Behind the Scenes of HB Capital Feat. Arthur Hood & Jeff Hiatt

Foreign.

So right now we are at Arthur Hood's, one of his development sites here in downtown Phoenix. Do you want to share a little bit about the project?

Yes. This project is with me and my partners, Russ Colvin and I with Eurospace America. This is a brand new generation 5 storage facility that we're building right here next to Diamondback Stadium in Phoenix. The site here, incidentally, used to be an old ice manufacturing and site for Phoenix a hundred years ago. And we're turning it into a storage facility for all the new residents in the area.

How many units is it going to be?

This one is going to be about 158,000 square feet.

And it's climate controlled.

All climate controlled, all gen 5, all lighted hallways, all energy saving.

And how much capital are you going to be raising for this project?

This one's fully raised. Our cost is about 26 million.

And then you're doing construction financing. And then do you plan to hold it or sell it once it's complete?

It is an opportunity zone.

Oh, nice.

We'll hold this one for 10 years.

10 years. Okay. And can you explain a little bit about what an opportunity zone is?

Very simple answer is as long as you hold that investment for 10 years, you can exit it and you don't have to do a 1031 and all the profit is tax free. So as long as you hold the investment for 10 years, the exit becomes tax free. Cool feature to it is there is no recapture of the depreciation.

Amazing.

So whatever depreciation you have, you don't get recaptured at the time of exit. And if the profit on the deal is 10 million bucks at the end of 10 years, you don't get have to 1031 that into another piece of real estate.

And so we have Jeff Hyatt here, who's the master of cost segregation with Ms. Consulting. Can you explain a little bit real quick on what cost segregation is and, and why it's so beneficial for projects like this?

So sure, what cost segregation allows the client to do, the property owner is to accelerate the depreciation, helping them reduce their income taxes today so that they can either redeploy that capital or use that capital however they want want as opposed to sending it down to Washington.

D.C. cost segregation is one of these tax strategies that we all use as real estate investors and developers. So it's a $26 million total cost. Quick math, that's about $6 million of tax savings that that depreciation can be accelerated and reduced from the income tax year. One of Starting the project.

Correct. So the way it would work is they would get it right away, they would get a chunk of it. Depending on how the tax things go in Washington D.C. it might be 100% bonus. If it does not go forward, then it would be 40% bonus for 25 and 20% bonus for 26.

Yep, exactly. And so that's what's so nice. And that's the strategy that a lot of us use to save on taxes and be able to compound our wealth quickly roll those proceeds into other developments. And because this is in an opportunity zone, they are not going to have a recapture at the end of the 10 years and they will just keep that tax savings forever. Where normally if you sell it, there is a recapture of that and you would have to recoss the next property or pay your taxes at a future date. What's your structure look like for this opportunity? What's the time period? Well, you said it's a 10 year hold.

It's a 10 year hold. Most of our deals are on a 7030 structure.

I mean 70% of the equity goes to the investors and 30% goes to the sponsors. Which is Arthur and his partner.

Correct. And depending on the deal, because we have several different deals, we pay somewhere between a 7 and a half and a 10% prep depending on the project. And through that project then you get your equity split.

Yeah. And so if you don't know what a pref is, is a preferred return. So basically this is a very common structure where let's say I invest $500,000 into this deal. I'm going to make an 8% pref on my money each year so I have some cash flow. Are you paying it out? How often do you pay the prep?

We pay the prep out. Once the property cash flows, the prep is accrued and then it pays out.

Perfect. So ye this structure, it's an 8% prep per year that will accrue each year until the property starts cash flowing and then the investor will start getting their prep and get their equity payout. Which is the 70% of the equity for their portion of the investment.

That's correct.

Cool. Well, let's go check it out. There's a B.

Every job has something that happens that's unplanned. And when we started this, we found ammonia tanks left from an ice manufacturer. And you can say how big they were. They were huge. Huge.

They were about 24 foot across right out there. We had a hole that was 35ft deep.

