#390 - Barrett Linburg - Founder @ Savoy Equity Partners - Big Beautiful Opportunity Zones

Chris Powers: Barrett, welcome to the show. 

Barrett Linburg: Thanks. I'm glad to be here again. 

Chris Powers: This is round two, first time in the new studio. So, we're breaking this in and it's great to see you as always. 

Barrett Linburg: Yeah. Glad to come over. 

Chris Powers: All right. If you've listened to my podcast, you need to go back to the first episode I did with Barrett. We cover a lot there, but I think the best place to start is what has happened between the episode we did in 2022 and today. What's happened with your business? Where were you then? Where were you now? And we'll kind of kick off from there. 

Barrett Linburg: Yeah, and that was my first podcast episode ever. I didn't really know you yet, so I was a little nervous. So hopefully I'll do a little bit better this time. Thanks for the re-invitation. 

Chris Powers: Of course. Well, let's kick it off. 

Barrett Linburg: Okay, where do we start? You go. 

Chris Powers: So, let's just start with where is your company today? So, what did your company look like three years ago and what does it look like today? 

Barrett Linburg: Sure, so let me kind of reorientate you. So I've been in real estate for 20 years, been in the apartment business the whole time. Started as a mortgage broker, started buying and renovating deals in 2011. That was all friends and family. My mother-in-law was the equity on my first deal and grew from there, all friends and family, for another 10 years. And then started raising from more people a handful of years ago, but have bought and sold 30 deals now and today own about 30 properties, all Texas apartments. But in 2022, when we spoke, really didn't own that much stuff. We'd sold most of our stuff in ’19 to ’22. And so we were back trying to figure out like, what are we going to do next? And so, the answer to that was, well, we're going to do opportunity zone deals, so deals in certain census tracts, raising money from certain types of people with a very long-term hold lens. And we were raising money from folks and they were saying, well, what's the name of your firm? You're going to be around for a long time and you're raising more money. And so we had just started a new firm called Savoy Equity Partners. And that was in 2022, probably 60 days before we spoke last time we'd started this firm. So that kind of gives you your bearings again. 

Chris Powers: Okay, and remind me again, we've heard opportunity zones now for, I mean, the legislation passed, and when did it first pass? 

Barrett Linburg: Yeah, so opportunity zones have been around since 2018. 

Chris Powers: Okay, and at what point did you come to the conclusion, this is- one, I don't think I know anybody in the country that knows more about them. I mean, the amount of phone calls that we've had where I'm like, so you can do this? And you're like, yes... So if you want to know anything about opportunity zones, you got to call Barrett. But at what point did the light bulb go off, this is actually how I'm going to spend my time and investors' capital and build a company around this thesis?

Barrett Linburg: It was an accident. So we were just focused on Texas apartments making good tax adjusted returns. And in 2020, we found a portfolio of eight properties in North Oak Cliff, an area of Dallas that we knew pretty well. And we said, hey, we like these deals, called our normal tax- our normal real estate attorney. And we said, hey, we want to do these deals, let's get them into the title company. And he said, do you know that these are in an opportunity zone census tract? And we said, well, what's that? And he said, well, your investors can get a lot of tax benefit if you do it right. And we said, cool, tell us about that. And it turned out our CPA also knew a lot about it, which in 2020 was rare. Like there weren't a lot of experts on this stuff. So, our tax attorney knew, I mean, our deal attorney knew about it and our CPA knew a lot about it. So it was like, all right, we hit the jackpot there. So we got educated really quickly. And this eight deal portfolio got into the OZ tax structure. And it was also the biggest deal that we'd ever done. So we're trial by fire right away. And it turned out it was a really good fit for our investor base. And these were the investors that had been with us for a long time. So, we raised $7.5 million for this one portfolio, and it worked out really well. And that was kind of off to the races for us. It was like, this is a fit for what we're already doing in a market that we like, asset class that we like, and our investors like it. Let's keep going. 

Chris Powers: So do most of your investors, when they come to you, are you the one teaching them about opportunity zones or do they come to you already knowing what opportunity zones are, they've had some type of exit or some type of sale, and they're looking for the best operator GP to place capital with? 

Barrett Linburg: So, at first, there was a big learning curve with our investor base. I mean, we'd had these investors for a long time, and I'm going to them, luckily it was in 2020 when everybody had capital gains from crypto and stocks and real estate and everything else, and I'm just saying, hey, we have this new way to make better tax adjusted returns. If you've had a capital gain, you can put it with us, and we'll do even better on these good real estate deals. Now, I've spent five years in the space, and I've been yelling about this on Twitter and LinkedIn and on podcasts and to all my buddies and everybody kind of knows what we do. So yesterday, I had a call from somebody who unexpectedly made way more money in private equity than he thought and he's got $20 million capital gain, and he needs someone in the OZ space to talk about, to talk with. Is he going to give me all that money? I don't think so, but he needs somebody to be his OZ sherpa, and my phone rang. 

Chris Powers: Okay, then let's just do a quick primer. You can go back and listen to our first episode. You can go anywhere. I'm the guy – I'm not the guy – but let's pretend I'm the guy that had the $20 million capital gain. What are his options right now with that 20 million? 

Barrett Linburg: Yeah. So opportunity zone is a tax incentive that was created by the government in 2018. What it's meant to do is incentivize you, the guy who had a $20 million capital gain, to invest in certain parts of the country that need investment. So they've designated census tracts all over the country, 8,500 of them, as opportunity zones. So they say, hey, you who have had a big capital gain, if you invest here, we will give you tax benefit. There are three big tax benefits for investing in an opportunity zone. Number one, you owe taxes today from your big capital gain. If you invest here, you no longer owe those taxes today. You get to defer them. You still owe them, but you defer them. 

Chris Powers: 10 years? 

