A lot has changed in the 51 years since four schoolteachers from the suburbs of Chicago founded Inland, a small development firm specializing in single-family homes.
The company has since grown to touch nearly every corner of the real estate world, from property management to sales and acquisitions to tax law. By the mid-2000s, Inland’s investment company had became one of the country’s top real estate financing vehicles, managing REITS channeling billions of dollars each.
But through it all, Inland never stopped building.
In a Q&A with The Real Deal, Anthony Casaccio, CEO of Inland National Development Company, revealed how the company managed to keep growing through a half-century maelstrom of political and economic shifts.
Casaccio described how Inland took a 180-degree turn after the Tax Reform Act of 1986, became a “pioneer” of triple-net leasing, and shapeshifted from multifamily to land development, then to retail, and then back to multifamily with a 100-unit building now under construction in Logan Square.
He also sized up the perks and pitfalls developers face in Chicago’s unique political system, issued caution on Opportunity Zones and described what distinguishes this city’s renters from those in other parts of the country.
This conversation has been edited for length.
How long have you been with Inland? How did you get started with them?
I started with Inland in December 1984, so I’ve been here 34-plus years. I started out originally in property management, did that for several years and started in property dispositions. At one point Inland had over 40,000 apartments in Chicago, but just prior to the Tax Reform Act of 1986 we started disposing of some of those assets, and I was in charge of dispositions of the apartment complexes, primarily in Chicago. So over the next five or six years I sold literally thousands of apartments, structured the deals and everything. Back in those days financing was much different than it is today, interest rates were significantly higher, and getting new financing was very difficult, so we were very creative in our structure and how we orchestrated deals, with wrap financing. We structured it so that the payments on the wrap [secondary] mortgage were always greater than the underlying mortgage so [buyers] had the ability to make a payment and make a cash flow as well. And we did very well with that, because as the economy improved in the ‘80s, people then had the ability to go finance the underlying loans and get rid of the wrap mortgages.
What was it about the Tax Reform Act of 1986 that made it necessary for Inland to switch its strategy?
The Tax Reform Act theoretically took away the ability to accelerate depreciation on real estate. In the heyday, you had limited partnerships so you could create tax write-offs for investors. The Tax Reform Act of 1986 took that away. And when that left, you just can’t unwind what you already did, so at Inland we found a way to start selling those apartment complexes.
So what did Inland invest in after that?
After that, I was asked to get involved in three public land funds we created, where we would acquire vacant land and entitle it, go through the zoning process and increase the value, and then sell it. We would entitle it to be allowed whatever number of lots in a subdivision, and we actually started building the subdivisions and would do all the horizontal construction. We would do all the earth work, we’d put the sewer and water in and would create what back then we would call “paper lots.” We’d have a subdivision with 300 residential single-family lots, we put in all the sewer, the water, the roads, the public infrastructure, and then we would sell them to national homebuilders. And we did that for a number of years, and did very well with that.
This was all for single-family home development?
Yes. We also developed land for shopping centers, and we built several industrial parks, so we’ve done a little bit of everything. But our primary focus has always been residential multifamily and hospitality.
Before 1986, the syndication business was almost exclusively through multifamily apartment buildings. So we would acquire the apartment buildings, we would syndicate them with a network of broker-dealers and investment reps, and that was the same business model for the first 15 years. When tax reform came in 1986 we had to pivot and shift. We became one of the pioneers of triple-net lease deals, where the tenant would pay all expenses for maintenance and insurance, and for the landlord it’s like a coupon we collect every month in the form of rent. We did that with Walmart, for example. By the late ‘80s, we had about 145 Walmart stores where we owned the land under the building and they were our tenant. But Walmart, like McDonald’s, shifted its business model and wanted to own its real estate. So over the course of time, Walmart no longer needed the triple-net lease scenario, they would own their own ground and build their own buildings.
So that was a big part of Inland’s strategy after tax reform in 1986?
Yes. That was necessitated by the fact that we needed to protect our investors. And we were also one of the first to do 1031 exchanges. So for the investors in a number of the apartment complexes, if we weren’t able to return all the investors’ capital, we would tax-free exchange them into a Walmart or a series of Walmarts to protect their investment. So Inland was proud that we could say an investor never lost money with us, because we would do these tax-free exchanges.
