Jack: Well, welcome back everybody to OZExpo Podcast. I'm your host Jack Heald. And joining me today is Dave Euzarraga. Dave, I know I didn't pronounce your last name right, but it's Portuguese and that's just way outside the comfort zone for my mouth. Welcome Dave. Welcome to the show.
Dave: No problem. No problem.
Jack: Okay, so really quick, pronounce your last name the right way.
Dave: The right way is A-U-Sar-a-Ga. And it took me until about eight to be able to say it the right way. It is not Portuguese; it is more Basque last name.
Jack: Oh Basque, oh okay. There we go. Yeah, yeah.
Dave: Spain in the Pyrenees.
Jack: Alright, well, if it is your own name and it took you several years to get it right, then I am not going to feel too bad for not getting right. Well Dave, in many ways you are perfect for The OZExpo Podcast, and yet you’re also completely unlike anyone else I have had on this show. Obviously The OZExpo Podcast is targeted at people who have an interest of some kind -- stakeholders -- in Opportunity Zone development. Whether that is tax accountants, tax lawyers, developers, fund managers, people who provide services. Some of the most interesting conversations I have had are people who are one step away from direct involvement. Your story, though, is really unique and that’s why, when I met you at the Expo in Las Vegas, I thought, “Gosh, this would be a fun conversation.” Tell us about the Sierra Creek development that is yours, that you’re in charge of and give us a little background on that and I think it will be quite obvious why you are on The OZExpo Podcast today.
Dave: Alright, Jack. And Jack feel free, sometimes I start running down the path because I am so passionate about what I have.
Jack: That’s all right.
Dave: If you need to bring me back on track, go head. I will talk quickly here so we don’t waste too much time. But I was born and raised in Southern California. Background in banking and real estate my whole life. I got involved in the mid-1990s in the Palmdale Lancaster. Which is basically, from LAX is about an hour drive. 45 minutes based on traffic. My son got transferred out to Edwards AFB, which is in a town called Rosemond, that’s Kern County. Even though Edwards does take up Lancaster and Palmdale also. Once I saw what my son got as far as a place to live, I decided that he needed to expand and use his VA and buy a home.
He bought a home -- five bedrooms -- and turned around and rented it to his buddies on the base. And when I saw what he got for his money, I ended up coming in, selling most of my stuff, small stuff in Orange County, condos and stuff like that. And then went out to Palmdale Lancaster, which is L.A. County and I purchase single family homes or five bedrooms and turned them into rentals. That was in the mid-1990s.
In 2003, 2004, I decided to spread my wings a little bit and into a subdivision and build homes. In my search I've found a developer. Rosamond’s a community district. It is controlled by current county. So it's not a city. And I found this developer there was selling the subdivision for 223 homes.
His name was Dale. Once he met me, he decided, why don't I sell you half the project since he was a developer? He had done thousands of units, Palmdale, Lancaster in Rosemont since the early ‘80s forward. And I was going to do the real estate market in and so forth. So we partnered up, that was in 2004 to build 223 homes. At the same time, I found this project, which is now called Sierra Creek to build 248 apartments and we found a self-storage site. Since Dale was a partner on the one project, he decided to be a partner with me on the other two. From 2004 to 2007 it took us to get everything entitled to build. We've got a construction loan with Deutsche Bank for the 223 subdivision on the single families and also on the 248 unit apartment project. Before we got to escrow. Yeah. First American title, the week before to sign loan documents, my partner found out, he has leukemia. It'd be in the building part of our relationship. Dale said, I don't know what's going on with my health, Dave. Let us just list the projects as shovel ready, which we did. Late 2007, someone paid cash for the self storage. The other two projects went into escrow with major developers. And during their 120 look-see period, investigation period, the security market crashed, 2008.
Jack: I remember that.
Dave: Everybody, everybody backs away from the table. And here I am with a project that's worth nothing. 2011 now advancing from 2008 to 2011, Dale comes to me, health not getting any better. We discussed a deal. I said, you can sell the 223, a single family subdivision. Let me buy you out of the 248, which I did in 2011.
2013 I see the market coming back in my own mind in the real estate side. I go ahead and get my approvals extended out another couple of years. I list the property as a shovel ready. I don't get the price I want. I wait, 2015. Yeah. Again, another two year extension. Enlist the project as a shovel ready. Had a group of Chinese falling in, kick the dirt, looked at it, said, we'll give you the money. You build it, fill it. We keep it long-term for income. Okay. I build my construction team, get everything ready to go. And January 2016 this group at least could not get their money out of the country out of China. They were a newer group, I found out and they did not have their avenues into Hong Kong open yet on the banking side. So here I am now in 2016, I have a project ready to go. It was not yet known that it's in a priority zone, Opportunity Zone.
