On the show today we have… Tim Shoultz of SMARTCAP Group!
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Show Links:
– Tim Shoultz SMARTCAP Group website
– Our podcast with Joe Ollis of SMARTCAP Group
– Our Podcast with Sean Katona
– Get signed up for the PNW Big Badass Real Estate Wealth Expo here
Show notes for Tim Shoultz of SMARTCAP Group!
The Vantastic Life is…
– is in Steamboat Spring CO!
Today we have Tim Shoultz of SMARTCAP, who we are 100% stoked to chat with today! Tim is the co-founder and CEO of SMARTCAP.
Tim
I grew up in Drain Oregon in a really great family. When I was 11 we moved up to Onalaska Washington, and grew up riding bikes and playing. Started working in construction when I was younger. My dad was a carpenter.
I tore my ACL when I was 16 and it started a change in my life. I got into computers and took a job at a computer store. Then moved to Vegas with my sister and got a job at a computer store.
Then moved back to Seattle and got hired at Microsoft when I was 20. I didn’t have an amazing skill set, and offered to work for cheap. I told them I’d work my butt off. I worked there until 2014, and in the process I slowly got into real estate.
My wife and I were looking into fix and flip during the recession. In 2007 my wife started a retail store in North Bend WA, and we suffered. Like everyone else. In 2010 we were up on our lease, so we moved to a much better location. And that’s how I got into commercial real estate.
I ended up calling a number on the side of the building and asked if they would sell. It wasn’t for sale, but they said yes. Then I asked if they would finance it (because I didn’t have the money). And they said yes!
So I had a 65k down payment, and I got into commercial real estate.
The broker that was selling asked for an Astople certificate, and I said “what’s that?”, and he asked if he could introduce me to an attorney.
At Microsoft we built this organization inside of Window and used big data to develop platforms inside of Microsoft.
So I created a data model and realized that we would be profitable based on the rents. And we would hopefully be successful. Her business became quite successful and we sold it a few years ago.
I thought this was so fun and so exciting!
Julie
Let’s talk about the building!
Tim
There were 2 tenants, and we had to do heating, lighting, flooring, the full process.
Julie
How did you come up with the down payment or terms of financing?
Tim
Yeah, the down payment and asking was all me. They were looking at it as a yield thing.
Julie
Is that because you had 65k, or what?
Tim
I don’t know that I was smart enough, but I’m always the person who would ask people things. I’m not intimidated and willing to ask. I think this is one of the most important things that you can do as a person. Sometimes that answer you get is pretty shocking!
Julie
There is nothing wrong about asking. You never know. Ask for what you need. Don’t try to figure it out first.
Tim
If you look at this deal… tenants are in there, we are renovating the building. It we default they get the building back. It really wasn’t a high risk thing for the sellers.
There was this deal scenario in Tacoma where I bought a strip center. Then I got an offer on the building, but I wanted to make it more attractive.
So I asked for a 200k discount which they said no to, but we agreed on an 100k discount. That I would have ever received if I hadn’t asked.
Julie
I think that real estate investing is a courage game. Just surround yourself with mentors. Even in my own life with my own speciality teams, when we have a group, the power of the group builds confidence. And courage!
So you bought a few buildings.
Tim
I went on Amazon and bought like 10 books, called my attorney, and started syndicating.
Julie
Were you still working at Microsoft?
Tim
Yes. I syndicated through people at work.
I was reading about using other people’s money, and that was powerful for me. So I started doing that.
2011, I did a deal, I did a few in 2012. I’d done a few deals before I met Joe Ollis.
All retail centers.
Julie
Why did you pick those?
Tim
Ignorance and ignorance :-). I had this concept of retail and that’s all I knew. It allowed me to move slower and still be successful. There was less competition on every deal.
Julie
Most people still avoid retail.
Our buddy Sean Katona is doing great with retail. Here’s his podcast with us.
Tim
So then I decided that I wanted a business partner. And there was a guy I was talking to, Keven. Joe, Kevin, and I did a deal together. But Joe and I decided that 2 people were better than 3.
Joe is very data driven and builds all our models. I look at big picture and where to grow, and it was working really nicely. We launched Smart Cap in 2014, and we both went full time.
We have done more than 200 million in transactions. We look at really high value add and we are building industrial.
Julie
Where is this going to be?
Tim
All opportunity zones. Marysville, Arlington… our first building was an opportunity zone.
We built an opportunity zone fund quite early.
We have an opportunity zone fund opened right now for the 2nd phase of a project we’re working on.
Julie
Do you have value add non-opportunity zones and opportunity zones?
Tim
Yep, that’s how we have it setup.