We’ve always tried to evolve. When you see a trend coming, we try to get there before it’s too late. That’s why we got into the land business and got into other avenues. We started doing commercial once residential was no longer the flavor of the month, so to speak. So we’ve always evolved into other areas, and I got into the land side of it after we created these three land funds.
So how did Inland come full-circle back to apartment development?
Just prior to the recession we had entered into a joint venture with AIG, the global real estate division of the insurance company. They were a great partner, and we did a number of those developments I previously talked about, but then everyone knows what happened to AIG during the recession — it became the federal government. So we had to unwind a lot of those land holdings and work out a lot of issues with lenders. So I did that for the better part of the next three or four years, and we started seeing development coming back in a different sector, and this time it appeared to be multifamily apartment buildings. So we started acquiring land and built and sold an apartment complex in a suburb of Denver, we built and still own a hotel in Schaumburg, we just built and opened a second hotel in Holland, Michigan. Right now under construction we have a multifamily project in Austin, Texas, one in Tampa, hopefully we’ll be starting two more in St. Petersburg, Florida, we have another one we’re working on in Colorado, and then we have the Chicago project on Belden [Avenue], and that is a 100-unit building in Logan Square. And we have a pipeline of more assets coming.
How did Inland’s portfolio get from being so concentrated in Chicago to being spread across the country?
We primarily have tried to follow job growth, which has been the key driver on both the multifamily and the hospitality. Let’s focus on the multifamily for example. Downtown Austin is a very hot market, but in our opinion it’s kind of overbuilt now, so we focused in an area in the northwest part of town called Tech Ridge. It’s the fastest-growing technology hub outside of California, and the job growth there is tremendous. We’re not looking for the class-triple-A high-rise building in Downtown Austin. We want the buildings that have nice amenities, that people can afford reasonably and that are well-built. Tampa is another one. Tampa and St. Petersburg, again, tremendous job growth. Our strategic plan has selective markets across the country: Florida, Colorado, Texas, and we’d like to get into Utah.
I’m a born-and-raised Chicagoan, but unfortunately, it has become more and more difficult to build in Chicago. We were fortunate to find this particular project [in Logan Square]. But we probably couldn’t do this project today, given the same economics, because of the increase in the affordability aspect of it. There are other things happening with [steel] tariffs, and now the mayoral race mess has just created a nightmare for developers. Chicago is is the only place in the country where aldermen have the ability to make or break a deal on their own. And it’s a very scary proposition, if you don’t know what you’re doing. Chicago is a world-class city and it’s done very well with multifamily in this cycle, but the barriers to entry and the ability to get projects done have made it difficult.
When you say the increase in affordability would have made the Logan Square development harder, you’re talking about the Milwaukee pilot zone of the Affordability Requirements Ordinance?
Yes. The ARO is not going away — in my opinion, it needs to be adjusted. In the past you could pay a fee and you could contribute to a fund that was supposed to build affordable housing. But in these hot areas, the rents are getting north of $3 a square foot, and a nurse, a firefighter a shop-owner can’t afford that, and people are being forced to relocate. I don’t have all the answers, I don’t know what the solution is, but [the ordinance] is going to affect values, simply because the more affordable units you put in, the harder it is to justify the financing for a project. So ultimately, the sellers of real estate are going to feel it.
So it is possible to build on land inside pilot zones, as long as the sellers of the land set their prices low enough?
Ultimately, that’s what’s going to have to happen. Because you can ask whatever you want for a property, but if the purchaser can’t make it work, you’re never going to sell them. So sellers are going to find they’re being traded down, because there’s no other way to deal with it. You can’t force it. People who own the real estate currently are having a problem, because that’s not what they bargained for when they bought the land. So for us, the alderman asked us to raise our affordable units from 10 percent to 15 —
This was Alderman Moreno in Logan Square?
Yes. So we made the deal with Alderman Moreno to have 15 percent. And it’s going to be fine, assuming everything stays well and the rents are sustainable.
Do you like the system of aldermanic privilege, where you as a developer getting your project approved basically comes down to a face-to-face meeting with one person? Or would you prefer a more regimented system where it goes through executive agencies?
