A record building year in Sioux Falls and similarly strong activity regionwide is driving significant interest in real estate investing. Whether you’re currently invested in local real estate or considering it, knowing market conditions and potential challenges is key to understanding your opportunity. We sat down with Chris Daugaard, a partner in Ernst Capital Group, for insight on the market today and looking ahead. 

How would you describe the state of the real estate investment market today? What are some of the themes through the first three quarters of the year? The real estate investment market is strong, very competitive and growing. Through the first three quarters, we continue to see interest in investment real estate and growing interest from firms that are located outside of the region. You see competition and higher prices for any property that hits the market.

You’ve consistently invested in Sioux Falls and regional markets like it. How are you perceiving the strength of those markets currently relative to the rest of the country? Around the country, the last two years have seemingly increased growth in certain areas and slowed growth in others. Markets in the Upper Midwest seem to have fared relatively well compared to much of the country. Sioux Falls is as strong as we’ve ever seen it and I think still flies a bit under the national radar. That is changing. 

You have invested primarily in multifamily but also in some retail and office properties. Multifamily is in a historically tight market. What does that mean for Ernst Capital and future investment prospects? It means that we continue to focus on multifamily investments, as the demand is there. Labor and material availability is what is limiting more multifamily development at this point, not opportunity. Sioux Falls has strong office and retail markets, as well, counter to the narrative that the pandemic has created in other places. Some coastal cities have significant downtown vacancy, retail vacancies and slowing trends. Sioux Falls is seeing the opposite. We have a robust downtown office market and new retailers starting and building in Sioux Falls, and the market seems to be just getting better, not worse.

Sometimes intense markets can lead to some bad decision-making. Are there any cautions you might share for real estate investors? It goes back to the popular quote, “Trust, but verify.” Excitement and good marketing don’t take the place of investors doing their own homework. It’s important to seek good information from people you trust. If you hear about how good a potential investment is, it’s OK to ask the person offering that investment for some documentation. What makes it a good investment? Would this investment work well in a slower, more “normal” market? Additionally, because a hot market can require quick decisions, it’s important to do your homework ahead of time. What exactly are you looking for as an investor? What type of property, what characteristics are important? Knowing that all ahead of time can help you make quick decisions about an investment property when there’s competition. We provide investors a more passive, measured approach to investment real estate. That way, they don’t have to be in the heat of competition to buy properties themselves.

What are some of the most common questions you’re receiving from current or potential investors? We are hearing a lot of questions about Congress, the state of the economy and what’s happening with the two main bills under consideration. A lot of investors are also looking at the stock market and wondering how much room there is left to run.

Looking ahead, what are your expectations for the remainder of the year and into 2022? We’re expecting the multifamily market to remain strong, with more announcements for new construction and new businesses planning to open in Sioux Falls and the region. We’re blessed to live in an area that is a great place to live, work and invest.

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Real estate investing can be a complicated topic, especially for the uninitiated. Explaining it is what keeps Chris Daugaard excited about his role. “What I really like about working with investors is taking what can be a complex or uncommon topic like development or finance and trying to describe it to people who don’t do this as a day-to-day job,” said Daugaard, a partner in Ernst Capital Group. “I don’t come from a real estate background. I’m not a deep finance guy. So it’s fun for me to explain things how I relate them and have people get as excited about our projects as I do.”

It’s an exciting time for Daugaard, personally and professionally. He and his wife, Emily, recently welcomed their first son, James. At Ernst, activity is so busy his days are filled with project and investor communication. Luckily, he has found a way to balance both, as one of his favorite activities is driving around the community with his son napping in the backseat. “I drive around town for a couple hours seeing projects going on and what’s going up while he catches a nap,” Daugaard said. “I really enjoy seeing the communities we are working in develop and being part of it.”

