How Opportunity Zones can succeed

How can five different groups of Opportunity Zone stakeholders come together to make the program a success? And what can we expect the Biden administration to do with Opportunity Zones?

Ira Weinstein, managing principal and Opportunity Zones practice leader at CohnReznick, and Steve Glickman, founder and CEO of Develop LLC, an Opportunity Zones advisory firm, and former co-founder and CEO of the Economic Innovation Group, joined OpportunityDb.com's Opportunity Zones podcast hosted by Jimmy Atkinson to answer a range of questions on OZ, including:

• How community development needs have evolved and become even more urgent as a result of the COVID-19 pandemic
• How the federal government can further prioritize Opportunity Zone communities with increased capital investment
• The geographic regions and industries that may be ripe for increased Opportunity Zone activity in 2021
• The concept of the Opportunity Zone incentive as a tool that can “prime the pump”
• The five different types of Opportunity Zone stakeholders addressed in Steve and Ira’s book
• Why the Opportunity Zones initiative has already been a huge success so far, and what needs to happen for Opportunity Zones to reach their fullest potential

Listen to the podcast on OpportuityDb.com by clicking below.

Full Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. On today’s episode, we’ll be discussing some of the top Opportunity Zone issues, and considerations for 2021 and beyond. Joining me on the show today are Steve Glickman and Ira Weinstein. Steve Glickman is Founder and CEO of Develop LLC, an Opportunity Zones advisory firm.

Steve was formerly co-founder and CEO of the Economic Innovation Group, where he was instrumental in designing and championing the Opportunity Zones legislation. He is known to some as the “Godfather of Opportunity Zones.” Ira Weinstein is managing principal and Opportunity Zones practice leader at CohnReznick, a professional services firm.

Late last year, Steve and Ira collaborated on a new book, The Guide to Making Opportunity Zones Work. Steve joins us today from Washington, DC. And Ira comes to us from Baltimore, Maryland. Gentlemen, thanks for joining me today. And welcome to the podcast.

Steve: Thanks for having us.

Ira: Thanks for having us.

Jimmy: Absolutely, guys. Really excited to have both of you on the program today. So, we’re recording this episode in late January 2021. And currently, we are still in the midst of a global pandemic. So, I’ll ask both of you, you can both chime in, how have community development needs evolved and become even more urgent as a result of the COVID-19 pandemic?

Ira: So, I think… I mean, there’s some obvious issues just the mere fact that the public health crisis, the COVID-19 have had a pretty devastating economic implication in a lot of places, I think, in any sort of crisis like this, low-income communities are gonna be the first ones to suffer and often suffer the most. So, I think that’s been largely true here. I think, obviously, lots of people living in these communities have been forced to be out working consistently, not necessarily working from home like Steve and I can do, and often are those essential workers that we all rely on and that puts them in greater harm’s way.

I think it’s also true that while there has been actually an increase for many in wealth, a lot of the people working in these communities have not enjoyed that same benefit. So, I think sort of the critical elements of daily living for a lot of people in these communities has suffered, their disposable income and maybe suffered as well. So, I think the economic activity in these spaces has really been constrained.

At the same time, I think there’s been, as we’ll get into, I think, over the course of this discussion, I think there’s been a greater sense of urgency for others who wanna have an impact. And I think that’s where Opportunity Zones can play a big role. And maybe the silver lining is that maybe this shines a greater light on the plight of these communities and the opportunity to make things better for everybody.

Steve: I think Ira did a great job describing the situation on the ground. Maybe I’ll provide a little bit of the public policy layer to this, which was always a big part of the rationale behind Opportunity Zones, which is that in the midst of everything Ira describes that we have less and less capacity to actually address the core economic problem. What you see happening in Washington now is really a band-aid to keep people in their houses and off food lines through the stimulus packages.

But if you look at layered… farther down, one of the biggest impacts I think of the last year or so has been at states and cities are going broke. Their tax base is evaporating. Their budgets are on a thin thread. And a lot of the anchor institutions that in particular Opportunity Zones were built around and that many of these communities employment bases are built around whether they’re healthcare and hospitals or education and university and colleges are also feeling an immense amount of fiscal pressure because, in fact, the students aren’t in classes and a lot of the ways that hospitals made money through elective surgeries isn’t happening anymore. And so that means that a lot of the building blocks of getting communities back in a good place are not there anymore.