We looked at a lot of different deals last year.
Julie
If something is OZ vs. non-OZ does it look different?
Tim
We do both. We have funds. We have a blind pool fund. Where we pre-raise and then look for buildings for the fund. Most of the money is tech, so we have pretty good reaches into the local big tech companies. People that want to diversify their portfolios. We take 10% as a deposit and then when we find the deal we do a capital call.
Then we have some larger investors that won’t invest into a fund. And we side car those into a deal. Then Smart Cap will partner with the investors. And we still manage it.
We have total control so we can invest into what we want to invest in.
Julie
The people that are parking their money, they are earning a return?
Tim
Yes, an 8% cumulative pref while it sits. Then it changes when we’ve found a deal.
We don’t pay prefs until we acquire an asset.
Generally it takes a few years to get up to that number.
We do Quartly distributions once we have an asset. Once we’ve caught up on the pref then we return equity next, and then share profits.
Julie
How does an OZ project look different?
Tim
You have some time. The fund that we have opened we launched in 2019 so you could get the full 15% tax adjustment.
Julie
And that starts from the date that you put the money in the fund and not when the building gets purchased?
Tim
Yes.
The real value in OZ is the equity multiplier. If you’re getting a 2.5 or 3x multiplier that’s big.
If you invest in 2020 you get the 10% instead of the 15%, but that’s negligible.
Julie
The 15% is no longer available because you have to pay up on the capital gains that you occurred.
Tim
If you go back to our fund. We launched it kind of blind but not really. We were looking at two deals. A ground lease and a fee simple. The fee simple being the first choice.
So it wasn’t totally blind. And that got our investors comfortable last year.
Julie
Does it change every year going forward?
Tim
It doesn’t for a little while. In my opinion it’s not that significant. The equity multiplier and the tax abatement are what’s more interesting.
When you invest in an OZ you have a zero basis tax account.
Julie
Can you run us though what an OZ is?
Tim
You sell an investment and you get capital gain. You can invest that money within 180 days of receiving the gain. You receive the funds and transfer them to a fund manager. The manager fills out forms. And it’s really quite easy. Then report to the IRS.
The key is working with your accountant to make sure you’re doing everything right.
Then you don’t pay taxes until 2026.
Then you don’t pay long term capital gains on any growth. You still have to pay the original taxes on 2026.
You can also use accelerated depreciation. Which reduces annual ordinary income as well.
It’s really a great thing, if the baseline investment is good.
Julie
Joe Ollis and I called this the Holy Grail!
It’s a double whammy. You get taxed on the growth and the depreciation.
In a 1031 you get to include that in your exchange?
Tim
Yes, but it all catches up.
Julie
1031 is for people who are looking to never sell anything until they die, and pass on generational wealth. But you have to exchange until you die.
Tim
Yeah, 1031’s are more complicated and limiting. This gives you a wider zone of things to invest in. And you can really analyze the deals and sponsors that you’re getting into a partnership with. You really want to get to know them. This could be 10+ years.
I never want you to have to call me to know your net worth. It’s really important to know all of this stuff.
Julie
So the goal is #1 you want to invest in a great asset. #2 maybe not the big part. You’re capital gains tax in 2026. The really gain is getting the tax free grown of the OZ fund, and the equity multiplier that come with it.
Are you required to sell it after 10 years?
Tim
No, but after 42 years. But you don’t really know, and there’s a market condition thing that you’re getting into.
Julie
The key part is that, let’s say you were to sell you stocks, property, whatever, you have to pay the taxes in 2026. How do you handle this?
Tim
We make it really clear that investors need to be ready.
I do annually tax planning that is looking out to that date.
We won’t take anything but actual capital gains money from an investor.
The easiest way to control this is to only invest capital gains money, and not to mix it.
Julie
Do you have people that want to invest without capital gains?
Tim
Yeah, but we just say we have other funds.
We are also investing into industrial in other markets.
It’s easier to manage if we don’t mix those funds. So we don’t mix them.
Julie
Are there any updates to the OZ laws?
Tim
We can refinance. The start date of the 180 days, which was confusing, you had risk of pre investing the money. There was confusion of where the clock started. So we invested our money on 12/31/2019. But now it’s been cleared up and you can invest without being before the clock.
As a sponsor you’ll be paying tax no matter what.
Kinda a bummer.
We can invest personally like any other investor. And we invest in all of our deals.
Julie
How about when you go to sell that you have to sell the entire fund?
Tim
That’s not an issue at this point, so you can sell single assets.
The great thing about this program.
This was created from 2010 census data, which was skewed. But other than that it’s been quite good.
Julie
Are you worried about the election at all?
