:06

that there's a potential high

28:10

risk of failure or just outsize

28:10

risks that they're taking, based

28:15

on sort of the underlying

28:15

manager, the investment

28:18

strategy, the lack of

28:18

diversification in the vehicle,

28:21

the assumptions that are being

28:21

made. So in our view, 10 plus

28:24

years, I want to be in the most

28:24

resilient part of the market,

28:27

the least cyclical part of the

28:27

market, that's rental housing, I

28:30

want to build, as I mentioned,

28:30

to the middle of the market,

28:33

which is the widest potential

28:33

tenant demographic, and I want

28:35

to be diversified, because

28:35

different markets are going to

28:38

behave differently at different

28:38

times. And by building a

28:40

diversified portfolio. I'm

28:40

effectively coming out of the

28:44

ground, recapitalizing assets

28:44

having to access the capital

28:47

markets across sort of a

28:47

different 24 month period across

28:51

my portfolio. And that's

28:51

certainly important when you

28:54

have capital markets disruptions

28:54

and you go through economic

28:56

cycles. So it's all about risk

28:56

mitigation.

29:00

Clint, what else

29:00

you got on this subject?

29:02

I think that was

29:02

about the perfect sum up from

29:05

that pitch perspective, right.

29:07

That's probably

29:07

the most layer. You've done this

29:09

before. Clear and concise

29:09

explanation. I have a question

29:15

that was asked to me and I said,

29:15

I don't know. I don't do

29:18

opportunity zones. Somebody said

29:18

to me, Look, it's clear that if

29:22

I fulfill my 10 year obligation,

29:22

I've got no taxes to worry

29:26

about. If I'm halfway through

29:26

the deal, and you're not excited

29:31

about where I am, is there an

29:31

opportunity to do a 1031

29:35

exchange from a QC to another Q

29:35

OC, you

29:38

can't do an

29:38

exchange from a QC to accusing.

29:41

So when you start there,

29:42

and I was asked

29:42

that and I said don't know. What

29:45

you have to do

29:45

is you have to take your money

29:48

out of the fund, which restarts

29:48

your clock to invest in another

29:53

fund. So when you take your

29:53

money out of that fund, if you

29:56

can, which in most cases you

29:56

can't, I figured that effect

30:00

actively, you're recognizing

30:00

that gain at that time that

30:02

becomes an inclusion event. So

30:02

if you're past the end of 2026,

30:06

and you've paid your tax on your

30:06

original gain, and you exit the

30:10

fund, you can exit the fun, but

30:10

you're not going to get the

30:13

benefit of any tax free growth,

30:13

which is, in theory, the reason

30:16

why you really did this. So it's

30:16

not advantageous. The things

30:20

that we see are broken

30:20

opportunities on fund

30:22

investments where, you know, you

30:22

had somebody that went out

30:25

pursuit on their own creating

30:25

their own opportunities on fund

30:28

and doing a deal, the deal is

30:28

not working, they take their

30:31

money out of the fund, and they

30:31

come into a larger, more

30:34

diversified vehicle like ours,

30:34

and restart the clock. There's

30:37

one thing that I want to add,

30:37

because I think this is

30:40

something that people don't

30:40

understand. And this is the

30:43

retroactive tax planning

30:43

benefits of this structure. So

30:46

as an investor, you have 180

30:46

days from the date that you

30:49

realize your gain to make your

30:49

opportunity's own fund

30:52

investment, and you can look

30:52

back across calendar years. So

30:55

you've got 180 days, the money

30:55

is fungible, you don't have to

30:58

use the gain itself to fund your

30:58

investment. As I mentioned, you

31:02

can just invest part of the

31:02

gain, but it's 180 days if the

31:05

gains are individual gains. When

31:05

we see individual gains. It's

31:09

the rebalancing of security

31:09

portfolios. It's selling a

31:12

concentrated position. It's a

31:12

personal residence, or it's an

31:15

investment piece of real estate

31:15

cell held as a disregarded LLC,

31:20

a single member LLC, which is a

31:20

disregarded entity. So those are

31:23

individual games, or self

31:23

collectibles, like, Paul, if you

31:27

were ever to sell your wine

31:27

collection was happening,

31:30

examples like that. But where it

31:30

gets really interesting is if

31:33

you recognize your gain in the

31:33

pasture, which is where large

31:36

capital gains events happen. So

31:36

think about, you know, s corpse,

31:40

anything coming on a k one, if

31:40

you recognize your gain in a

31:43

pasture, you can start your 180

31:43

days from the date of gain

31:46

recognition, just like

31:46

individual gains from the end of

31:49

that partnership tax year, or

31:49

from the entity's tax filing

31:55

date, which is usually March 15

31:55

of the following year, plus 180

31:59

days takes you all the way up to

31:59

September. So think about this,

32:02

if I own a piece of a business,

32:02

as an S corp, that business gets

32:06

sold. And let's just say that

32:06

business got sold in early 2023.

32:12

I could start my 180 day clock

32:12

on 1231 23. Take me out to June

32:17

or I could start my 180 day

32:17

clock March 15. Take me all the

32:22

way out to September of the

32:22

following year. Most tax

32:25

professionals aren't necessarily

32:25

aware of that. So, you know, as

32:29

we work with our clients in the

32:29

private wealth space, we say

32:32

look, do you work with m&a

32:32

attorneys? Do you work with tax

32:35

professionals, if you make them

32:35

aware of that, generally,

32:39

they're serving clients that did

32:39

have capital gains from the sale

32:42

of in the sale pass throughs in

32:42

2023, and they think there's

32:47

nothing that they can do to help

32:47

them they actually have all the

32:49

way up to September of 24 to

32:49

make an investment in an

32:52

opportunity fund. So just

32:52

tremendous flexibility in the

32:55

structure to do some retroactive

32:55

planning.