This may be even a worse scenario than we saw during the recession a decade ago. And that really leaves the private sector, which to Ira’s point, you know, if you think about this as a K-shaped recovery, the large companies and the wealthy investors who have done so well consistently over the last 12 months, we really need them as a country and as communities for them to step up and fill this gap because I don’t think the money and the resources are gonna come from anywhere else.

Ira: I think, Jimmy, too, if I could just follow on to that, we really hadn’t gotten… I mean, the whole need for Opportunity Zones came out of the great recession and the inequity in how things recovered. And the fact that so many of these communities were left behind, and before we really got to final regs, or as we got the final regs and we’re in a position to really kind of launch forward with Opportunity Zones, getting hit with the pandemic, and on top of which having all the social unrest that ensued and impacted a lot of the communities, communities of color, communities that happened to be Opportunity Zones or have implications to those communities.

I think that the urgency was just front and center for a lot of people. And I do believe that what Steve describes and the policy implications, I think we’re actually gonna be headed into a really positive direction because I do think that going forward there’s gonna be a lot more interest in making a bigger difference and for a longer timeframe. I hope that our mindset has shifted into thinking more long term than we ever have and being willing to appreciate the need for some level of equity in the sort of the economic infrastructure we have.

Jimmy: Well, I agree. I agree with everything both of you gentlemen said. And I think it’s a brilliant program, obviously, a little bit biased. I’ve been working in the industry for a couple of years now, but I just love the fact… I love how the legislation crafted or how the policy is crafted, such that it’s an economic incentive for private investment. And it’s really more or less hands-off from any sort of central authority administering the program. But that said, there are some things the federal government can do to ramp the program up or down. And we are in a new administration now.

Steve, you served as an advisor in the Obama-Biden White House prior to your founding of the Economic Innovation Group. So, I’ll turn to you to chime in on this next question first. How do you expect the Opportunity Zone program will evolve under this new Biden Administration in the coming years? What changes do you think we can expect?

Steve: Thanks for that question. I was talking to a reporter who follows Opportunity Zones a few months ago, right after the election actually. And he asked me that very similar question, but more along the lines of how soon is the Biden Administration going to get rid of the program? And I said, “Well, I’m not sure I accept your premise.”

Now-President Biden did a big event around Opportunity Zones after the time when he was Vice President. His Vice Presidential nominee then, now-Vice President [Kamala Harris], one of her first events upon joining the ticket was doing an event on Opportunity Zones in Wisconsin with African-American voters, and talking about that group of voters, they want to double down on this program.

And the President’s Chief of Staff, Ron Klain was the right-hand person to Steve Case, who was one of the big champions. Jared Bernstein, one of his chief economic advisors. So, there’s a lot of people around the President who have a lot of skin in the game in this program and want see it continue to succeed and grow. And he goes, “Why do you think that?” And I said, “Well, maybe they think it’s a good idea.”

There’s been this notion, I think, baked into some of the coverage of Opportunity Zones over the last few years for some legitimate reasons and for some other reasons that this is a Trump program. And that really couldn’t be farther from the truth. This program was created years before Trump was President, and is really embraced not just in DC, but as you probably know, Jimmy, by mayors and governors around the country, most of whom are Democrats because it’s become such an important tool in the toolbox.

And I think the same thing is true going forward. If you look at one of the few things…one of the few programs the Biden campaign pointed to, one of them was Opportunity Zones as part of the way that this administration was seeking to address racial equity issues. And I think it’s clear that President Biden’s administration is looking to double down on the question of not just inequality broadly, but racial inequities, in particular. And as anyone who’s studied the OZ map knows, 60% of Opportunity Zone communities are non-white.

These are African-American and Latino communities around the country who have, in many places, disproportionately been able to have success raising money through the Opportunity Zone program in places like Baltimore, and Detroit, and Cleveland, and other markets. They’ve really struggled to fundraise.

So, I suspect the Biden Administration having had some conversations in the past with folks who are now in the administration see this as a blank slate and one they can add to any number of priorities, not just racial equity and community development, but also things like how the administration addresses small business growth, infrastructure, clean energy, and any number of other issues.