And what was the cost? How did that Impact the deal about 150 grand. Yes. This is what the project's going to look like. So we have a public storage right here. So how do you determine, you know, if there's enough demand in the area where when you have some other big competitors close by?

We look at it by the number of rooftops, the number of people, the number of apartments or new housing that doesn't have storage as much in their new houses. A lot of these houses don't have a lot of storage in them. And there's a tremendous amount of rooftops in this area. There's a lot of apartments. And then we have no problem filling up because we will poach a lot of the people from the non climate controlled who feel safer. And there's stuff that lasts longer in our storage because it is climate controlled. It is top tier, it's safe, it's locked, it's got cameras, you know, and one of the things is just the new, the new help. And since the municipalities are hard to approve, there's nobody else going to be Right here next to Diamondback. You can see all the apartments over here, all the student housing here. All these people are our customers.

If you're a real estate investor or you're a doctor, you have a professional career and you just want to invest in real estate and get some of these depreciation benefits, but you don't want to be an active developer and do the business of real estate. You can still get those pass through depreciation based on how much you invested in the deal and get those tax benefits by investing in a project like this with Arthur and his team without having to go out and buy your own, you know, 100% of your own assets. So it's a really great strategy for people that want to get some tax benefits. A lot of people, you know, can have one member in their family be classified as a real estate professional.

And that's the pro tip? Yeah, that's the pro tip right there.

Yeah.

But I, I can see a day that AI kind of replaces a pharmacist because at the end of the day, the tech puts the pills together and that's really it. I mean, everything can be done a different way, right? Same thing. You know, they've already proven that AI reads radiology reports better than a doctor and it finds things that doctors miss. Now there will always be doctors, but maybe not as many. The skill sets that are going to be needed is your plumber, your H Vac, tech, things that somebody has to physically go do.

Yeah. And it's scary too, with all the deportations happening on job sites and stuff right now. Yeah.

Not to get political, I understand it. But at the same time, we need the labor.

Right.

I just. It's a fact. We need the labor. Right? Wrong or indifferent, we need the labor.

All right, so right now I am with Arthur Hood and Jeff Hyatt. We are in Arthur's plane about to head to Vegas. We just finished looking at one of Arthur's projects here in Phoenix. 150,000 square foot development project. Obviously I'm with HP Capital. We help raise debt and equity for our clients for various different types of projects. Arthur's raising equity right now on this storage deal as well as multiple other storage deals that they're developing between here, Tucson and Vegas. And we're headed to Vegas to take a look at a few projects and. Yeah, and then we're going to hit a podcast afterwards, talk about cost seg and tax strategy and real estate investing. It's going to be a good day. We're out here in Vegas. We're about to go check out some of the projects that Arthur Hood with your space America is developing. We just flew in and we're super excited. So let's go check them out. How many people do you have on your team at Yourspace America?

At Yourspace, we have about a six man development team full time, which is so cool.

And that's because the way you guys have it dialed in where you, you, you know, hire a contractor, you don't have your, you don't have an. Thank you. You don't have an in house construction company.

No, I, I have an in house construction company with my home building business. That's enough.

Oh yeah, back in oh 2, we did a bunch of projects. We were doing five or ten projects a year back then and we ended up doing some product properties that had been sold in a sale leaseback. So we did for the buyers, cost SEG and we saved those guys about $4 million of income tax. And their CPA said, oh my gosh, this is amazing, you need to do a seminar. And so I said, well, okay, that sounds great. How would we do that seminar? And he goes, well, I'm on the board, I'll get you in. So we got connected into a CPA society and we did the seminar for them. In early 03, we had 85 CPAs show up at this event. We talked about cost seg for a couple of hours and we went from doing five or ten projects a year to doing a couple of Hundred now we do about 1500-1800 a year. So that one connection that. That guy, for him, it was a kind of a throwaway connection. It didn't matter to him, but it changed my life because it enabled me to grow so much more because I was in the right space at the right time. And that one relationship really changed everything for our firm. And that connection still is paying dividends now. And every time I see the guy, I'm like, hey, Ron, thanks a lot, buddy. Thanks for your help. And it's. It's great.