Barrett Linburg: No, for a period of time. I'm going to leave that vague for now because it's a moving target. There's OZ 1.0 and OZ 2.0 and the dates are changing, but just know that for now you get a deferral. 

Chris Powers: Okay. Fair enough. 

Barrett Linburg: So that's the smallest tax benefit from OZ investing. The much bigger tax benefit is, hey, you want to invest with me and my firm. We're going to go develop a great real estate project in a cool area that we've decided is really going to go up in value. And we're going to hold it for 10 years. If we hold it for 10 years and it goes up in value, you're not going to pay any taxes on the increase in value over a 10-year hold. That's the second benefit. The third benefit is we're going to use 100% bonus depreciation on that deal and give you a bunch of tax write-offs along the way for a 10-year hold. You can use those tax write-offs against other passive income, potentially even against the tax bill that you're deferring. So a lot of different ways. In a normal real estate deal, you have to recapture depreciation, which is like the dirty secret of depreciation. In an opportunity zone deal, you never have to. So those are the three big benefits. You get a deferral, you don't have to pay tax on the appreciation of the deal, and you don't have to recapture depreciation. 

Chris Powers: And I think one thing, just to go back, usually I would think of this in like, okay, it's a 1031, I'm selling real estate to invest in real estate. What you're saying is I can have a gain from equities, crypto, basically any type of gain that I've created in the business setting applies, can be applied towards an opportunity zone? 

Barrett Linburg: That's right. And so now we have about a hundred investors who have joined us over the last five years. We've seen it all. So you've sold art, you've sold your primary residence and had more than a $500,000 gain, you've sold a vacation property, certainly crypto, certainly your business, all kinds of things. 

Chris Powers: Can I challenge the number one on the deferral? And I know you said it's a little bit of a moving target. But if I'm going to give you my whole gain that's going to be held for call it a minimum of 10 years, at least right now in that moving target, could they still come to me in year five where maybe I don't have liquidity, it's parked in your deal, and say, you kind of owe the tax this year? 

Barrett Linburg: Yeah. So let's get more specific about when the tax is due. So today, OZ 1.0 rules apply. And those rules say that your tax bill is due in April of 2027. 

Chris Powers: Okay. So you know the date. 

Barrett Linburg: You know the day. 

Chris Powers: Whether you sold it in 2018 or April of ’24, the due date still the 20 of ’27. 

Barrett Linburg: April of 2027. That's right. So you know when it's due. So, if it was the guy who called me yesterday and he said, I made 20 million bucks, he knows that if he gives me the whole $20 million, then he knows that the tax bill on that whole 20 million is due in April of 2027. The nice thing about OZ, different than 1031, is he can choose how much of that 20 million he wants to invest in OZ. So, say that he wants to invest 5 million in OZ, well, he's going to defer the tax bill on the 5 million he invests in OZ. 

Chris Powers: So basically, a fourth of his gain he's deferring. 

Barrett Linburg: That's it. So 1031, you got to roll the whole thing. OZ, you can roll a piece of it. So it can just be a piece of a tax planning tool. 

Chris Powers: Okay. There's 1.0 which was from 2018 until recently, and the BBB came out, not the Better Business Bureau, the Big, Beautiful Bill. And I think a lot of people are interested in understanding this. What, as far as you know, changed or enhanced or is different from 1.0 to 2.0? 

Barrett Linburg: Yeah, so OZ 2.0, the big ticket thing is that this is now a permanent part of the tax code. So a lot of things that have to do with that, but I'm going to stick with that. Like, that's the headline, and I'm going to come back to it... Opportunity zone is now a permanent part of the tax code. So 1031 has been around for 100 years, and everybody knows it and thinks about it. Opportunity zone is now the same thing. So that's the headline. But let me get back to the deferral where it was a calendar date and we had until April of 2027. Well, now it's five years for everyone. And this is starting for investors after January of 2027. So, if you invest in opportunity zone fund in January of 2027, your tax bill is now due in April of 2033. You invest in ’28, April 2034, and so on. So it's a rolling five years, which is actually much more investor-friendly. So that's number one. Number two, the opportunity zone census tracts, which there are 8,500 today, those are going to change. So we know what the map looks like. It's looked the same since 2018. But next January, January of 2027, again, every state's governor is going to pick new ones for their state. 

Chris Powers: Is it 2026 or 2027? 

Barrett Linburg:’27. Yeah. So January of 2027, each state's governor is going to pick new ones. 

Chris Powers: In addition to the 8,500 or they might get rid of some, add some new? 

Barrett Linburg: Yeah. So for two years, there will be an overlapping map. And these transition- like we're in a weird spot right now. But now that it's permanent, it's going to get more regular. So every 10 years, there's going to be a new map. And there'll be a lot of lobbying. Like you're going to be down in Austin saying, I really want this one, not that one. There's criteria. It has to be below 70% of the area median income or have more than 20% poverty. So only a certain set of census tracts is eligible to be designated as an opportunity zone. But a new map is going to come out every 10 years. 

Chris Powers: Okay, I know we talked about this at some point; I think it was on a phone call. And walk me through this piece again, because there was a deal that we owned, that deal on 23rd Street, that cold storage building that I showed you. 

Barrett Linburg: Yeah. In Fort Worth.

Chris Powers: But we owned it. We bought it in 2016 or ’17, so prior to the opportunity zones even being around. So, somebody that wants to get ahead of the curve might say, I want to go start buying deals that are already- that might be in future opportunity zones. Has anything changed there where, so basically you're answering my question for me. If you own something that's in what will be a future opportunity zone, do you benefit from it at all? 

Barrett Linburg: There are workarounds. So this is like call your attorney type stuff. 

Chris Powers: Don't call Barrett. 