And so, I’m very bullish on what the administration will do to run with this program in the coming years. It’s much more than regulatory changes, I think, at the margins, which you may or may not see. I think those will be relatively unimportant to most of your listeners and most of the market. I think it’s much more how OZs are kind of built into the fabric of how we think through government spending and government building and investment programs for large.

Jimmy: Can you go into more detail on that? What do you mean when you say built into the fabric like that? I understand that regulatory changes at the margins, maybe there’s some more data collection that’s been brought up a lot. But can you go into more detail on what you mean by how the federal government can weave OZs in the fabric of the economy?

Steve: Well, my basic view is that Treasury has done a lot of what it needs to do in terms of defining the rules of the road of the program. As you know, Jimmy, to your point that this is a program that is very much where the investment kind of goals and objectives are defined by the private sector.

The federal government has created 200 pages of regulations to ensure that there is, you know, the spirit of the program is met in as many ways as possible primarily if there’s economic growth connected…long-term economic growth connected with the investments that happened through this program. And they may do some tweaking at the margins in terms of data collection or other rules. Maybe the biggest one the government has to deal with is how to deal with the census. And the fact that we’re gonna have changing census tracks and how it overlays with the OZ program, which is a complicated question.

But I think in the scheme of things, these are gonna be the margins. What I mean by weaving this into the program is you may see other agencies are now much more important stewards of the program. So, for example, if you’re building infrastructure and prioritizing projects, if I were the administration, I’d be prioritizing projects in Opportunity Zones. These are places that have been picked by governors and mayors in almost all cases because they were deemed to be the most important places to receive that next drop of investment and that could be one way to govern prioritizes spending. Or as we look at how we provide preference in terms of small business contracting benefits, or state and federal venture capital, or R&D dollars. We should be prioritizing those businesses that are either in or willing to relocate to Opportunity Zones around the country.

And there are many examples of where we build telecom infrastructure. There are many, many examples of where increased government investment would serve the purposes of the program and the communities because that would in turn send the right signals to the market that they should be doubling down on these communities because they’re gonna see more economic growth going forward. That’s where the government is the biggest buyer as a spender of $4 trillion a year can have the biggest impact on these communities and on the program, in flux about the program, really, and just how to target this so that federal dollars are really going to places that need it and that are have been dramatically under-invested for the last few decades.

Ira: I was just gonna say if I could add, Jimmy, I think that while Steve’s comment about those that have the premise or put forth this premise that the Biden Administration is in favor of or do away with the program, I think what you see is, is almost the opposite, I mean, the fact that there’s so many people that are being nominated for positions inside of agencies, commerce, Treasury, folks on the Council of Economic Advisors, folks that seem to have a really…

Steve: Transportation.

Ira: Transportation is obviously a big one. I mean, they have a very interested and kind of experienced approach to economic development and I think really understand the power of this tool and particularly the way that it can interact with other tools that are often used around economic development. So, I think that level of what I think will be collaboration across agencies.

So, it may be a little different than what we heard about in the White House Revitalization Council, but hopefully a much more impactful outcome actually. And I think Steve’s point about the governors and mayors, that is a place for some unity and some bipartisanship at a local level, which I think can really affect the sort of psyche of people around Opportunity Zones to the extent that the collaboration occurs not just across the federal government, but amongst federal, state and local governments.

And I think that very few people would be uncomfortable with the more significant level of transparency and reporting to the extent that it’s going to create a greater opportunity for everybody. And I think that that whole notion of tracking the community benefits and being able to think differently about, as Steve mentioned, things like infrastructure and small business finance, those things are gonna create greater diversity within the program. It’ll help us get beyond it being a predominantly real estate program and beginning to really support other asset classes.

And I think that’s what’s gonna create the kind of momentum that’s critically important. We’ve got some good momentum to build on. I mean, the statistics that are out there in terms of the level of investment, notwithstanding the fact that just after the final regs were published, we had a global pandemic. You’re still seeing a lot of money flowing to these areas, so imagine what can happen if there’s a real concerted effort with folks that have a real focus on economic development and are willing to bring more of the capability of government to that sort of public-private partnership to make this thing really something special?

Jimmy: Yeah, certainly the potential for dramatic transformation exists if everyone’s rowing that boat in the same direction, so to speak. Gentlemen, are there any geographic regions or industries that you expect are going to be especially ripe for Opportunity Zone activity this year?