So, you know, it's too damn hot to be out here in Vegas.

Yeah. I'm Hannah. Nice to meet you.

Good to meet you. She's helping us create some content for Russ and I to show off what we're doing and all that. Let's go get you a vest and a hard hat, all that fun stuff. And Bill will show you around from the last time I was here. We. We've come a long way. The guy down at the other site this morning, that boy is country. Is.

Is he ornery or what?

No, he's country.

Yeah.

He ain't honored, but he country.

Country.

He's like, yeah, you gotta come over. Go Arkansas. Go deer hunting.

Yeah, who's this?

I need this contact.

He was down in Phoenix.

He's our Phoenix superintendent on our Phoenix site.

Oh, Clyde.

Yeah, he's character.

Huh?

Huh.

He. He gets out the truck. He's got a knife on the outside of his boot. Not in his boot like the rest of us. On the outside of his boot.

And the boots are shown outside.

Yeah, yeah.

So you can see everything that's going on.

Yeah, yeah. I was like, well.

Well, so at this point, we're at the. Obviously the third floor. So framing is complete. We're going to be pouring the deck on the fourth floor. Take us about three pours just because of height, and then we're going to frame that up the following week. Not next week. Well, yeah, probably next week around Tuesday. We got a pour in Monday.

Okay.

I didn't let you know, but. So we'll start framing. Be another couple weeks on that. Get to the roof. Electrical roughing is complete on the first floor. Second floor is probably 90%. Fire sprinkler systems complete on the first floor. Working on second floor, probably 60, 70%. We also have fire protection which is coming in. So they're on the third floor now actually putting their boxes in. But first and second floor are rough in. And then on the street, we're bringing in. This is our Water for the fire loop. So we'll have a hydrant over here soon. Working on the sanitary sewer, getting that into site as well as the, the domestic water.

Some road work out here and replacing.

Stuff in the street.

So that's what we had to do. Some stuff out on the side.

Over a thousand linear feet.

Yeah, we've had to do quite a bit on the public side.

Yep, yep. There's a lot of work up the street. We've been out there for fighting with existing piping that was nobody was aware of. So a lot of it was days here. We'd lose a day. Lose a day, lose a day. It's been a fight. But yeah, we finally got it here.

So this is 1100 something units.

1147.

Okay.

1147 units, 140,000 square feet. Very nice. Generation 5 self storage, class A. Yeah. All the corridors will be clean. We've got lighting control.

So these are some size options. How many size options do you guys have for units?

Total of six.

Yeah, six. Six or seven.

Okay.

Those are the questions for him. He's reading the plans every day.

Yeah, we've got five by fives, five by 10, 10 by 10, 15 by 10, 20 by fives.

Very cool. And do you guys optimize those based on what you think demand will be for?

They do that on their end. And then we optimize the hallway layout so we try to get to about 75% efficiency of the building. So I think that pleases them and they can have as much net rental as possible. But as you start diving that down a little bit, obviously they're not making as much money month over month and it takes, I guess longer to pay it off.

So.

Yeah, but everything's got clean lines. These are all make everybody feel safe. You came in here at 10 o' clock at night, put something in your storage unit, you're going to feel safe. The lights will come up, cameras, I'll follow you.

All right, sweet.

Perfect.

So this is just our standard hallway layout. As you can see, we've got the big 10 by 15 units here. Right now we've got a rough opening size of 5 foot 4 inches. So a good clear area in the hallways. Once we finish out the front side of the units with our Janus system, it'll be a five foot clear hallway. There's been some back and forth between whether we're going to be using carpet in this facility or if we're just going to leave bare concrete floors. I've been working with ownership on getting samples in front of them. Seeing if we can find something that matches the public space storage look. So that's in the process. Might be a slight design change for our hallways, but could add a little bit more.