It was a bit of an unlikely career path for the Dell Rapids High School graduate who grew up thinking he might become an electrical engineer and went to SDSU with that in mind. “I was going to go somewhere in state because that’s what I could afford, and I was paying my own way,” he said. “I liked technology – still do – science and math, so that had me looking at School of Mines and SDSU, and I chose SDSU because I wanted to play in the drum line for marching band.” His academic direction changed after a year when he pursued economics and political science instead, ultimately graduating with a political science major and minors in business and economics. “I graduated a semester earlier than planned to help my dad campaign, and the plan was to go to business school,” Daugaard said.

One of three children of Dennis and Linda Daugaard, he had grown up around his father’s career in the South Dakota Legislature. In 2010, Dennis Daugaard was elected governor of South Dakota. But here’s a perhaps little-known fact about the family: Chris Daugaard also has a history of top elected office. He served as student body president both in high school and at SDSU. “And before I worked on my dad’s campaign, if you’d asked me whether I would consider running for office someday, the answer probably would have been yes,” he said. “With today’s political climate, it’s harder to say.”

His first job, as an analyst for the Public Utilities Commission, was in state government but was focused on policy and technology and less on politics. “I was able to work with the state’s telecom industry but also on wireless service, broadband and renewable energy. I really enjoyed that.” After getting married, Daugaard’s career took him to Sioux Falls, where he worked first as a business analyst and then in the corporate organizational development group at Raven Industries. “I really enjoyed my time there and had planned for it to be my career when I unexpectedly learned Ernst Capital was looking for someone to be an analyst, working on their portfolio and entities in addition to working with investors to raise capital for new investments,” he said. “So I looked at it as an opportunity to do something different and still do analysis while also helping our area communities grow and develop.”

He joined the firm in 2014 and was made a partner three years later. “My day-to-day involves visiting with our current investors as there is always something new going on with our portfolio and something to look forward to, but also meeting with people who aren’t as familiar with Ernst or who are looking to participate in the growth of the region – as an investor, developer or interested community member.” He also oversees the firm’s marketing and communications, and works personally with a few hundred investors.

Ernst generally looks to invest within a 400-to-600-mile radius of Sioux Falls. “We’re happy to be here and looking to grow within the region,” Daugaard said. “We’re working with people who are fun and rewarding to do business with – that’s the type of relationship we’re looking for both from an investor and a partnership standpoint.”

For fun, you’ll likely find him and his family downtown listening to music or checking out a new eatery. “And I like to golf, and my dad and I do a river canoeing backpacking trip every year,” he said. “I’m just very glad to be in South Dakota, doing what I’m doing and growing here personally and professionally. We’re very fortunate to live and work in this part of the world.”

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According to a recently published article, many Sioux Falls area property management companies are seeing historical highs in occupancy and leasing of rental properties. Many Sioux Falls properties are anywhere from 99 to 100 percent leased. “Anything that is coming vacant is almost already spoken for even before it becomes vacant,” according to the article.  

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LINC at Gray’s Station has filled yet another one of the building’s commercial spaces with a high-end nail salon, Tipsy Nails. According to the article, “Tipsy Nails will have everything you would expect with a touch of high-end options like massages and eyelash services at our new location,” Luong said in a prepared statement. “We are very happy to be one of the first businesses to be opening in Gray’s Station.” Luong and his family own and operate Nails, a salon at Cityville on 9th, which will remain open.” The new salon is anticipated to open sometime in 2021. 

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LINC at Gray’s Station has announced a new tenant in one of the building’s ground-floor commercial spaces. According to the article, “Iowa Spine and Performance will open in a retail bay at LINC, 210 Southwest 11th St. It is the third business announced for the commercial ground floor of LINC, which fronts Martin Luther King Jr. Boulevard. Also planned is Mad Meatball, a former East Village pizzeria, and Craft Bru DSM, a 60-handle craft beer taproom. ” The chiropractic clinic is anticipated to open later this summer.  

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An article recently released in the Argus Leader, details the Veterans Parkway interchange construction which is enabling easy access to the east side of Sioux Falls along with future development along the project. The article also goes into future planning of the second half of the project which will connect Veterans Parkway to I-29.    “Construction is planned to start by 2023 and is expected to be completed in the next five years”, according to the article.  

