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.
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.”
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.
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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.
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.
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.”
Amazon has announced a second 270,000 square foot sortation center that will be built next to the 645,000 square foot fulfillment center. The larger warehouse is to open toward the end of 2020. The newly announced warehouse will provide 100 additional jobs to the area. “Amazon will hire 100 full-time workers at the new warehouse, which developers should finish building by July. The company also will hire 200-300 temporary workers during busier seasons.”, according to the article.
Amazon recently announced the need for around 1,000 new employees to work in the new fulfillment center in Bondurant. The new center is an exciting addition to the area. Blue Ridge Commons is under construction less than two miles from Amazon’s new location. City Administrator, Marketa Oliver has stated “It’s a huge addition to the community, when you have people working in your community, they’re going to stop and get gas. They’re going to eat lunch. They’re going to buy groceries here. Maybe they will decide to buy a home in the city. It’s a huge deal to have that center of employment.”, according to the article.
Major apartment projects, established retail development and a new property in Harrisburg all are part of a local firm’s latest investment fund. Sioux Falls-based Ernst Capital Group recently closed 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. “We’re excited to have these four new, local investments in the Sioux Falls area,” said Chris Daugaard of Ernst Capital Group. “Our investors can drive around our area, see the projects and know that’s what they’re helping to build. When you look at where we’re investing, you also can see where we think growth is heading in this market.”
Willows Edge Commons
A significant portion of the Signature Fund III is an investment in the Willows Edge Commons apartment project, “the entry point to a larger development that’s going to be really, really cool,” Daugaard said. “It will transform the area.” The full 180-acre development from Signature Cos. is along Arrowhead Parkway between Dawley Farm Village and Willow Run Golf Course and will include commercial, multifamily and both single-family and town home for-sale units. The area also will feature a planned recreational trail running through the entire development, with two pedestrian bridges and integrated city park land, highlighting the waterway running through the site.
The first phase will be on 18 acres and include 334 multifamily units. The style will vary, including about 150 units in three-story traditional center-load apartments and the remainder in town house-style units with and without attached garages.
“This is along a main corridor into Sioux Falls with a lot of neighborhood commercial in the area that we’ll control,” Signature owner Clint Ackerman said. “We feel like multifamily is a great catalyst for everything in those developments given its proximity to the eastern gateway of Sioux Falls. It’s a direct shot to downtown and a lot of employment.” The apartments will include community amenities such as a coffee bar, gaming area and golf simulator plus a fitness and pool area. Construction has started, and the plan is to start leasing in early 2021.
Whisper Ridge Commons
On the far southeast side of town, another apartment complex developed by Signature is leasing up. Whisper Ridge Commons was also part of the Signature Fund III and includes two buildings totaling 221 units with a two-story attached community building at Graystone Avenue and 69th Street.
“They’re more of a traditional market-rate center-load apartment,” Ackerman said. “I think the southeast part of Sioux Falls really carries a residential feel, and people like to go home to somewhere that feels like a neighborhood, whether they rent or own. So that part of the community really seems to flourish.” The units range from one to three bedrooms and have a modern, almost downtown, feel to them, including some two-story loft units.
“We figured there’s no reason you can’t do that look in the ‘burbs, and it’s going really well,” Ackerman said. “Lease-up is going very well. We just opened the doors to the first 60 units in September, and we had about 40 leased opening day. Residents share an amenity package that includes a two-story clubhouse with a lofted fitness center, gaming area, golf simulator and indoor/outdoor social spaces plus an outdoor pool and patio. The second building is expected to be ready in April. “The 57th and Sycamore area has been busy for some time now, and I think you’re seeing development push down to 69th Street, and it will continue to move,” Daugaard said.
The Signature Fund III also includes investment in an existing property, Waterfall Plaza on the southwest corner of 69th Street and Minnesota Avenue. “We like the existing tenant mix, and we think it’s an attractive property in a lot of ways,” Daugaard said. “It’s well designed, and it’s got good visibility. This isn’t a corner that’s going to be slowing down. If anything, there are more rooftops coming nearby, so we think the traffic will be solid, and there will be a good opportunity to fill vacancies if we have any.” There aren’t any now. Waterfall Plaza is fully leased with retail and office and is adding on to the gaming side of Tinner’s restaurant. “That’s obviously encouraging given some of the challenges seen elsewhere this year, so we’re happy with the performance and think we’re going to see continued strong activity here,” Daugaard said.
“We’ve done a number of funds like this where we’re looking to pair new development properties with existing properties that are stabilized and we acquire. It creates a small portfolio with some diversification.”
Ernst Capital also included its first investment in Harrisburg in the most recent fund. The Creekside retail and office center at Cliff Avenue and Willow Street “is our first development in the Sioux Falls metro area that’s not in the city limits of Sioux Falls,” Daugaard said. “We anticipate a couple more investments as these lease up. The site offers outstanding visibility and surrounding future developments, include a Sanford clinic and B&G Milkyway.” The retail center developed by Signature has solid occupancy, Ackerman said.
“I think about 70 percent of the space is spoken for right now, and we feel it’s meeting or exceeding expectations and doing very well,” he said. “We’ve leased multiple spaces to a dentist, another space is a financial planner, and we are working with a couple of other interested businesses about locating in the remaining spaces at Creekside Plaza.” Overall, working with Ernst to raise capital for the projects has been a good process, he added.
“They’re a great equity partner. Everything is on time and on target, and they’re just easy to work with.”
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