Barrett Linburg: Yeah. You can do like ground leases on them. You can lease it to another... like there's stuff, but it's deep in the weeds. It's not easy. And I wouldn't want to buy land and then speculate that that gets designated. You could certainly put stuff under contract towards the deadline. 

Chris Powers: If you go under contract and then legislation hits while you're under contract, by the time you close, you’re good?

Barrett Linburg: Yeah, I think the biggest benefit, say that cold storage building, like it's probably worth more in an opportunity zone than before, although maybe not. 

Chris Powers: If I wanted to go look at where are all 8,500 census tracts, do I just go to like opportunityzone.gov or something? 

Barrett Linburg: Just Google OZ map. 

Chris Powers: Yeah, and you can find them pretty easily. Okay, let's do real quick, we'll kind of bounce back into some of the legislation, but let's go to a case study. So, your big deal has been in this southern part of Dallas, Bishop Ridge. Walk me through like a case study of how that whole thing has played out. 

Barrett Linburg: Sure. So I mentioned earlier we started in 2020 buying eight properties in an area, Oak Cliff area of Dallas. At that point, it was not called Bishop Ridge, it was just a crummy area of Dallas where we bought eight buildings. 

Chris Powers: And really paint a picture of what- like walk the listener through what this area was like. 

Barrett Linburg: Yeah, so these eight buildings were like the worst, the worst properties in an already bad area. They were owned by a Japanese guy who'd never been to Dallas, managed by a property management company out of Corpus Christi that had never been to Dallas. It was 280 units that were like 20% occupied. The day after we bought, there was a murder in front of one... like drug-related murder in front of one of the buildings. The gang unit asked us to vacate one of the buildings a couple weeks after we- like everything that could be bad was- the city attorney was after us on one of the buildings, said that they were going to ask us to tear one of them down that we wanted to renovate. Like, it was just a really, really rough area and rough buildings. But our thesis was, hey, we're buying the worst eight buildings in this little three block by five block area. And if we fix them, then the area is going to get a lot better. And these properties are going to have real value. And so, we bought them and we gut renovated them, I mean, like $70,000 a unit, windows, doors, foundation, roof, mechanical, electric, plumbing, everything that you need so that you can have pride of ownership over a 10 year hold period. And it worked. 

Chris Powers: Okay, real quick, and this might not have anything to do with opportunity zones because obviously that's a benefit to what you're doing. But can you walk me through just a little bit, just because it's a bad area doesn't mean it could be good with some TLC. What about the location... You actually made a post on Twitter the other day I thought was awesome about Mike Avalon's lesson. But what about the location, and this is maybe just like how you view finding what could be the next great area, was in play that you go, yes, not good, we can improve it, but it's also got all these other amenities and maybe highway systems and things around it, you're like, this could be a good area?

Barrett Linburg: Perfect. Yeah. We were really deliberate about the area and had to be. And whenever we're trying to pick our next project or next site, we're really deliberate about this as well. So if you were to have done what we did in the middle of an area that was surrounded by other bad things, you would not have success. What we look for is an area like this that's surrounded by good stuff, whether that's private investment, public investment, ideally it has physical, natural barriers that allow us to control our own destiny. So in the case of this little neighborhood, which is three blocks by five blocks pretty much, it's got a highway on one side, a river on another side, a huge 40 acre park on the other side, and a school on the bottom. So now all of a sudden, it's three blocks by five blocks, but it has boundaries. And on the southern part, there's this park where the city's spending a billion dollars, city, state, and federal government are pumping in a billion dollars. Then we've got another park, then we've got a river, then we've got a high- So it's like, now all of a sudden, it's like a high fence ranch. And whatever I spend in the middle, I'm spending to benefit everything else I do in the future. Cool. I like that. And so once these first eight properties succeeded, and they did, we underwrote $1.50 rents and today we're hitting $2.20. So those worked. Now all of a sudden, I said, great, I can double down. So then we went and we bought six more properties to renovate. Then we said, well, how much land can we buy? Because I want to start being a developer. And so today, we have 16 properties that we've gut renovated, about 450 units. We're just delivering our fifth new construction building, which will take us to about 250, 300 units of new construction. And we have three or four new construction buildings in the pipeline as well. So, we'll hit a little over 1,100 units in a three block by five block area, a full build out. 

Chris Powers: Okay, we're going to get to how you've built the company over the last three years. Because clearly the team that started is probably not what you have today. But let's just keep going here for a second. So, you found this awesome location. I know that's where a lot of your work has been done. That's where you've publicly spoken. Are you doing this in other areas? 

Barrett Linburg: We're trying. I mean, I can't imagine we're going to find a lot more, like lightning in a bottle doesn't come along a lot, but would love to. And certainly, looking forward to the next OZ census, OZ map and working with the governor's office to say, where can we recreate this? 

Chris Powers: So you're going to get involved? 

Barrett Linburg: We already are. 

Chris Powers: In what capacity? How do you get involved? 

Barrett Linburg: Well, the governor has designated several people in the Economic Development Office to pick the OZ census tracts. 

Chris Powers: So what are you doing? 

Barrett Linburg: So we're looking very carefully at the eligible OZ census tracts and saying, hey, I think this one, we could do another Bishop Ridge. 

Chris Powers: If it was an OZ?

Barrett Linburg: If you designate it OZ, we would go here. What does that mean? We're spending several hundred million dollars in one census tract in Dallas. Wouldn't you, Economic Development Office, like us to do that? Because it's all federal incentive. It's no skin off the state's back to do this. So property taxes are going up, jobs are going up. The people that are moving here, we've looked at all of our data, their prior address isn't in the city of Dallas. So we're bringing new residents in. Some of them aren't from Texas. So, we're bringing new residents in. So new sales taxes. It's showing that the jobs being created are being filled by people that are moving into our apartments. So all those things are good. So, our pitch to the governor's office is like, hey, make this one a census, an OZ census tract. We'll do several hundred million in development here. 