That's going to be managing it.

Yeah, yeah.

This is just a split. So I guess a cross section of our corridors intersecting. You can see on some of these units. Instead of having full height shear walls, we got this X bracing configuration. That's just a structural design to reduce a little bit of the steel that we have to buy. Obviously buying a couple strips that you fasten with 12 screws is a lot cheaper than having to put 100 screws in. You can see right here we've got a rough end for our fire sprinkler system. So these are our branch lines that feeding our individual units. A good value engineering opportunity for storage facilities is if you keep 18 inches clear below the deck. So what our exposed ceiling is, you can sprinkle it as an open warehouse concept. You might want to turn around because this is just the dead end. But sprinkling it open warehouse allows you to not drop individual heads in each unit, which is a little bit of a cost savings there.

The retaining wall we built up, you can see all of the I15 highway.

Oh, I see.

See the strip. So people coming in and out of town, they're going to see this. The billboard is going to add tremendous value as well. But you know, it's true though. I haven't seen the diagonal wall on many of these.

Yeah, no, but it did maximize area.

It did for sure. Yeah.

I was telling them we had to change our structural design, but you. Because of that diagonal wall.

Right.

But it allowed them to utilize the full site instead of having to cut it off.

Yeah, yeah. As long as you get your work done before about one in the afternoon when it turns to hotter than hell here.

Oh my God. It's 110.

We're heading out to the Mount Hood. It's out by Nellis Air Force base. It is a 15 acre site going to have over 300,000 square feet of storage plus RV and boat storage.

Oh, this is the big boy.

This is the big site. This is the site of our 15 acre largest site. Currently Mount Hood development. It's going to be over 300,000 square feet of climate controlled self storage, boat and RV storage. All the boat and RV incidentally, are going to be angled so that it's easier for people to back in and pull in. The site's right here by Nellis Air Force Base. You can kind of see, we'll walk up on the little dirt mound here and you can see the whole 15 acre development site.

So what's your estimated project completion timeline on this and how much capital do you guys think that you'll continue to raise on it?

We're going to raise somewhere between 15 and 16 million. Approximately 12 million has been raised. We get a little closer. We're probably within 90 days of a building permit.

And this is the big boy. This is going to be the biggest one. Right. So how many units and unit mix.

Is being finalized, but significant. Plus the boat and the rv.

Cool.

We're right now working on what we feel the best unit mix is going to be because you've got residential housing in the area, but you also have military base. Military base housing.

And what do you think the projected IRR is for investors on this one?

This one is in the upper 30s. Jeez.

Let me know if you're interested in investing in this project. We help investors and developers get debt and equity capital for their deals. Arthur is one of our clients here and they're raising capital on this project.

We're doing a joint venture with the landowner and we're building storage right next to a gas station right next to a neighborhood. The city initially wouldn't approve storage here. We had to come up with a design that was more aesthetically pleasing to the residential area. It's got a lot of rooftops. Again, it's near a highway. Not on the highway, but near a highway. So this will be a project that we will begin an equity raise on probably in the next 60, 90 days.

Awesome. What do you think the raise will be?

Probably 5 to 7 million.

Okay. In total project cost.

20 something.

Okay, cool.

Why did you.

Why did you choose the business model that you did, Hammond?

I just got into real estate at 18 and got into commercial real estate and started buying some residential properties and flipping them. And I just love finance because I was always working with private lenders for my own deals because I was a young kid that couldn't get a bank loan and I didn't want to. I just wasn't able to go through that process. But I still wanted to invest in real estate and that's how I started my own private lending company. And then that eventually evolved into commercial mortgage brokerage. And now we have HB Capital and we help place debt and equity for. For commercial real estate properties across all asset classes nationwide. So it was just kind of a natural evolution. I love the volume, I love the speed. I love being able to help Clients build their projects and make their dreams come to reality. I love looking at a variety of different deals and being able to build relationships in the space. And I also love the finance side because I don't need to be boots on the ground. It's a very scalable model. We can serve clients nationwide. And in the real estate brokerage side, which I still do and own a real estate brokerage as well, but it's much more intensive licensing wise. You do need boots on the ground. You got to go look at sites more often and be much more involved locally where you are. So I just liked the freedom and flexibility and the scalability of the business model and CRE Finance.