I think the way Chicago is set up with 50 aldermen, the conventional way would be very difficult. Because trying to get 50 people, or even 26 people, to agree on something is hard. The current system is probably at the opposite extreme, and there are a lot of potential problems that come with that. But when you sit down with the alderman and his or her chief of staff, just like you describe, and you understand what they’d like to see, at least you know what you’re dealing with. The thing that can change that, in my experience, is that they make you go to public meetings. You get a lot of people coming to those meetings who have a particular issue that they don’t like, and those meetings tend to run on very long, and you lose a lot of discussion because people just wear out.
But like I said, Moreno wanted us to agree to an additional 5 percent, and we agreed to it. It was all very open, it was all above-board and it was fine. Again, as long as I know the rules, I’m OK with that, and we adjust our deal accordingly. Either it works or it doesn’t. As long as we don’t keep moving the goalposts, and if I’ve underwritten it properly, then I’m fine.
So why choose Logan Square for Inland’s first new multifamily development in decades?
We chose Logan Square because it’s not Lincoln Park, it’s not Streeterville, it’s not the West Loop. It’s more of a millennial-driven trendier area, highly-educated, young millennials who are transit-oriented and right on the Blue Line. So we ventured into this project cautiously, and we’re hopeful that it works.
Looking back at Inland’s history, it’s had a pretty car-centric development strategy. But this one is taking advantage of the city’s transit-oriented development rules to have less parking. Is that part of a larger change in course for the company?
I think it’s really based on location. The project I mentioned that we built in Lakewood, Colorado, that’s a transit-oriented development, literally across the street from the light rail system. But the parking we have there is 100 percent full. Because in Denver, even though people like to take the train to work and for entertainment, they still really like to go to the mountains on the weekends, and we found that people still really want their cars there. And on Belden, we have the TOD, 27 spaces for 100 units, and all the market research we’ve done indicates it’s going to be a heavily transit-oriented group that’s going to rent there — millennials looking for a nice common area amenity package. They want things different than I did when I was their age. The units are smaller, and all our market research is saying they want common space. They don’t want to be in their apartment, they want to be where their peers are. So you have to design and build accordingly.
Do you think that’s part of a wider phenomenon in tenant preferences that you’re seeing nationwide, or is that something that just Logan Square indicated would be attractive?
Every area is different. TOD in Colorado is different because of the mountains. In Chicago, public transportation, biking and walking really don’t bother people, even in this climate. In Austin we’re also gearing toward young professionals with a high-amenitized apartment complex, but they’re going to have cars, so you’ve got to have parking for them. Each development is different. And if we’re doing our job, we really have to study it so we can understand who our market is, and who we’re trying to attract in that particular property, so I don’t think there’s any pat answer.
Is Inland looking seriously in any Opportunity Zone areas? How do you size up all the investor hype that’s building up around them?
I understand what Opportunity Zones are, I know how they work —
Well no one really knows for sure until all the regulations come out, right?
Right, because they’re still too new. And the problem is, the intent of Opportunity Zones is admirable, but the execution of building in Opportunity Zones is going to have to work fundamentally, and all the community benefits that are supposed to be derived from it are secondary. It’s got to work financially to begin with, otherwise I don’t know that it’s going to solve anybody’s problems. It might exacerbate their problems. We’ve been approached by several groups throughout Chicago, in Bronzeville, in Chatham — Bronzeville is one of those that I think can work. I think it’s on the cusp of happening. But again, it gets back to the sellers understanding that just because an Opportunity Zone designation has been given to your property, that doesn’t necessarily give you gold that you now own, and that you can get a high price for. At the end of the day, if the numbers don’t work, it still doesn’t work. I don’t care what benefits there are, tax-wise.
A 1031 exchange program allows you to defer taxes ad infinitum if you want, as long as you know how to do it. But if you put money into an Opportunity Zones, you don’t have to pay tax on that if you hold it for more than 10 years. So even if they have the money set aside, which is probably not the case, you’re still going to have to pay it eventually.
What’s Inland planning next? Is there another pivot in store?
I can only speak to the development company, but we’re going to continue to focus on multifamily and hospitality. We’re exploring medical office properties, we’re looking at self storage, and that’s about it. We’ve been approached by different people to do student housing, but it’s an area that we haven’t quite gotten comfortable in, although other parts of Inland have. Buying existing is one thing, but ground-up is a different matter. And that’s pretty much it. We’re going to follow job-growth markets, with very diligent underwriting on every project we build.