Ira: I think that we started to see a lot of… And this is all anecdotal. It’s not necessarily well-analyzed data. But I’m interested to see where things go with rural communities because we’ve started to see a lot more examples of folks getting really innovative. So, the geographic matter, really interested to see what happens in some of these rural areas because there’s been some good momentum there. And just generally, in some of the sort of non-major metro centers where I think that there’s a big need that may be fueled by a sort of out-migration from big urban centers.

At the same time, I think some of the urban centers are still so large and so in need of economic support, that Opportunity Zones can bring and also have some level of existing infrastructure to support economic development. I think you’ll start to see some of that increase as well. And then we’re particularly excited to see what we think could be a really interesting opportunity around more of the operating business context, we are starting to see some folks get more interested in things like what I would call sort of small scale manufacturing and interesting technology applications to those kinds of businesses. I think that can get really interesting because it has some real compelling job creation opportunity and it’s obviously a bit different than the traditional real estate focus.

Steve: Yeah, I agree with Ira. I would maybe just go a step further and say last year, at least for me, the big test for the market was around geographic diversification and whether the program was gonna be getting to more than the top markets like New York and Los Angeles that typically get a disproportionate amount of investment.

And I think one of the most interesting trends of last year from the data we’ve been able to see from groups like Real Capital Analytics and CBRE is that it was the second-tier markets that Ira described that were getting disproportionate amounts of investment where you saw the growth the highest was in places like Baltimore, and Detroit, and Birmingham, Alabama, Philadelphia, and other markets like that also because the base was lower there, but it was, at least for me, amazing that you actually saw a decline in places like Seattle and Portland and Miami.

So, there does seem to be an organic trend at least for investors picking less expensive markets where land prices are cheaper and where, long-term… And if you’re looking at this over a 10-year horizon and not a, you know, 2, 3, 4-year horizon, your investment strategy, I think, it looks different. But for this year, I do think the big question is gonna be diversification into different asset classes at least.

I think this past year, not just OZ. And OZ really followed the overall private equity investment markets. You saw a huge disproportion focus, I would argue, on multifamily. Multifamily is always gonna be a big asset class in this program, but I do expect you’re gonna see other asset classes begin to bounce back as people take advantage of cheap assets and things like retail and hospitality and office. So, I do think you’re gonna see more of that this year.

And then to Ira’s point, I think you’re gonna start to see these other verticals, particularly that I would call real estate, the Jason protocols that can take advantage of the really generous depreciation, accelerated depreciation benefits you can get, and Opportunity Zones around industries like manufacturing, clean energy, infrastructure, and others that I think will track nicely with some of the public investments that I think most people expect to see. So, watch for that. This could be a very interesting model to view, for instance, energy and infrastructure investing at a great scale.

Ira: And I think too and interestingly some of the cities that Steve mentioned, we shouldn’t lose sight of the fact that many of those cities invested in their own economic development infrastructure and around Opportunity Zones. I mean, the collaboration in some of those places, I think of Baltimore, some of the other places Steve mentioned where we see it in parts in Birmingham, in Cleveland, places where there was a concerted effort to make sure that there were people that were either hired to do things specifically around Opportunity Zones, or a lot of investment made in making sure that there was that sort of critical mass of knowledge, awareness, and collaboration, and that’s where I think that whole sort of compelling federal meets state and local government can really have a big impact.

Steve: Yeah, I totally agree. I think this is a really important point that gets lost, this notion around OZs being a way to prime the pump in these different parts of our ecosystem it’s an important point at least to talk about a little bit more so people can understand what’s really happening on the ground.

Jimmy: Well, let’s talk about that. Go ahead. What do you mean by prime the pump?

Steve: OZs are not your traditional community development program. Ira has as much or more experience than anyone else in the country around working in our traditional programs. They’ve been around 20, 25 years like Low Income Housing Tax Credits and Historic Tax Credits and New Markets Tax Credits. Those are really important programs. I hope we double down on investing in them. But they’re also, I would call them, closed programs in that they tend to happen within their own ecosystems and they tend to, you know, have their own kind of captive sources of capital. So, these are a little different. They require different public and private sector things to happen alongside of it.

They’re just the equity or part of the equity deals. And so what they’re really designed to do is not to solve for economic inequality but to prime the pump from both the public and private sector to focus and work together on solving problems. And so… Or solving the problems in this space.

