A Henrico County-based real estate investment and management company is developing three apartment buildings in Scott’s Addition and raising some of the money to pay for the projects under a new, federal tax incentive program for investors.
Capital Square plans to spend about $82 million developing the three complexes that will have a total of about 390 units.
“It dawned on us as one of the largest investors in multifamily in the Richmond area that it was time to develop projects. About the same time the [federal] opportunity zone statue was out,” said Louis J. Rogers, the founder and CEO of Capital Square, which sponsors tax-advantaged real estate investments that qualify for tax deferral under the Internal Revenue Code.
“What makes these projects unique is they make sense even without a tax cut benefit,” he said. “They are great projects before they qualified under the opportunity zone. The tax benefits are the icing on the cake.”
The federal opportunity zones program, created as part of the federal tax overhaul in 2017, would reward investors with tax breaks for putting money earned from other investments back into businesses or real estate projects in more than 8,700 census tracts around the nation.
In the Richmond region, opportunity zones include census tracts covering land between Broad Street and Interstate 95 stretching from Scott’s Addition to the VCU Medical Center.
Capital Square is creating three separate funds for the three developments rather than having one fund with a variety of projects, Rogers said. “That way investors can do due diligence on each project and not put their investment into a blind fund,” he said.
The three projects are:
Scott’s Collection 1:
• The five-story, 75,000-square-foot building at 3000-3008 W. Clay St. at Altamont Avenue would have 80 units and on-site parking.
The project would cost $17 million, with Capital Square planning a $7 million equity raise in its project-specific opportunity zone fund, formally called CSRA Opportunity Zone Fund I LLC. Construction would start around the end of the first quarter 2020 and be ready about a year to 18 months later. The two parcels for the project are under contract and should close in September.
Scott’s Collection 2:
• A block east would be the 60-unit building at 2900 W. Clay St. The 65,000-square-foot building also would have five stories. This development would cost about $13 million, with $4.5 million to be raised.
The timetable for construction and completion would be about the same as the Scott’s Collection 1 building.
Capital Square closed on that parcel on Tuesday.
Scott’s Collection 3:
• The plans for a building at 2911 W. Moore St., near the intersection of Moore Street and Altamont Avenue, would be Capital Square’s biggest project.
The building would have about 220 to 250 units and feature a swimming pool and gym. The project is expected to cost $52 million with the company planning to raise $21 million in equity.
Construction would start by the end of the second quarter 2020 and take about 24 months to complete. The parcel is under contract.
“Part of the idea is that the buildings will be incorporated together,” said Adam Stifel, Capital Square’s executive vice president who oversees the company’s development division.
The three buildings are within a couple blocks of each other, he said.
“They will share amenities and they will be leased together,” he said. “They will be special to each other architecturally. We are trying to bring something with a little more industrial sizzle to the neighborhood.” Scott’s Addition, Rogers said, is a good place for investments in apartments. The area, he said, has a 97.6% occupancy rate with apartments there generating rental rates that increased 8.1% on a year-over-year basis and are projected to increase 3% to 4% per year for five years.
Stifel, who had been a Washington developer, started talking to Rogers about financing the three projects he had in Scott’s Addition. That turned into Stifel joining Capital Square. “We decided it was a marriage made in heaven,” Rogers said. “We put ourselves together in the same company to develop mixed-used apartments in [federal] opportunity zones across the Southeast.”
Stifel said Capital Square has an “incredible setup” with the right investors for these types of projects. “So it made sense for me to come in house and combine forces,” he said.
The three projects in Scott’s Addition were far enough along to be the first ones to use Capital Square’s project-specific opportunity zone funds, Rogers said.
For investors, Rogers said, that’s an important factor.
An investor who has profited from the sale of stock, a business or property can defer the capital gains taxes by rolling over the money within 180 days into so-called opportunity zone funds, which would invest the money in business or real estate developments in one of the opportunity zones across the country.
The fund has 31 months to construct a building, he said.
“We have the land that is zoned. We have developments that are easily buildable within the time frame,” Rogers said.
Capital Square plans to offer investment opportunities on other project-specific opportunity zone fund developments within a few hours drive of the Richmond area, he said.