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It was enough to make a husband-and-wife dental team grin. As Drs. Seth and Lauren Schroeder watched the annual Harrisburg Days Parade in 2019, “we saw what we believed was the most jampacked parade route lined with strollers,” Seth Schroeder said. “There’s a lot of families.” To them, that meant demand for dental care.

“We were in dental school at Nebraska, worked a few years and had done a whole bunch of research on where to start our family business,” Schroeder said. “So we set the wheels in motion and sent an email to the Chamber of Commerce and said: ‘Is there anything you can do? We want to be dentists in Harrisburg.’ ” It led them to connect with Gregg Brown of NAI Sioux Falls, who had a future retail center as an option. “It took a year of building, and in September of 2020, we had the doors open and the first patient in the door,” Schroeder said.

Harrisburg Family Dental leased three of the seven spaces available in the new Creekside Plaza retail center – or 3,000 square feet. It’s more than they need now, “but we built it so we can grow into it over the years,” Schroeder said. “We want it to feel like you’re walking into your living room – a nice homey feel versus sterile. And it’s going awesome. You can’t believe how much traffic there is. Our biggest advertising comes from people knowing where we are, seeing the signage.” And it wasn’t long before Harrisburg Family Dental gained new neighbors. The nearly 9,000-square-foot Creekside building drew fast interest, thanks to its strategically strong location at the prominent intersection of Cliff Avenue and Willow Street. It’s now fully leased. “The coolest thing is every single one of these tenants lives in Harrisburg,” Brown said. “These are local people, they have kids who go to the schools, and in most cases, they were brand-new businesses to Harrisburg.”

The tenant mix includes Edward Jones, Evolve Chiropractic, RightQuote and Serenity Nail Spa. “It was clear the demand was to have quality space, a brand-new building,” Brown said. “This was on the heels of Sanford and Lewis breaking ground, you’ve got Fareway and Ace nearby, so Cliff and Willow really has become Main and Main for Harrisburg.” That was the vision shared by Ernst Capital Group, which included Creekside Plaza in its third real estate investment fund with local developer Signature Cos. The Signature Real Estate Income Fund III raised more than $16 million in private investment to support four local projects.

“It’s our first retail and office development outside of Sioux Falls, and we’re thrilled with the market response,” said Chris Daugaard of Ernst Capital Group. “The occupancy and tenant mix here show the momentum Harrisburg is experiencing residentially, and it’s clear Creekside Plaza is positioned to meet a need commercially.” Construction will start in the coming weeks on a second, nearly identical retail center, that will be available this fall. Suites range from 985 to 1,792 square feet, including end caps with drive-thru capability, building and monument signage and five-year minimum leases.

“Part of what is making this such a desirable fit for businesses is the approach that developer Signature is taking with construction, using an in-house architect, so we can meet with a prospect, turn around a space plan and lease proposal and then quantify for them what their contribution would be toward the build-out,” Brown said. “Signature builds out to its specs, and then the tenant pays for any upgrades. So they pick their finishes, and the speed to market is amazing. It’s been a difference-maker and made it really seamless and a unique model.”

Creekside II could be a good fit for a fitness center, coffee shop, bank or any other retailer or service provider looking to capture the growing Harrisburg market, Brown added. “There were a lot of prospects we talked to who couldn’t commit during COVID, so my hope is they will be ready for a building that delivers later this year,” he said, adding there’s also room on the site for a standalone restaurant, bank or office. “Ernst Capital Group makes the decisions on leases with Signature, and Lloyd Cos. manages it, so we have a lot of parties involved, but it’s worked really seamless and been a lot of fun to work on,” Brown said. Schroeder encourages other business owners to consider locating there.

“I would say there is a massive amount of traffic, and it’s a small-enough town where, when your business is being built, everybody already knows what you are,” he said. “If you have a service people need, they will utilize you rather than going to Sioux Falls.”