Why do 95% of businesses fail? Most people just won't stick with it and put in the work. They won't do the five or 10 years, years it takes. That's kind of beating your head against the wall till you get the relationships. Do you get the knowledge to be able to do it? People just give up too quickly. Resilience, resilience and just tenacity to do it.

Yep.

You got to decide that you're going to get up one morning and you're going to do it, period. Not think about doing it, but do it. Yeah.

At any cost, no matter what.

Correct.

Yep. Being relentless.

Probably it is about 95% of the people that just give up too soon and, and they don't stick with it. And there was a famous, I want to say he was a Spanish or maybe Portuguese explorer way back in the day and he got to the new, I, I want to say the new world. And when he got over the ocean, he burned the boats so that his crew members didn't have the option of going back. There was, they were committed at that point. There was nothing else they could do. They just had to make it work, work if they were going to live. And so when people ask me that question, my comment is, you got to burn boats. I've heard people say, even at some recent conferences, well, I can always go back to my old job. And I was like, no, that cannot even be in your brain as an option. You have to burn the boats and you have to make this work, period. And you will be successful if you go into it with that attitude.

This site, which is our Henderson site, seems small. It's still going to be over 140,000 square feet, over a thousand units, approximately 1100 units right here. It's going to be built a little differently to look a little more like it belongs in a neighborhood.

Yeah. Because you've got residential sites.

It's going to be a very nice, nice site. Residential site. We got plenty of rooftops. As you notice, we weren't five minutes from the highway. Lots of traffic around here. It's really a good site.

Cool. Can't wait for this one. When do you think you guys are? Pretty early in this process.

We just got all the final approvals done. We're probably four to five months from construction start.

Okay, cool. You think 12 month project.

Once construction starts, it'll be 12, 14 months to build and construction should start within five months.

And you guys are gonna. When are you gonna start raising capital for the. This one?

Pretty much immediately. We haven't put it, put it out yet, but we'll put it out.

Okay, awesome. And what's this project called? Just for those?

Henderson.

Henderson.

In the city of Henderson. It's Henderson.

Well, if you're looking to invest in storage projects with amazing operators, this is the fourth site we've walked today. And this is the next project coming up. So let me know if you're interested.

I think one of the biggest things is having six figure earners work for you to create the value to get to the seven and eight figures. Because you know, everybody can get to six figures pretty easy. And probably on your own you may get to a seven. But having other people that are earning good money in different capacities that are helping bring you even more money, even if they're getting a big split of the pie, if you've got 10 of them, it's still better than one.

Yeah, I would say the same thing is people think that they have to do it all. And I think, obviously I'm not a billionaire, but what I've heard a billionaire say is millionaires are very good at making themselves money. Billionaires are very good at making other people money. So just focusing on the size of the problems that you're solving for other people will determine the size of the checks that you're able to get and then just who, not how. We can't create anything just on our own. We all have same amount of time in the day. So really finding those people to come on your team and help you scale whatever it is that you're building. So we just spent the day walking a bunch of different development projects that Arthur Hood is doing with your Space America. And we just got here to one of his final products. So once the development is complete, this is the type of product you can expect. It's a beautiful building and it's managed by partners, public Storage. And so that's why storage is so awesome. Because there's such a big demand for storage. And when they can get these sites approved because the buildings look nice and then they can have it managed on the back end, it's an easy deal. And investors win a lot. Investors make a lot of money. So if you're interested in investing in storage projects like this, let me know. We have opportunities and relationships with these amazing operators and you can get in on these deals. So these are some of the questions that developers have to ask themselves. You know, they decided to put in a climate controlled entry and exit loadings area for the customers of the public storage. But they're deciding if they're going to do that on another project because it's expensive, you got to enclose it and that AC is running all day. So it's a matter of knowing your numbers and understanding what can we make extra for providing that kind of amenity to our customers. And is it worth the investment?