So, if you look at really successful cities, and I think Baltimore and also, in particularly, places like Birmingham and Erie are really good examples of that. The local community got together with their stakeholders, whether it was insurance companies or a leading role by the mayor or in Alabama, the case of a public-private entity on their own accord take ownership, for lack of a better word, of the future of their cities and their states and come up with a long-term plan, pull the stakeholders together, begin to identify and publicize and market their pipelines and really attract investors.

And I don’t think Alabama or Erie would be having as much success or, frankly, maybe any success if not for the fact that it primed the pump for those local stakeholders to get engaged. And the same thing is true on the private sector side. This is really meant to just be directional for the investing community to change people’s mindset about the fact that if they’re investing in real estate or other private equity deals, they should be looking at second-term markets. There’s no reason not to invest in them. In fact, the investment thesis, it could be a lot stronger because of the fact you’re offsetting the risk with lower pricing.

And in that, we’re supposed to choose…you know, the idea is to change capital flows from more expensive markets to less expensive markets and also where people are going. And I think that’s a very interesting trend that we could correlate to post-recession, which is the trend of people moving out of expensive cities to less expensive ones because they may no longer have to be in the office in the same way they want to bid or they may value being closer to family or closer to green space. And that may change the dynamic of how investors invest.

So, it’s meant to prime the pump on that big conversation. And if you look at any critic of the program, including someone like…group like the Urban Institute, which has been critical of it, they say unequivocally that this program has created a whole new ecosystem of community development, organizing, and investing and new fund managers around the country. And that’s something we shouldn’t lose sight on…sight of, rather.

Jimmy: Yeah, that’s a very good thing, I think. You mentioned Erie and the state of Alabama. I think you were referring to the Erie Downtown Development Corporation, among other groups there that have done a tremendous job of building out an Opportunity Zones prospectus for their community. And in the case of the state of Alabama, I believe you’re referring to Opportunity Alabama, the statewide deal marketplace, for lack of a better term, created by Alex Flachsbart. Is that right? Do you have anything else to add there?

Steve: No. That’s exactly right. And I’d say that if… The state of Alabama wasn’t getting, like, hand-over-fist investing, and the city of Erie wasn’t either. I mean, Alabama is one of the…has, over the last several years, been one of the poorest states economically in the country. Erie is one of the poorest cities. And so they’re great examples of places that have shown that with the right level of local and statewide organization, you can change the narrative in those places.

Alabama has $1 billion in OZ deals. Erie has gotten a $50 million commitment from one of its largest companies. And that’s something we shouldn’t just want, but expect to happen in other places around the country because increasingly, we need to get back to this idea that our companies and the private sector have to take ownership over this issue or we’re not gonna be able to solve it, and there’s no excuse not to do it, because Alabama and Erie can do it. And they would say this themselves, I think, if you talk to the leaders of those groups, anyone around the country can do it.

Ira: And I think, Jimmy, that’s borne out still. We did a whole chapter in the book that Steve and I wrote that you alluded to earlier on this very issue: This idea that there is sort of a framework for any locality to really roll up their sleeves and figure out how to make this a cornerstone of their process, their economic development, programming, and find ways to establish the opportunity to collaborate, really take stock of what they have. What are their strengths and weaknesses, and how can they be most valuable to those investing from inside or outside of their communities?

And doing it in a way that’s really beneficial to the residents, the existing small and large businesses, the way to leverage the anchor institutions, the way to really bring everybody together to figure out how to do this. Rather than it being what I’ll call too opportunistic around just an opportunity to do something in isolated places within a particular community, but a concerted effort to really focus on the entirety of, for instance, an Opportunity Zone geography and really be discerning about how to really make that happen and for the benefit of everybody in that whole process.

And I think that Steve is right. There’s nothing magic about it, about doing it. The magic is in how you do it and who gets involved. But the notion of doing it is something that I think every locality should engage in. And it’s a relative thing. They may pour more or less resources in it depending on what those strengths and weaknesses are. But I think that there really is a nice framework as to how this can be done and why it can be really valuable for everybody.

Jimmy: Right. Right. Yeah. Let’s talk about your book now, The Guide to Making Opportunity Zones Work. In your book, you identify five different types of Opportunity Zone stakeholders. And I’d like you guys to go through each one very briefly. Maybe you can give our listeners a key lesson that each type can learn or to go forward with if they participate in Opportunity Zones.