Chris Powers: How are you actually talking to them though? So, you've clearly built a network within the OZ world. So, like, what are you Barrett doing? Are you getting in a car, going down to Austin, and there's some people you meet with? Is it happening in Dallas? Is it happening at the city council level? Like, who are you talking to and how have you made so much progress to where you're kind of like a well-known figure within the community now? The OZ community that you always wanted to join since you were a kid. 

Barrett Linburg: Yeah. Never envisioned this. So, five years ago on Twitter, I started talking about opportunity zone and apartments, for no reason. Just talking about what I did... And have grown an audience of 64,000 people who like listening about opportunity zone tax structure, which is so weird, this like really strange niche. That's grown into like me having this valuable audience that cares about this weird stuff. So, I got to play a part in the opportunity zone legislation that was part of Big Beautiful Bill. I went to DC three times over the last year and got to meet a number of senators who were part of drafting the language. Senator John Cornyn is very active on Twitter, and he manages his own account, and he and I send DMS to each other. And so, a member of his staff actually hooked me up with the economic development team for Governor Abbott. And so that's how I'm having conversations with them. So, it's just like these relationships have played out and become a part of the process, I guess. 

Chris Powers: Okay, everything you're doing right now is kind of in an urban setting. Do the same rules apply or the same kind of theses play out in suburban settings, like more rural areas, or is it, are people thinking about them differently? I know you really haven't done anything in a rural area, but maybe the question is more like what could be done in a rural area that might be different than an urban area or is it kind of the same thing? 

Barrett Linburg: Yeah. So as part of Opportunity Zone 2.0, there's some sweeteners for doing an opportunity zone project in a rural area. And rural has a pretty generous definition. So it's an area with 50,000 people or less or a census tract adjacent to that. So, if you look at like what qualifies as rural, it's pretty darn- like it's most of the state. 

Chris Powers: So like a 50,000, like compromising that city, the boundaries of that city?  

Barrett Linburg: So it's most of the state. And so, then you say, okay, well, what sweeteners do these rural OZ census tracts get? Well, number one, to qualify for the benefit, you have to do less improvement if you buy an existing building. We haven't talked about that, but I can go into it in a minute. And then number two, we talked about deferring your tax bill. Well, OZ 2.0, you also get to reduce your tax bill after five years. So, on any OZ deal, you get to reduce your tax bill by 10%. On a rural deal, you get to reduce your tax bill by 30%. So, it sounds like a huge difference. If you actually run the math, it changes your tax adjusted IRR by only about 50 basis points on a 10-year hold. So, it's not a huge sweetener, but most people when they hear 30% versus 10% do what you just did, and they say, damn, that's big. But the tax adjusted IRR only moves a little bit on a 10 year hold. 

Chris Powers: Okay, the equity comes in. So, when you set up your LLC or whatever entity governing doc's going to own or develop that property, it is designated as an opportunity zone legal structure fund? What about the debt side? Is it just typical, same debt you'd get on a market rate deal you're getting on an OZ deal? 

Barrett Linburg: That's it. 

Chris Powers: If we go back to Bishop Ridge for a second, I know you can answer this based on increased returns because of the OZ structure, but maybe the question is, could you have even done the deal without an OZ in place? Looking back now, in hindsight, obviously we were in a good market for a while, the last few years have been- but just in general, was this a deal that could not have been pulled off or just would have been harder to raise capital and convince people to do? 

Barrett Linburg: I think that we could have- well, the returns that we're hitting on all of our deals are commensurate with...

Chris Powers: Market rate deals. 

Barrett Linburg: Yeah. So, IRRs are mid-teens-ish, kind of commensurate with everything else that we would have pitched. So the OZ really is like a sweetener. Now I will say that our business plan is very long-term hold. And a big part of what we're trying to do in these neighborhoods requires a lens to be a very long-term hold. If you're going into a really rough area and saying, trust me, it's going to get better, like you have to have that lens. So, I think it's a good way to think about it, by saying, we're going in for a very long time and I'm getting this benefit for going in for a very long time. And so that sweetener is what allows you to draw the capital in versus somebody saying, well, why don't I just go into a credit fund? You can say, no, if you come over here with a different pool of capital, pull from a different pocket and think with a long-term view, and this is going to make a lot of sense. 

Chris Powers: Okay, let's go back to what you said a second ago on improvements. 1.0, remind me what the improvements were needed to achieve the OZ zone requirements, and has that changed going into 2.0? 

Barrett Linburg: Yeah, so there's three types of deals you can do to get opportunity zone tax benefits. So you can do new construction. So if you buy land, you have to improve that land by a more than insubstantial amount. So you can buy $10 million of land and build a $1 million barn, and that's fine. That qualifies. So no dollar amount, you just have to build something. Number two, you can do- you can buy a building that's been vacant. If it's been vacant for three years, and all of a sudden you open it back up again, you're good. 

Chris Powers: Even if you put zero improvements into it? 

Barrett Linburg: Zero improvements. Just has to have been vacant. There's a caveat to that. If it's been vacant for one year prior to being designated an opportunity zone, you're good. Which will be very important January of 2027. If it was vacant all of 2026...

Chris Powers: You don't have to meet the three-year requirement. 

Barrett Linburg: And you don't have to spend any money. You just open it back up and you're good to go, which in industrial, I mean, if it just didn't have a tenant for a year and you go lease it up, you get all those OZ tax benefits. So that's an interesting one. Then the last one is where everybody always gets tripped up. They say, if you buy an OZ deal, you have to double your money. You have to spend double after you buy it. And it just trips people up, but it's not really true. So, if you go buy this warehouse building that we're sitting in, you have to look at it and say, well, how much did the building cost and how much did the land cost? So, say this building was purchased for two million bucks, the land cost a million bucks, and the building cost a million bucks, if you want to qualify it for OZ, you'd have to spend another million dollars, the cost of the building, in order to qualify for OZ. So then you'd be all in for three million. Now the catch there is attorney's fees, interest carry, management costs, anything that can be capitalized counts for that million bucks. So, it's not an enormous hurdle, but it's a hurdle. 