Tim
No, not really.
I could see potential problems where they are building super high end buildings.
I tell people that you should be doing these investments looking at them as a good deal to begin with. And if the tax treatment continues, great!
Julie
Are the laws for timeline to invest the same?
Tim
Yeah that hasn’t changed. Also the startup costs aren’t going against you and there was clarity on how that money was treated.
You can receive money that’s not taxable or you can get taxed without receiving funds.
Julie
We need our accountant to help us discuss this.
Is anyone paying a higher price for OZ investments?
Tim
No. When we first got into OZ’s and everyone was supper excited. I don’t think it really changed comps in South Seattle.
In Marysville and Arlington you’ve seen a lot of growth and that’s pushing prices. But I think that’s due to growth and not OZ.
Everyone is worried about Boing but nothing has happened yet.
Julie
Tell us about Smart Cap Construction.
Tim
It was a complimentary business that just made sense. With a lot of property management you don’t always get the quality that you expect.
Construction was the same thing for us.
We own a lot of office building that we are always upgrading, so we had a lot of opportunity in front of us.
We brought a partner on named Tyson, who has been in the business for 25-30 years. And Joe and I are good at running businesses.
And we are doing 3rd party work. We saw some opportunities and we jumped.
Julie
What about transitioning from buying from mom and pop to institutional type stuff?
Tim
We wanted to get into buying higher quality assets/buildings. It took a lot of time and challenges.
It’s quality, location, and size, that’s institutional investing. Institutions shy away from risk.
We bought a couple buildings near Payne Field. They are doing really well, but were a little off the mark. But that allowed up to build into other great markets like Bellevue. The competition is really big.
We had to get to the point where our reputation was squeaky clean and we were going to close if we put in an offer.
With a mom and pop you demand everything.
With an institution they will tell you, no. They protect their information and expect you to get how the world works.
Julie
So they want you to write you own shit, and if you can’t, go away.
Tim
It’s super daunting! We got over that by working with a brokerage community that helped us through that.
You have to create relationships with people you can know and trust, and then doing business with them.
With institutional your clock starts with your letter of intent.
Sometimes you can buy an extension, and sometimes you can’t.
This is more of an existing building thing.
You really have to understand the market you’re investing into.
Julie
How do you win a deal?
Tim
We win by being local boots on the ground and reputation.
And by closing deals we’ve worked our way up into the top 1 or 2 guys.
It takes really dedicated focus to build specific relationships. You have to play the game.
Julie
What’s been the hardest part and hasn’t gone right?
Tim
We’ve had deal challenges. We went to Colorado and they have some tough tax laws occurring right now.
We got our of those deals. One we made 10% and low on another. We made money, but so low it’s not worth talking about.
It was a change in the way that administer their tax law in CO. We couldn’t predict it.
Julie
So are you just in the PNW now?
Tim
Yeah, we pulled back. We decided to be experts in PNW and focus on office and industrial, and get really good at that first. Specifically in the Puget Sound.
Julie
Is that because it fix OZ the best?
Tim
Yes. We don’t compete in multi family.
Julie
Where are you heading?
Tim
We are looking at doing a REIT and rolling our portfolio into that. WE have some interesting potential tax advantages. And producing long term for our investors.
Joe has been spearheading with another group in TX about a single family REIT. Call Joe back in a few months.
Single family, not multi family. Black rock is doing similar stuff as well.
Julie
And looking pick up single family properties?
Tim
Yep, and we’ll come out with a marketing campaign with those guys.
We have a lot of interest in this.
Julie
Single family in markets that are more affordable?
Tim
Yeah, not in the Seattle area.
Julie
If someone is in a 1031 can they take money out and put into your OZ fund?
Tim
Yeah. Make sure you consult your CPA. Our minimus are 25k across all of our funds.
Julie
Wow, you guys should give Smart Cap a call!
You have something right now?
Tim
Yes, probably in the next two to three weeks. Then we have a blind fund that we’ll be launching very soon.
Julie
How can people reach you?
Tim
Info@smartcapgroup.com or at smartcapgroup.com where you can register.
Julie
What do you need right now?
Tim
We just hired a new acquisitions guy, but we can’t keep up with our deals. We are looking for opportunities on land or buildings.
We should buy down to 5-8 million, but ideally 10 million and up. We are looking at a tower right now with some institutional partners. Under 10 million looks less interesting.
Julie
Where for industrial dirt?
Tim
Arlington markets down to Lacey. It’s really hard to find in Kent Valley and Everett.
Julie
We appreciate your time today Tim!
These are the experts in the market.
Tim
Definitely keep up with Joe.
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