32:58

I know my co

32:58

hosts wheels are spinning up

33:00

been frozen for a long time

33:00

thinking about different

33:04

applications and conversations

33:04

that he'll start having. Am I

33:08

wrong? Clint, you

33:09

are not wrong.

33:09

You're not wrong, Nick, you are.

33:12

Expect some texts and phone calls.

33:16

On home here, the

33:16

title of our podcast is the fat

33:18

pitch. As you know, Nick, and

33:18

you know started with Ted

33:21

Williams. I don't know how many

33:21

your Boston guy how many

33:25

sections he said he divided the

33:25

plate into. But there's a reason

33:28

you know, he could pick where

33:28

you want to hit it. And then the

33:31

other day we were talking about

33:31

by the way, just decide now was

33:34

it with you Clint where you're

33:34

talking about Maddox, never even

33:37

getting to three balls, of

33:37

course until he faced Tony

33:40

Gwynn, who hit everybody. But

33:40

then Clint told us he lives by

33:44

the Buffett Rule, which is lived

33:44

like Warren for five days and

33:47

would like Jimmy on the weekend.

33:47

was my favorite but in your

33:52

mind, in that big multifamily

33:52

sector? What's the fat pitch? Do

33:56

you think?

33:57

Look, I think

33:57

the fat pitch here is the way to

34:00

solve the housing issue in terms

34:00

of affordability is to create

34:05

more housing. But there are

34:05

large barriers to do that. So if

34:09

I as an investor can get things

34:09

capitalized today when others

34:13

cannot, because the credit

34:13

environment is what it is I'm

34:16

going to have cheaper

34:16

construction costs, better

34:19

access to prime sites, and I'm

34:19

going to be delivering at a time

34:22

two and a half three years from

34:22

now when others are not. So our

34:27

view is the opportunity from an

34:27

investor's perspective is to get

34:31

deals capitalized now, get deals

34:31

in the ground now because when

34:35

you're coming out, it will be a

34:35

very advantageous time because

34:37

the demand is clearly going to

34:37

be there. But to create more

34:41

affordability in the housing

34:41

market, you need more housing,

34:44

you know, policy has not done a

34:44

good job of making that happen.

34:47

It's not political. It's

34:47

politically expedient, obviously

34:50

to greenlight projects in

34:50

people's backyards. But clearly

34:54

if you look at what's happening

34:54

in markets where you see a lot

34:57

of deliveries right now housings

34:57

getting more afford We'll. So if

35:01

we can reduce the barriers to

35:01

creating new supply, then we

35:05

will be in a situation where

35:05

housing becomes more affordable.

35:08

But we've got a long way to go

35:08

because the credit markets are

35:11

not going to be very

35:11

accommodative very quickly.

35:13

Yeah.

35:14

I don't think that March rate cuts coming anytime soon. Do you, gentlemen?

35:17

I mean, I'll say

35:17

who knows? Right? It's a 50 per

35:19

less than a 50% chance. Now,

35:19

according to Fed Funds Futures,

35:22

I think is it the higher the

35:22

video goes, the more hawkish

35:26

Powell has to be right. So

35:30

he's probably

35:30

working on bad Wi Fi out in the

35:32

country. So I got started, like,

35:36

I got great Wi

35:36

Fi. All right.

35:39

Let me give you one more thing to think about just quickly,

35:42

you give us one

35:42

more thing, it's a perfect sign

35:44

off for all of us. I know Nick

35:44

very well, he's gonna get the

35:48

last word. And no matter what

35:48

format we're on, if rates go

35:51

down in the

35:51

short term, I think single

35:54

family home values go up. But

35:54

building takes two and a half to

35:58

three years for supply to come

35:58

online. So the affordability

36:02

crunch is probably going to get

36:02

worse in the short term as rates

36:06

go down.

36:07

I don't disagree

36:07

with that at all. I mean, Clint,

36:09

and I look at three numbers

36:09

behind inflation. I started

36:12

working on this perfect storm

36:12

presentation at peak inflation,

36:16

summer of 22. And we broke it

36:16

down and looked at CRB. We

36:21

looked at home prices. And then

36:21

we looked at labor costs, Non

36:25

Farm Payroll and average hourly

36:25

wages and they all went through

36:28

the roof and went nuts. You're

36:28

right. Everything we talked

36:31

about constraining supply on

36:31

single family homes, all the

36:34

other conflicts of events. It

36:34

makes a lot of sense what you're

36:38

saying, Clint, any final thought

36:38

today before we wrap up?

36:42

No, Nick, thank

36:42

you. This has been enlightening.

36:44

Awesome, that pitch in

36:44

multifamily development. I can

36:48

see it. And I appreciate all

36:48

your wisdom in space. Yeah, look

36:51

forward to

36:53

Bella check lines

36:53

up, Nick. I know you're still a

36:56

big pats fan. But for Clint and

36:56

Paul on our guest today Nick

36:59

Rosenthal. Thanks, everybody for

36:59

tuning in to the fat pitch

37:02

podcast and we'll see you on the

37:02

next episode. Thanks for having

37:05

me.