Jack: Good lord, we’re 14 years into this now, 12 years into this now.
Dave: Exactly. And here's the big thing. Here I have verified there are thousands of employees in that area, in hotels since 2013 to today. Where the HR departments are spending $2,500 a key and $500 and $600 for food and entertainment. Because these hotel rooms don't have kitchens. Okay, I have thousands of people today being driven either by Amtrak, which had quadrupled their delivery middle of last year. Going forward to deliver people out to the Palmdale Lancaster areas for employment.
Jack: When you say 45 minutes east of L.A., is that by car or is that by rail?
Dave: If you have to drive, let's say if you’re in the LAX area and you have to drive out to the town of Lancaster and Palmdale, it is going to take you minimum 45 minutes to an hour and 15 minutes to get out to the Palmdale Lancaster area in a car. I personally don't know what that delivery is on the Amtrak. A lot of these corporations, remember Lockheed, NASA, Northrup. I can keep going on the superintendent of school’s regional hospital. We can go on and on next to our project. If we go a little further as Mojave where you have Branson's galactic station, there's at least 24 large corporations down at Mojave. It's kind of secret. But again, if you sit out there in the parking lot where the buses come in the morning, you'd be shocked.
You think there was a Super Bowl was going on with the amount of people they drop off.
Jack: Wow. Okay.
Dave: The thing with Edwards Air Force Base. You know, in front of our project there's 14,000 people twice a day going back-and-forth in and out of there. But getting back to the story. I'm hearing with this project ready to go in 2016 I talked to your regular banks like Chase, Bank of the Ozarks, some of your conventional multifamily lenders and because of the area, the premixed, we don't go there. We've kind of red-lined it out of the picture. So here I am with a project. I have the HR departments are staying in line for will have immediate occupancy upon completion of construction. We have no competition in front of us. Palmdale Lancaster had a density thing. We're on 13 acres. You can build 120 units on 13 acres.
In Kern County I can get 248 units. It's pretty interesting project. Then at mid-2016 is this Opportunity Zone. You start hearing people talking about this legislation published half of the regs and then stalled out like and then recently they've pretty much kind of tightened everything up and I believe they've answered 98% of all the questions that need to be answered today. And my project just happens to be in an Opportunity Zone. Everything on the east side of the freeway in that town is an Opportunity Zone site. Which now brings me why I'm going to your expos and so forth and around meeting some funds and some developers that are quite interested. And I think people just need to hear my story. And even more important than my story is to open their eyes and look in their own backyard.
And some cases where you don't have thousands of units being built around you as competition, it's a seller's market now across the board. I don't care where you're at and where you're trying to do add-in you’re paying top dollar for aged product that needs to be completely renovated in areas such as you know Arizona, Utah, Vegas, but you walk out your door and you're looking at all of the construction going around you. If you can't see the construction going around you, your project's pretty far out in an area that might need to be dusted off. And that's why an Opportunity Zone comes into play to bring a face lift or bring work on jobs to an area that wouldn’t necessarily attract those kinds of funds.
Jack: So, if you were going to categorize the type of development, this is multifamily, but this low-income housing. Is this disadvantaged housing? What's the credit risk on this?
Dave: Yeah. Here's what happened. Since conventional financing would not look at me. I had CVRE out of San Francisco pick me up. And at the same time, I had Berkeley Point, I had New York part of Kantar at the time. They have since been sold or bought out. They looked at my project and said, “This is something that HUD would possibly insure.” HUD financing. Okay. And the project is not a section eight project. It's not income qualified. Ah. And they said that “No, he doesn't care. They'll still give you the 221 program.” So CVRE and in Berkeley point took it to HUD. Four months later they came back and they said, interesting, but HUD likes this and actually HUD wants to make your project the flagship, especially in that area out there. So, we do have construction financing right now with the HUD program. I don't know if we're going to stay with the Berkeley Point Group. I have a couple of bigger guys looking at me right now that want to take over and Gray Stone is one of them. But you know, again, getting back to your question, no, is a full market rate deal. You got to look at the middle, mid-low income out there starting off and which is Kern County, it's almost 80,000. Okay. So when people step back in…
Jack: It's one of those weird situations with the Opportunity Zone where it's not the normal kind of Opportunity Zone that the government had in mind when they designed the program.