Chris Powers: Who appraises the building value? Because obviously everybody would like to say, oh, the land was worth 1.999 million. The building was a dollar. 

Barrett Linburg: You can do it three ways. So, talk to your CPA and decide which way you want to do it. But the most commonly accepted way is you look at the tax rolls, and if they say it's 25% land and 75% building, then go with that. If they say it's 50-50, go with that. That's the most commonly accepted. Number two, you can do a cost seg and go with that ratio. Number three, you can just do an appraisal. So, any of those are accepted. 

Chris Powers: Okay, and then in your case, and I know you haven't come up on the 10 year yet, but what will happen at the beginning of the first 10 year run? Will most of these investors, are they- and again, I guess maybe you don't know, maybe everybody has a different idea, but what will be the plan after 10 years? 

Barrett Linburg: Yeah, so the way that the language in the legislation works is it says you're allowed to step up your basis in an OZ fund one time after 10 years. So, say that you set up the Powers OZ fund five, seven, eight years ago, and you bought five deals in your OZ fund. Well, once you've owned the Powers OZ fund for 10 years, you can now step up your basis. The question is, do you want to? Because if you own five deals, you want to step up your basis at the most advantageous time for you as possible. So, the question is what happens after 10 years? And it's really, well, if I know I'm going to sell all five of those deals in 2035, well, then I want to step up my basis in 2035. If I'm going to sell one of them in 2035 and the rest in 2036, I still want to step it up in 2035. So, it's really that, playing around with that, like when do you want to step up your basis? 

Chris Powers: Okay, real quick then. I think we glossed over this part at the beginning. What does the step up in basis do for you? 

Barrett Linburg: Yeah. So it's the same as dying. You literally get to take a market value for all your assets, which erases the tax on all your appreciation and all your depreciation recapture. 

Chris Powers: That's what it raises. 

Barrett Linburg: That's the mechanism. 

Chris Powers: That's the... Okay. I got you. I didn't know if that was an addition to. 

Barrett Linburg: That's the mechanism. 

Chris Powers: Okay. Now I'm going to ask a dumb question. So, Savoy sets up Savoy Bishop Ridge apartment building number three, and you're going to go raise money from 10 investors. And I'm one of them. Am I putting my money into your opportunity zone fund through an opportunity zone fund that I've created on my own? 

Barrett Linburg: So, a cardinal rule is that an OZ fund cannot invest into an OZ fund. We have solved that by taking money both into the Savoy OZ fund and from the Powers OZ fund and then putting them into the Bishop Ridge apartment number three deal. 

Chris Powers: Got it. So, the deal isn't an OZ fund, but the money going into it is. 

Barrett Linburg: The deal is what's called a qualified opportunity zone business. 

Chris Powers: Which is another thing you can invest into. 

Barrett Linburg: Which has investment from multiple opportunity zone funds. 

Chris Powers: Okay, can I keep going for a little bit? Doesn't the- again, now we're shifting a little bit. You can also, as part of the opportunity zone fund, invest in a business within that tract, correct? 

Barrett Linburg: Yeah. Unfortunately, because the way the legislation is written, it's really hard to make a business qualify. And cash flow, like interim cash flow, other than depreciation, really doesn't get any special treatment. What gets special treatment in OZ is the exit. The exit is tax-free. 

Chris Powers: Okay. So now let me just start over again because... So, you could create Bishop Ridge LLC, which is not an opportunity zone fund. It's just an LLC that's going to invest in real estate in the census tract. You and I are going to come into that LLC as LPs. You're going to have Savoy OZ fund as one LP. I'm putting in Powers OZ fund as another and that qualifies? 

Barrett Linburg: Yeah, so that Bishop Ridge LLC in your case would be an opportunity zone business. 

Chris Powers: Which is similar to what we just talked about? 

Barrett Linburg: It's just the nomenclature, so every piece of real estate that we have, we designate the LLC as an opportunity zone business. 

Chris Powers: Got it. Okay. As an LP, do I get to set my basis in that property on my own as just my tenth of the deal, or do we all do it together? 

Barrett Linburg: You all do it together, but the weird thing about opportunity zone is that your tax basis on day one is zero. 

Chris Powers: Say that again. 

Barrett Linburg: Your tax basis on day one is zero. So, the only way I can give you basis to depreciate against is either with recourse debt or qualified non-recourse debt. 

Chris Powers: And then at the end of 10 years, I guess there's no incentive to want to step up my basis to eliminate that tax at a different time period than another LP in the same deal would want to. 

Barrett Linburg: Well, in the instance we just talked about, Powers OZ Fund is an investor. Well, what if Powers OZ Fund invested in five deals, Bishop Ridge, but also something in North Carolina and Miami and Phoenix. So you... 

Chris Powers: Now we know where you're looking. 

Barrett Linburg: Yeah, not me. But if you made those investments in multiple places, maybe your Phoenix deal is selling and I'm not selling Bishop Ridge. Well, you're going to want to do a step up in basis before that Phoenix deal sells. 

Chris Powers: But you have to do it across all five deals? 

Barrett Linburg: Well, you only have one chance to step up your basis. 

Chris Powers: Gotcha. So in that situation, might you end up paying some tax if the step up in basis doesn't cover, like one deal just runs and just crushes it? You might end up paying some tax. 

Barrett Linburg: So, say that you do your one time step up in basis in 2033. And then Bishop Ridge doesn't sell till 2035. So, you said when you stepped up your basis that Bishop Ridge was worth whatever, that project was worth 10 million bucks. But I end up selling for 12. So then you would sell that to them. 