Exactly.

Wow.

This is a fully finished, beautiful.

Oh, this is so much nicer than the old sheds. Oh yeah, old storage sheds. The first generation.

See how, how they turned out? So nice. Good camera walls and we got cameras everywhere. The lights go on and off based on movement so we don't waste any electricity. All the doors are clean, all nice roll up doors.

What was the total raise?

This one was actually only about 14 million to build. 16 million. So raise wasn't that bad. And we did it mostly with bank financing.

And what was the IRR that ended up.

Well, not fully calculated yet, but it'll be in the mid-30s.

Mid-30s, geez, that's.

It won't be the 40s because of the size of it, but it'll be in the mid-30s.

Yeah. So this is the loading zone. So they opted to go with a climate controlled loading zone as a really nice amenity so people can come in. It's 110 degrees outside and they have a nice cool space. They took on that a little bit additional cost but it's a great value add for clients who want to have storage and make it a nice process to get their items in and out. And what was the total project cost and what were you able to depreciate with the cost?

Seg, we haven't done that study yet for this property, but that'll be Arthur's answer for whatever.

It's about 15 million project cost.

So somewhere between probably you know, 15 to 25% could be reallocated here on this and probably on the heavier side because you do have nice amenities and things going on here. It's not just like we were talking about. Not just the drive up, barn or shed. You've got anything that's not structural is going to be eligible for a faster write off. So things like these walls that don't go all the way up and things like the doors and items that come along with it that are just supporting the business that this is will be eligible to go into a faster life. You've got the nice heavy diamond plate here on the corners. That would be kind of an amenity, if you will, or something to protect the business. You've got all kinds of built ins around that we've already seen and gone by. So this is going to be a real nice outcome for Arthur and his investors.

And so because of the cost study, about $4 million can be written off against the investors and Arthur's taxes because that's what the cost study helps you do. So that could be literally, I mean if you're at a almost call it, you know, 50% tax bracket, that's a $2 million approximate tax saving of the year. One that it's put into service.

Even outside, you know, we have things out here that can be depreciated. Like Jeff will explain it, our trees, landscape.

Okay, so imagine this, Hannah. You're driving down the road and you're trying to figure out, okay, well where, where does the accelerated items, where do they start and end? Well, we're driving down the road and we pull into the parking lot. As soon as you pull off of the public right of way, you now all of a sudden are onto 15 year property. So you've got these bumpers, you know, the curbs. Curbs. Thank you.

Thank you.

The curves, you've got the gravel planting beds, you've got the trees themselves that are planted there. You've got the signage. My bet is at nighttime that signage lights up. So there's underneath somewhere you don't see any wires going to that sign. There's a conduit under underground. And it's not just the conduit with the wire in it, but it's the compacted soil around the conduit. We've got the asphalt again. Underneath the asphalt, compacted soil. You've got stripes on the parking lot. Somewhere along here there's going to be handicap striping or painting. You go along, you've got fence again. There's stuff on the outside, outside lighting. You're going to have, I see security systems out there. You've got these bollards to keep, let's say, numb nuts from driving into the building and damaging the building. Well, that's protecting the building. You've got the graded ramp system there on the concrete. More than likely, there's a pad for the dumpster to sit on and maybe fencing around the dumpster itself. So all of these things, when you stack them up, just keep adding tax benefit to the property for the property owner and the investors. And Arthur's done a great job here putting together a Class 1 facility that really will help everybody and it enhances the beauty of the community as well. With these nice plantings, it's not just plopped down on a parking lot.