Dave: No. There's commercial being built all around me right now. I mean they just did a $90 million expansion on the elementary school at the end of my street. Yeah. Dollar General just built the new Dollar General right next to our apartment project. They had built a store a year-and-a-half ago, a mile away. So there, you know Granger Hardware, right? I can go on and on with the commercial. Another interesting thing here that your viewers need to understand is the cost of construction in today's market. Even though in my opinion, construction costs are rolling backwards now. Just to give you guys ideas on my project. I just got a phone call from my lumber. He just dropped our bill $2 million. I have calls coming in now for my concrete dry wall and stucco they're, at least in California, starting to roll backward here because a lot of jobs have ceased in certain areas that these contractors had pegged for the 2019, 2020 seasons interest rates in my opinion.
Again I said that six months ago, they would be rolling backwards. They have, I think that they're stalled now and I still think they're going to come down even further. And again, those are just my personal opinions, but the cost of construction, the cost of your water, water connection fees. Just to give you an idea out where I'm at, which is a two-story walkup country club atmosphere, kind of a project because of the clientele we have secured, obviously it’s $260 a square foot. Well, David $260 a square foot for two-bedroom, two bath is $260 grand. Well, yeah, but then you look at the rents that we're getting right now and remember project is 100% leased prior to completion of construction when the waiting line like holiday weekend at Disneyland trying to get into the project. And these are all verified by third parties.
Jack: As a father of four children. That… It's a really painful metaphor for me.
Dave: But you know, it's very interesting and like I said, my biggest problem, people say that David, it's that good of a deal. What's your problem? And you know, why can't you get your joint venture partner right now? Because really that's what I'm looking for. Where if we keep the HUD financing, I'm looking for a $15 million equity raise right now as a joint venture partner not really look to borrow the funds as financing or what have you. It’s really a partner that wants to have a long-term investment in, especially if they're Opportunity Zone people, this is perfect for them. So that's really where I'm at right now. And again, the biggest hurdle has been the fact of, maybe it's a little outside of the area, but when you're 15 minutes or 10 minutes from Palmdale-Lancaster and the amount of rents that we’re getting in the people that are lined up to move into the project. I think when investors sit down and look at their IRR and how fast they get back their initial investments, they'll be surprised.
Jack: Well, I think you've done a terrific job of laying it out. I don't think there's any more to add.
Dave: Exactly. And I challenge anybody, you know. Yeah. Jack honestly, I'm a realist. It doesn't do me any good to promote something here that just somebody who investigates and finds out it's wrong. It's just wasting everybody's time. So yeah. You know, for serious investors out there or if you know your client base here that listens to these podcasts want some numbers I think you'll be pleasantly surprised. There's a lot of opportunity here in California. And I just think people need to kind of open their eyes and then, and not be so negative about California because of our in some cases are all it takes in some cases are our guidelines and construction costs and this and that. But I think there is some opportunity if people are willing to pay attention and really understand what's going on.
Jack: That's good. Any last words for listen to this before we go?
Dave: You know, I think I spilled my guts. You know, I think it was all from my art too. So it's like I said, I don't have a chip on my shoulder. I'm a business guy, just get things done. I do have a couple of other projects lined up. I've closed escrow on a few others, a smaller stuff in the same area, but it'll be commercial lender needs multi-family on top, but it's a small market out. There are not a large area to do anything, at least. Did you gonna stay in that Opportunity Zone? And I think that's all I have to say.
Jack: Well good stuff. Well I thank you lot Dave. If folks want to get ahold of you, what's the very best way for them to do that?
Dave: You know, my email address is probably the best and that email address is just the way it sounds. It's firstname.lastname@example.org. My cell phone number, which 24/7 works is (714) 345-3744 again, (714) 345-3744.
Jack: Very good. Then I will remind our listeners as always at this contact, information will be available on the podcast website. David has been a lot of fun talking to you. I've actually got family out in that part of the country, so unthinkable my mixed drive out to the L.A. area. I will, I'll make a point to drop by and see Rosemont and the Sierra Creek area. Sounds cool. Well, on behalf of Dave Euzarraga, I am Jack Heald for OZExpo Podcast. Thanks so much for listening and we will talk to you next time.
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