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It’s tax season, and hopefully your income and investments fared well in the past year – but now you might have a big tax bill to show for it. If your investment portfolio includes real estate, however, your tax burden might not be so high. “Many of our investors don’t initially consider the potential tax benefits as part of their investment, but they definitely should,” said Chris Daugaard, a partner in Sioux Falls-based Ernst Capital Group. “Especially for investors who may be in a high tax bracket, it becomes more and more important for them to consider the tax on their investments and on their income in general.”

Ernst Capital Group allows investors to add real estate to their portfolio by investing in local and regional commercial properties, including multifamily communities. “As we talk through how our opportunities are structured, many investors aren’t aware that in addition to the other benefits of investing in real estate, there can be advantages when tax time comes around,” Daugaard said. “It’s a bigger deal for more people than they might think.” How so? Start with these three reasons.

Tax deferral through depreciation

Income tax from investment real estate is often deferred, especially at the start of the investment, with most of the tax deferred until an investment is sold. “Most of the taxable income becomes backloaded in the investment, even though it’s still a cash-flowing property for you,” Daugaard said. “This ultimately reduces your tax liability along the way.” When you own commercial real estate, you can take advantage of depreciation. This can seem a bit counterintuitive because real estate investments tend to appreciate over the long term. However, the ability to use depreciation throughout the life of the asset can count against your income, reducing your tax liability. “For instance, if you have a 10-year real estate investment, it’s not uncommon for the first few years to not have taxable income due to depreciation,” Daugaard said. “And even when you do start to have taxable income, there’s still some depreciation built up from those earlier years to offset it. Sometimes you don’t have cumulative taxable income until toward the end of a 10-year investment.”

Cash flow remains

While depreciation helps reduce your tax burden, it doesn’t impact the cash flow of the property. “You can be receiving cash flow from income generated from your real estate investment while still taking the depreciation expense. It is an expense that does not affect cash flow,” Daugaard said.

Appreciation and capital gains advantages

While real estate generally appreciates over time, that appreciation is subject to capital gains. Those long-term capital gains taxes typically are “at lower rates than what you would have paid on ordinary income otherwise,” Daugaard said. “And while you will pay some depreciation recapture, it’s usually at a rate of 25 percent or lower, which for many investors is lower than their ordinary income tax rate. However, everyone’s tax situation is different, and we encourage everyone looking to make investment decisions to discuss their individual situation with their tax adviser.” But tax advantages are just one benefit to investing in real estate – especially when you’re working with a local firm like Ernst Capital.

To see others, click below.

Thinking of investing in real estate? Go local and simplify with this approach

The information in this article is not providing tax advice. Please consult your tax adviser for information regarding your individual situation. The information contained in this article is not an offer to sell securities. If an offering is made, it will be through a Private Placement Memorandum, which will contain details of the offering, including a discussion of risk factors. An investment decision should be made only after a careful review of the Private Placement Memorandum.

Ernst Capital is used in connection with several entities owned and controlled by Todd Ernst, Rick Martin, Nick Gates and Chris Daugaard, including Ernst Capital Group LLC, Ernst Capital Securities LLC, Ernst Capital Partners LLC and Ernst Capital Holdings LLC.

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Real estate investing can be a strategic benefit to many portfolios – but whether it’s seamless or stressful can depend on the approach you take. “The concept of buying a property and having your mortgage payment covered with a little income and equity over time is pretty appealing, but there’s a lot that goes along with being a property owner that many investors don’t consider upfront,” said Chris Daugaard, a partner at Sioux Falls-based Ernst Capital Group. “A common approach is to invest in a Real Estate Investment Trust, or REIT, but most if not all of that investment goes to properties elsewhere. It doesn’t go to your community. With our approach, you can invest in your own backyard and allow us to take care of everything that happens behind the scenes to succeed in real estate.” As a Sioux Falls-based firm dedicated to real estate investing, Ernst has become a regional leader in the field, recently closing an $16 million capital raise for a fund that included multiple large apartment complexes and retail centers in Sioux Falls. As many investors are discussing, there are multiple benefits to this passive investing approach.

