Riaz Capital talks lending as it gears up to double micro apartment portfolio

The San Francisco company is raising capital for its third Opportunity Zone fund.

Riaz Capital is raising capital for its third Opportunity Zone fund, with the Oakland real estate private equity fund gearing up to more than double its 1,500-unit portfolio of urban micro apartments at a time when more lenders are becoming interested in the strategy.

The company focuses mainly on the San Francisco Bay Area, which has a roughly 400,000-unit shortage of affordable housing units for individuals who earn between $50,000 to $120,000, Riaz Taplin, founder, told Real Estate Capital USA.

Recent deals include the acquisition and planned redevelopment of the Z Hotel in Oakland, with plans to convert the 102-key hotel at 233 Broadway into workforce housing apartments in the supply-constrained San Francisco Bay Area. The plan is to create high-quality, micro-living studios for teachers, nurses, first responders and other professionals in the area.

While Taplin and his family have a long history in the multifamily sector in the Bay Area, the company started thinking seriously about the potential of building well-designed, micro housing units that were affordable and accessible.

“I knew someone who was doing a PhD at Stanford and living in West Oakland, which is not very close to Stanford. But it was the cheapest place that he could live with his wife and not have a roommate,” Taplin said. “And I thought, ‘If someone can drive 60 miles a day on [Interstates] 405 and 808 – which is literally the definition of hell – just so they could come home to a private space, there was an opportunity there.’”

Lending strategy

The firm has a variety of lending sources for its projects, which Taplin characterizes as well-designed properties with rents that are about 30 percent below the area median income.

Taplin has frequently worked with First Republic Bank, which has provided it with more than 30 construction loans, as well as Bank of California and Boston Private Bank.

“We have also been able to take advantage of community development financing, some subsidized lending and we get advanced green points for stable loans,” Taplin said. “The life companies and big banks are very active too and the agencies are very important, especially during a period like in 2009 and the pandemic. The government will step in to support the capital markets for multifamily during a crisis, which they did hands down in 2009 and 2020.”

Because affordable housing is a relatively new asset class, there’s been an educational process with some lenders. “Lenders don’t want to lose money and because this is an innovative category, it has taken a lot of education to get lenders to understand that this is a good place to allocate capital,” Taplin said.

The Taplin family got into real estate in the 1970s with a 400-unit condo conversion play, eventually pivoting to multifamily rentals. Taplin personally jumped into the family business while he was still in high school and college, working on buying and flipping luxury houses. Eventually, that business grew to about $20 million in sales and the company built a brand around what Taplin calls “ease and quality.”

“The business was going well and then this thing called the Global Financial Crisis happened, but I was lucky enough to sell the last house in 2008,” Taplin said. “We used that time as an opportunity to grow our portfolio, growing our apartment portfolio from 100 to 800 units in a series of syndications.”

Most of the company’s investors are high-net-worth individuals and therefore have different needs than institutions.

“Our funds are part of the retirement solution, investing capital gains in a cyclical-resistant investment strategy. We are part of their portfolio allocation and we proved during the pandemic that our urban portfolio did far better than luxury multifamily,” Taplin said. “If you’re going to be allocating out of the S&P 500 and into real estate and don’t want that to be a high-risk part of your portfolio, serving an underserved customer and getting stable income ends up being a good place to allocate capital. These rents don’t fall that much, and the tenants are less likely to peace out to Colorado.”