Charlotte developer Clay Grubb is finding a way to balance unprecedented demand for affordable housing with an investment vehicle that meets the capitalist desire for solid returns.
Since 2019, Grubb Properties has raised about $350 million from about 800 individual investors to develop apartments in tax-advantaged Opportunity Zones. Late last year, shareholders of three Grubb funds agreed to consolidate into the Link Apartments Opportunity Zone REIT. (REIT refers to real estate investment trust.)
Grubb isn’t aware of another North Carolina group that has raised as much money for Opportunity Zone multifamily investments, says Clark Spencer, the fund’s portfolio manager and a Grubb managing director.
“We thought the scale of the combined portfolio would help our investors from a cost and diversification standpoint,” he says.
Grubb funds have financed apartments under the Link Apartments brand in markets stretching from Washington D.C. to Los Angeles and northern California. The 19 Link Apartments communities have about 4,935 units, while 16 more sites are in development or under construction. There are Link communities in the Charlotte, Triad and Triangle metro areas.
Congress passed Opportunity Zone legislation several years to spur development in more economically struggling areas. It became a controversial concept because some zones included very valuable property, particularly with real estate prices soaring over the last several years. About 8% of privately held U.S. land was included in the Opportunity Zone designation, Spencer notes.
Grubb Properties emphasizes “essential housing,” which Spencer describes as units that lease at rates affordable to those earning from 60% to 140% of an area’s median income. Link Apartments are mainly in densely populated urban areas and tend to be most popular with people under age 40, typically early career nurses, teachers, municipal workers and other types of professionals.
The company has been able to keep rents lower than many rival apartment developers by focusing on design and cost efficiencies. It acts as construction manager and offers only six floor plans, while some competitors have dozens of different ones. In an extreme case, Spencer recently visited a 397-unit apartment complex in Colorado that had 61 floor plans.
“By using the same plans, we save on architectural designs, while our construction people are getting better at making these units with less waste,” Spencer says. While noting the Link units are typically slightly smaller than rival offerings, “Clay says they are the six most efficiently designed floor plans in the country.”
Clay Grubb’s father Robert Grubb started offering affordable housing in Lexington in Davidson County in the 1960s by making loans to local buyers who otherwise were shut out of the market. His sons, Clay and Gordon, have emerged as two leading N.C. developers, operating separately with companies based in Charlotte and Raleigh, respectively. Clay became CEO of Grubb Properties in 2002.
Since then, the company has had 15 funds and deployed $1.6 billion in equity, achieving a 39.6% weighted average internal rate of return on the properties it has sold, company officials say.
The first Link Apartment development opened in Richmond, Va. in 2012, but most of the growth has come in recent years. The Opportunity Zone funds have spurred the expansion with investors generally seeking tax benefits in addition to exposure to the strong real estate market. About half of Grubb Properties’ investors are referred by registered investment advisers from across the U.S., with others coming from other marketing channels.
The legislation requires that Opportunity Zone properties be held for at least 10 years to achieve the maximum tax benefit, but Grubb has structured its funds so that properties can be traded without investors suffering a taxable hit.
Still, the plan is to hold the apartments for a lengthy period because Grubb officials believe that demand for affordable housing is a long-term trend.
”We are focused on the housing affordability crisis,” Spencer says. “We’re seeing a convergence of market opportunity, real estate expertise, real need and mission-driven investing.”