Ernst handles everything. The idea of buying a home, duplex or small multifamily property to generate real estate income might not sound too complicated, but there’s a lot to consider. First, the market is exceptionally tight for single-family homes. “It’s very difficult to buy a home at a competitive price where then turning it around and renting it out is a compelling investment,” Daugaard said. “Let’s say you’re buying a $200,000 home. There are a lot of people who are super active in that market, and some are willing to write a $200,000 check with no financing, inspection or other contingencies.” Even once you secure a property, you still have to keep it leased. “And that means you’re competing with property managers and apartment communities that offer a ton of amenities and a streamlined experience,” Daugaard said. “They have a team of leasing professionals, websites, payment portals, contactless move-ins, virtual showings. So there are hurdles and challenges.” With Ernst, qualified investors simply write a check when investment opportunities are available and a good fit, and then wait for Ernst to send a monthly check or direct deposit with their earnings. Along the way, Ernst and its partners are involved in the development, construction, financing, property management, bookkeeping, tax returns, asset and performance management, lease and property sales. “There’s a lot that goes into managing a real estate asset throughout its life cycle that you never need to worry about when you work with us,” Daugaard said. “And while we’ve experienced significant demand from investors, at a high level we are able to have conversations with potential additional investors as we’re working on opportunities for 2021.”

You can receive regular, simple payments. This is going to sound a little “too easy,” but it’s true. When funds are making distributions, Ernst Capital investors generally receive distributions monthly, paid by check or direct deposit, providing steady cash flow. “Investors who are in, say, five of our funds might get five direct deposits each month,” Daugaard said. “They have the flexibility and cash in their pocket, so they then can decide how they want to manage their money from there.” “It’s not guaranteed, as each of these is an investment. If someone is telling you an investment is guaranteed, you should quickly head the other direction. However, we’re looking to buy and build properties that we think will have a high likelihood of paying that distribution regularly and hopefully each month from ongoing cash flow.”

You can sleep through the night. You know that vision of owning a rental property? Does it include getting woken up in the middle of the night because the furnace isn’t working? That’s reality for landlords, who find themselves juggling maintenance and leasing needs large and small. “With our approach, you’re not the one trying to find a plumber at a moment’s notice or making the trip to the hardware store to figure out an issue yourself,” Daugaard said. “The leaking faucets, bad water heaters and broken air conditioners aren’t your problem. And you won’t find yourself before the planning office or city council needing to get your property zoned or up to code.” And don’t forget: Just because you own real estate doesn’t mean someone always is renting it. That makes for sleepless nights too. “Your property might go vacant for a few months, and without that income, you’re having to write the check for the mortgage and cover the utility bills for things otherwise covered by the renter,” Daugaard said. “Those become your worries very quickly.”

You’re not the one guaranteeing the loan. One of the lesser known pieces of different real estate investments is loan guarantees. “It’s not uncommon for real estate investors to have to personally sign for some, if not all, the loans to buy or build their projects,” Daugaard said. “If a deal doesn’t go as well as you hoped, you’re on the hook for loan principal or making payments.” Ernst Capital and its development partners guarantee any financing that is in place, if required by the bank. “So your risk is really limited to your investment and not to the guarantee of a loan or the performance of the loan, which is a big deal,” Daugaard said.

You’re investing where you live. Ernst Capital investments are everywhere you look in Sioux Falls and increasingly throughout the region. “A lot of our investors and our team appreciate that the work we do is dollars being invested back into our community, building both housing and business opportunities and growing jobs,” Daugaard said. “So there’s a lot closer payoff.” With investments across the city, including in the core, Ernst investors can drive by and see their investments as they’re being built or operating. “It’s a real tangible piece to what we’re doing instead of national investments with assets you’ve never seen and likely don’t know much about,” Daugaard said. “We have investments all around our community. We just made our first investment in Harrisburg, and as the communities around Sioux Falls continue to grow, we expect to continue investing in our area’s growth. As an individual investor, it would be very hard to diversify like that and even harder to invest at scale, for instance, in a 300-unit apartment building.” Bottom line: You don’t have to become a landlord or invest out of state to become a real estate investor. “The way we approach this is seamless, successful and a lot of fun for investors,” Daugaard said. “People like investing back where they live. If they can get great investment returns while investing close to home, it’s the best of both worlds.”