Chris Powers: So, is the lesson there just don't do five deals in one OZ fund? Just do each one on its own. 

Barrett Linburg: Yeah, you could. 

Chris Powers: So let me just ask maybe the obvious question. Why would you cram five deals into one OZ? Because you just don't want a bunch of paperwork and tax returns? 

Barrett Linburg: Maybe. But like all of the big, there's a dozen billion dollar OZ funds and they're doing a lot of deals. 

Chris Powers: But those are companies set up to bring in lots of capital for lots of people. But if you were just an individual, it might make more sense to do them separately so you don't run into a situation where you're paying tax purely because one of your deals killed it. 

Barrett Linburg: That's right. 

Chris Powers: I gotcha. Okay, let's go back more to just company stuff for a second. So, describe what the company looked like employee wise, capability wise in 2022, and then maybe the evolution of thought on like what the company needs to look like going forward to build something that's sustainable, long-term, has enterprise value, et cetera, et cetera. 

Barrett Linburg: Yeah, so my business partner Seth and I have been doing deals now for seven, eight years. And so, in 2022, when we started Savoy Equity Partners, we really joined forces to start Savoy and also there was a property management company that still exists today. That was it. So we had property management and then we had investment development. So since then, we formally started a construction company, which was a spinoff from the management company. So, the construction company does renovations. 

Chris Powers: Not ground up. I’m getting ahead of myself. 

Barrett Linburg: So we started doing renovations formally, which we'd been doing for 15 years. But it was just kind of, we were just doing it on our own. So, we gave that a name. And we also started doing all the property management for ourselves formally. So now we've got three companies. And then we ran into a very interesting issue last year. So, we had purposely said, hey, for this ground up construction, we're going to use third-party GCs. We're really good at renovations. We've done 40 plus deals, even gut renovations, but for ground up, we're going to hire a third party. That's hard, it's a different skill set, whatever. And so, for four deals, we did. And then for deal five and six, we hired another third-party GC, a different one, but another one. They gave us great pricing. We got good referrals, vetted them, the whole deal. About six weeks after we hired them... When you hire a third party GC, you send them a mobilization draw. 

Chris Powers: What’s that?

Barrett Linburg: A couple hundred thousand bucks on the front end to cover certain expenses for their office and their overhead. You're paying their insurance for the life of the job. It's a big deal. These were both 20 plus million dollar jobs. And some of the guys who'd given me the referral called me about six weeks later, and they said, hey, you need to check on this guy. I don't think he has insurance. I said, what do you mean? I wrote him a big check and I have the certificate from his insurance agent, and I'm supposed to get 10 days notice of cancellation like if he doesn't have insurance. Now, keep in mind, we have insurance. Like there are several layers of insurance, but it wasn't good. And so, I text- I call the guy, he doesn't pick up. I text the guy, what's going on with your insurance? He said, I'm working on it. Oh. So, then I call the insurance agent. Cause I have the certificate. I know who it is. And she said, he does not have insurance and he's never had insurance. Oh, okay. 

Chris Powers: So how did he get the certificate? That's not your... 

Barrett Linburg: So, I fired him immediately, like within one hour he was fired. So, then I had to go through the process of telling- this was a partnership with the city of Dallas. I had probably our most- we don't have any real institutional equity, but like our most institutional equity partner and our lender. So, I had to go through with them and explain like here's what happened. Here's how you do have insurance coverage and here's how we didn't. And here's why we fired our general contractor last night. And so, then we had to make a decision, who's our general contractor going to be? Are we going to go hire somebody else, or are we going to do it? Because we talked about doing it. And so now we're a general contractor. So for the last six months, we've taken over and he was the GC on two jobs. So for the last six months, we've stood up our own GC business. We've hired a really great guy from Streetlights. And we hired several of the superintendents and project managers that this guy who's now bankrupt and we've sued and have a judgment against, but it doesn't matter. So we hired some guys from his shop. And it's actually a blessing in disguise. But so now we have that business... 

Chris Powers: So property management, development investment, construction. 

Barrett Linburg: Renovation construction and ground up construction. And we've officially hired a guy who is really doing asset management, and that's really underneath investment development, but might stand that up as its own business. And so, it's interesting. 

Chris Powers: Are all these businesses only focused on Savoy owned properties or are you doing business for other people now? 

Barrett Linburg: We're doing business for other people. So, our property management business, we have 1500 units ourselves and we're managing 6000 units. Our renovation business, we might not do anything for ourselves, like anything meaningful for ourselves this year, but we'll do 50 million in revenue, I mean, in work. Ground up, we'll only do our own deals this year, but we're actively searching for third party. So, our hope is that we're doing business for others and we're excellent on our own stuff. 

Chris Powers: Okay, didn't think I was going to ask this, but you just described a couple of situations. And obviously we know, maybe I'll ask the question like, how do you know if your GC has insurance, but that's really not what I'm getting at. Costs have gone up. Deals are tight. I think I certainly have been through this at certain phases of my career, but I know a lot of people. You're trying to thread this needle of how do I get construction that can deliver on budget, which is number one, which sometimes pushes you towards maybe working with a contractor that might not have insurance or they might not have the expertise you thought they have. And the amount of times you hear this story of hired a contractor, didn't work out, and they tended to be maybe the low cost provider, maybe not. But if you from what you've learned, if somebody is listening to this and they're trying to decide how do I hire a third party contractor ground up, what should they know or what would be the things that you would go through if you didn't have your own and you were about to go hire a contractor knowing how deals five and six went? 

Barrett Linburg: Well, and so I just went through that story and said we've stood up our own GC. Our next job is a 315 unit wrap deal that'll be our biggest job today. And we're not building that ourselves, we're hiring a third party GC. So we've just- because basically what I said to our- and we evaluated our team, we had not hired up to the point where I felt we had the estimation capabilities and even the project manager and superintendent to be able to execute on that really well on our own account. So, we just went through the process of bidding and vetting multiple contractors. And we interviewed and took through their paces three really good GCs, because on a 300-plus unit deal, you can. And actually, the Cadillac group, who you probably know well, but a very Cadillac group came in and won the deal at the end. 

Chris Powers: Was it all on price or was there other considerations? 

Barrett Linburg: All the above, but they actually won it on price. We'd internally made a decision that there's so much- they are so respected in the community that there was a number where even if they were higher, we probably would have gone with them, but they won it on price also. 

Chris Powers: Okay, then let me ask the question a different way. Now that you've been through this several times, what are things that you used to hear in a meeting that you thought oh wow, this is awesome, that now when somebody says that, you're kind of like, yeah, that's just all sales talk, that has nothing, that's not a good indicator of what I'm...? Is there something that like you've matured past, like no matter how many times you hear it, that will never sway your decision? 

Barrett Linburg: Well, certain things like, well, I can save you money on this because I'll self-perform it. Or like you just hold the contingency on your side. I don't need any. Things like that, just like... now those are red flags. 

Chris Powers: Yeah. So you look at their body of work. You've seen their portfolio of what they built. You probably call some references. What about bonding and insurance? 

Barrett Linburg: Yeah. What's your bonding capacity? Now... like the insurance deal has me so spooked because I don't know if the dude had insurance, like I've seen- I held the certificate. I don't know. 

Chris Powers: Do most of these contractors tend to use the same subs or do they all use different subs or do some of them own their own subs? 

Barrett Linburg: All the above. Yeah, and you're up and down the scale of like who's using more pickup truck guys and who's using the guys who have their name on their truck. And I think where I've gotten to and where we're going with our own GC is like, what percentage of the subs can you take risk on? And how many are you- and which subs are you unwilling to take risk on? So, on a framer, we're not willing to take risk. Or on the foundation guy, you're not willing to take risk. But on a drywall guy, am I willing to maybe go with an unknown or go with the lower bid? Maybe, if I can find... and so it's like, am I willing to say on five out of 35 subs, take some risk? Hey, this guy's going to be a pain. He's going to give me his invoice on a napkin, whatever, yeah, I'll take that risk on five of them, but not in these in these divisions. 

Chris Powers: Okay, let's move to property management for a second. Arguably one of the most important aspects of the whole industry but also the toughest and it's like the old saying, nobody calls their property manager to tell them how great of a job they've been doing. As you think about property management, and maybe again, I know you own a company, so this isn't a sales pitch on why to hire Savoy, although maybe you should, what matters when you're looking at a property manager? Because what I've found over time, a lot of the bidding is just a race on price. It's not a race on customer service and quality and everything else. And I'm not looking for some magic answer, but you manage 6,000 units, 1,500 of your own. And I think property management is arguably more important today than it's ever been, the quality of properties, what people expect. You have apps, you have all these different people competing for different amenities. Like what really matters? 

Barrett Linburg: Yeah. And I'll say it is a brutally hard business. I've tried to stay out of it and leave it to my business partner. 

Chris Powers: Yeah, Seth, he's amazing, by the way.

Barrett Linburg: But we talk a lot, that it's just really, really hard. So, what is the most important, and I think we just constantly need to push ourselves to work on it, it's just like having the human experience with your tenants. People just want to be heard. They want to know that you care about them a little bit. And that's true whether you're in a totally C-class deal or in a AA class deal. And as we go more towards AI and more towards everything else, what you have to balance is like, how do you have that human experience with your tenant, but also automate and make sure that everything is like clicking at all levels. And that's a hard balance. 

Chris Powers: It's hard. Okay, so sometimes we tend to weave in and out of stories. So we've now hit our 10 year mark. It's been awesome. You crushed it on the OZ deal. And you're sitting here like, look, I kind of want to keep owning this thing. This thing's got juice. And I'm an LP going, I want out. And again, this happens in market rate deals too, but maybe not like what you'll see in OZ where the real mentality is long-term. It's not these three to five-year holds. Can I just go sell my LP interest in the deal? If we make an agreement, I'm out. You're going to continue holding it and maybe another group comes in, or have you thought- have you even thought that far? 

Barrett Linburg: Yeah, potentially you could. I think with our- I mean, we're basically syndicated from high net worth folks, so that's pretty hard to do. We do have the rights in our deals to exit as like a REIT, which I don't think we would ever do, but like we have that ability. And that was our attorney in 2020, like to think that that's in our docs in 2020 when we were doing an eight deal like rehab, but we put that in, and now thinking that we're going to have over 2000 units in the OZ structure maturing at roughly the same time. Is that possible? Maybe. 

Chris Powers: Could one OZ fund, so let's say, let's just assume it was one single fund that did your deal. 10 years is up. Can a new OZ fund come recapitalize them out and it starts the clock over again? 

Barrett Linburg: Probably not. Because of what we talked about earlier. You have to substantially improve it or develop something or... So, it doesn't really work like that. But if you exited as a REIT would give everybody liquidity, so then they could sell as they wanted to. But the overriding thing is like, look, when we sell, nobody's paying taxes. So like, what's my incentive to hold on? 

Chris Powers: That's actually true. So 10 years... 

Barrett Linburg: As long as we're happy with the price, like if the market kind of sucks, like it has the past 18 months, I'm probably going to say let's wait. But in general, if I feel like we're at a decent time, why do I want to hold on? 

Chris Powers: Didn't think about that. All right, let's kind of bring ‘er home on you said the markets kind of sucked the last 18 months. What are you seeing in the market from your view of the world? I know you're not a predictor of interest rates in the future. You probably wouldn't be doing OZ deals. You could just go trade bonds or something. But like, what does the world feel like to you right now? 