The information contained in this article is not an offer to sell securities. If an offering is made it will be through a Private Placement Memorandum, which will contain details of the offering, including a discussion of risk factors. An investment decision should be made only after a careful review of the Private Placement Memorandum. Ernst Capital is used in connection with several entities owned and controlled by Todd Ernst, Rick Martin, Nick Gates and Chris Daugaard, including Ernst Capital Group LLC, Ernst Capital Securities LLC, Ernst Capital Partners LLC, and Ernst Capital Holdings LLC.

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On the rare occasion a two- or three-bedroom town home apartment becomes available, Adam Dather knows it won’t take long for his phone to start ringing. “It’s pretty rare to see one available for longer than a day,” said Dather, a property manager at Lloyd Cos. “Our residents are attentive, too, so they check availability because they know the town homes are tough to get into. I usually get three or four phone calls from people in the property.”

Despite having 292 apartment units in varying styles, The Commons rarely has much vacancy. “We have a habit of being perpetually full,” Dather said. “More often than not, if we have more than 1 percent of units vacant, it’s rare. Out of 292 units, you typically have 282 to 290 of them filled up.” Ernst Capital Group saw that potential several years ago when it partnered with developer Clint Ackerman, owner of Signature Cos., to raise equity for the project. “It was a compelling site with great visibility,” said Chris Daugaard, a partner at Ernst Capital. “There’s a waterway that runs through the site and creates some nice little ‘neighborhoods’ within the property. Because there’s city land across the street, the property will always have visibility to the interstate as well, without being right next to it.”

The Commons is easily accessible by both Interstate 229 and the nearby major intersection of 69th Street and Louise Avenue. “The original vision was really bringing affordable, market-rate rental housing to that area of Sioux Falls,” Ackerman said. “Given the proximity to a lot of retail and jobs and other industries in the area, that location really was well positioned for what a lot of entry-level renters are looking for.” Ackerman deliberately integrated a variety of housing units within The Commons, including traditional apartments in a three-story building, town homes with attached garages and town homes without attached garages. “That gives us three different products, and even though they’re not that far apart, it helped us stabilize the property better,” he said. That was appealing to Ernst Capital as well. “The Commons was our first development that was large enough to feature all three of Signature Cos.’ major building types in one site, allowing us to offer residents everything from a studio apartment to a three-bedroom, two-bath town home with a double attached garage,” Daugaard said. “We can have diverse options for what most any resident may need, with a great amenity package.” Bringing the project to fruition through a capital raise also was a positive experience, Ackerman said. “Ernst Capital is always great to work with,” he said. “It’s just a very easy process when they’re raising the funds for you and putting the capital together. It was a seamless process, and that’s why we always go with them.”

The property began opening in phases in 2017. “It’s not a typical apartment look,” Dather said. “We have a lot of exposed ductwork even in our flats, or condo-style units, so it has more of a downtown-loft feel without paying the premium for a downtown loft.” Popular resident amenities include a large community building, media room, fitness center, outdoor pool and dog park. “The pool is jampacked all summer,” Dather said. “And our fitness center gets regular daily use.” The variety of apartment styles is a significant factor in retention. “We have a good retention rate,” Dather said. “Because we have such a variety of homes, we have a lot of people who maybe move into a standard apartment and after six to 18 months maybe want something bigger and graduate into a town home. So letting people move within the community definitely has appeal and keeps people here longer than they might otherwise be.” Being part of the Harrisburg School District also has been a big benefit, Dather said. “And we’re just far enough from 69th Street and the interstate where I’ve never had a concerned parent worried about cross traffic, plus we’ve got two bus stops and a city park nearby.”

Going forward, the area likely will be an even more sought-after place to live, Daugaard said. “The Avera on Louise campus is only going to expand, along with the nearby Edges office park and future development along 69th Street, 85th Street and Tallgrass Avenue. They all point to this area continuing to be in high demand for housing well into the future.”

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