Barrett Linburg: Yeah, we're finding more deals than we're finding money. 

Chris Powers: Great. OZ deals? 

Barrett Linburg: Yeah, that's all we look for. So, we're doing something very specific, which is we use the PFC tax structure, which in Texas, some people don't know what that is. Some people think it's awful. There have been headlines about HFC deals, which are not PFC deals. 

Chris Powers: Okay. What are PFC and HFC? 

Barrett Linburg: So, PFC deals are public facilities corporation. So we make a deal with the city of Dallas with a local partner. Local partnerships or local cities want affordable housing. And we as the developers don't want to pay property taxes. And so we make a deal with them. We say half of our units are going to be affordable housing. So we're going to rent to low income folks and we're going to give them a discount on their rent. And in exchange for that, we're not going to pay property taxes. 

Chris Powers: In Dallas?

Barrett Linburg: In Dallas. So we make the deal with the city of Dallas for properties that we're going to build in the city of Dallas. It's a big pain. We have to go through... 

Chris Powers: What’s a pain?

Barrett Linburg: Getting the deal done. So first we have to go to the PFC board. Then we have to go to the housing and homelessness commission. Then we have to city council. Then we have to go back to the PFC board. So, four meetings, usually takes six months. But we've done more in the city of Dallas than anybody else. We've now done our ninth one. 

Chris Powers: Real quick, are these PFC deals that are also in an opportunity zone structure? These are like- 

Barrett Linburg: Yeah, we combine it. 

Chris Powers: I'll get there in a second. 

Barrett Linburg: So, in general, it's accretive to the yield on cost by a hundred basis points. So, we're taking deals that are of 575-ish and taking them to a 675. And for reference, for anybody who's not a real estate nerd, 575 today is not attracting debt or equity. And 675 is like above what everybody's looking for. So, all of a sudden, our deals are in the sweet spot of being able to get capitalized. And so that's what we're doing. 

Chris Powers: All right. I'm just- bear with me here. PFC OZ. It sounds like you're like, are you double dipping? Are you getting like double the fun here? How does that- because you're already saving on all the taxes by doing an OZ deal. So now you're just eliminating property tax as well along the way. 

Barrett Linburg: That's right. So the highest and most volatile expense for Texas investors, we get rid of that too. 

Chris Powers: At what point in that six month cycle- is it a foregone conclusion you'll get it? 

Barrett Linburg: No, I mean, now- 

Chris Powers: When do you know you won't get it? 

Barrett Linburg: We've done 10 of them now, so we know what the box looks like. And we've gotten denied a couple times too, not recently, but early. So we've learned what we're capable of and what we're not. So, in general, we feel pretty good about it when we go in, but it's never a done deal till city council does. 

Chris Powers: Okay. I'm not inviting you to tell your playbook so that you have a lot of competition around Dallas. At a high level, what qualifies as a PFC deal? And do you have to already own the property, or do you go to a seller and say, look, we're going to put you under contract, we can't pay you for six months because this needs to happen first, and we'll close as soon as we get the designation? 

Barrett Linburg: Yeah. And to be real clear, we made some very expensive mistakes with some earnest money, and it was not investor money. It was out of my wallet and Seth's wallet where we tied some property up and we lost earnest money because we were too confident. But now we kind of know like, hey, you've got to do new construction, it's got to be in a certain area, which city councilmen are for this and which ones will not support you, which neighborhoods will fight you and which ones won't, how big does the deal need to be, what does the unit mix need to look like, like all those things. And then you go. 

Chris Powers: How... could you do a duplex, or does it need to be like a hundred plus units? 

Barrett Linburg: And really, a hundred isn't even big enough. So, it needs to be kind of 200 plus units or we've figured out how to do a couple deals at once. 

Chris Powers: Is that because of the way the legislation is written or it's just not worth the time, brain damage and cost to do anything less? 

Time, brain damage and cost. So generally, at closing for one of these PFC deals, you're going to spend three, four hundred thousand bucks on legal fees. 

Chris Powers: Got it. Yeah. You wouldn't go do a duplex. 

Barrett Linburg: Yeah. I mean you can. 

Chris Powers: So, you are maybe one of the only people in the country doing PFC on top of OZ deals saying any tax that could possibly come my way, get out of my way. 

Barrett Linburg: You and I are gray haired in a young age. 

Chris Powers: Are you using like the same legal team and consultant team that just now has your playbook and now you're just kind of ripping through them? You’re not doing these without consultants and legal? 

Barrett Linburg: Yeah, we do our own PFC stuff. I mean, not the legal, but like we don't have an outside PFC consultant. 

Chris Powers: Are costs coming down at all in construction? Are you seeing any...?

Barrett Linburg: Flat.

Chris Powers: Flat? It's not growing... Inflation is kind of tamed for now. 

Barrett Linburg: I would say the labor is what's coming down. 

Chris Powers: And you're just focused in Dallas right now for the meantime? 

Barrett Linburg: We have a deal under contract in Austin. We just completed, and now it's 70% leased, a deal in San Antonio. 

Chris Powers: All OZ deals? 

Barrett Linburg: All OZ. But we're primarily looking in Dallas. We like Dallas. 

Chris Powers: Dallas is pretty good. 

Barrett Linburg: Fort Worth is too. Fort Worth is too. 

Chris Powers: Fort Worth's pretty good. All right, if people want to get in touch with you or learn more about what you're doing, how would they reach out to you? How would they connect with you? 

Barrett Linburg: Our website is savoyequity.com. I'm very active on Twitter and LinkedIn. Reach out. 

Chris Powers: Barrett, thanks again. 

Barrett Linburg: Thanks, Chris. 

Chris Powers: Appreciate it.