The five different types of stakeholders that I’ve counted that you identify in your book at least are:

Opportunity Zone investors;

Qualified Opportunity Fund managers;

Real estate developers and deal sponsors;

Business owners and entrepreneurs, those who are looking to establish Qualified Opportunity Zone Businesses within OZs; and then
The group that we’ve been talking about here in the last few minutes are Opportunity Zone community leaders.

And really, you encourage all of these stakeholders to turn to that last group and to work with their opportunities and community leaders as you two believe as I do as well that really the community is what this is all about. The local community and developing a cohesive holistic strategy within each community is what really can make the Opportunity Zones engine go.

So, could you guys go through each one of those different types and give a quick lesson that each one can learn? Maybe we can start with OZ investors.

Ira: Hey. Let me start, Jimmy, by saying that I think the whole purpose of the book was to provide some education and deal with some misinformation that we thought was out there and do it in a way that was comprehensive, but not necessarily a technical treatise, that it was more kind of a layperson’s guide. And so, in part, to identify the stakeholders, but then think about which stakeholders haven’t been participating. So, on the investor side, I think that this idea that it’s been to date primarily those kind of high net worth or family office type folks.

We wanted to provide something that said, it could be as democratized as anyone with capital gains all the way up to a very sophisticated institution and provide a framework for all of those folks with the expectation that the more investors of any stripe that came into this effort, the better off we would all be. And so we really set out to try and explain what investors need to be mindful of and kind of where and how critical their role is.

But I think another part of the rationale for the book was to dig into each individual stakeholder, for instance, investors, but make sure that investors, as well as every other stakeholder, understood the benefit of collaborating with every other stakeholder, and so they could sort of appreciate what the nuances for each person’s role was, and therefore that this sort of collaboration would be more effective.

Steve: Yeah, I totally agree. I was gonna make the same contextual point. And Jimmy, to dive into your question on investors. In some ways, they are… Investors have, in some ways, the lowest burden in this program. There’s a bit of a fire and forget for most investors where they get to have the money that they’re looking to putting through the program, managed by a third-party fund manager. And the compliance burden of this program really falls on the fund managers.

So, there’s kind of two pieces, I think, to what we described when we were talking about investors. One, if you’re that kind of investor looking for a third-party fund manager, which I think is more often than not what we see in the program, then you’re really just evaluating, for the most part, a lot of the same ways you would be evaluating now private equity context. What’s the track record of the fund manager? Do I agree with their thesis? Am I comfortable with the underlying assets there? And so a lot of the extra complications from OZs, I think, are less important to many investors.

Now, there are all sorts of investors that have their own funds. These captive fund investments you might see with, like, a single-family office. And obviously, for them, they’re really operating more, like, the fund manager. And that’s a much more complicated way to invest. But for your typical investor, there’s not a lot to understanding the program other than you gotta stay invested for 10 years to get the full benefit and you need to do a really good job diligencing the underlying fund manager and what they’re investing in.

Jimmy: Right. But for a typical Opportunity Zone investor who is a passive investor who’s investing in a third-party fund, you do your due diligence, you write your check, and then there’s really nothing else for you to do for the next 10 years, hopefully.

Let’s dive into that second stakeholder group now that you mentioned, Opportunity Zone fund managers or the qualified opportunity fund managers, which sometimes are also Opportunity Zone investors themselves. What are some lessons there or some points for QOF managers to be aware of?

Ira: Well, I think to be aware of… I think Steve made the point in talking about the investors that the fund managers, oftentimes, they are folks that are gonna take on fund management where they’ve got infrastructure in place and they’re looking to effectively just do the kind of private equity activity they would otherwise do that asset management. They’re just doing it in the context of an Opportunity Zone. So, I think there’s obviously a significant compliance burden, there’s a fiduciary responsibility.

And I think that this is really the nexus of the program, right? Everything happens most of what’s contained in the statutes and regulations revolves around what an opportunity fund manager will ultimately be responsible for doing and managing to ensure the compliance. I think the challenge is that for some that get excited about the economic development potential and think, “I can manage a fund,” but they haven’t done very much of it, there’s a huge burden because this is complicated stuff in any situation with the added burden of compliance. I’ll call it a burden because I think there is a lot of things to be considered in the extent to which you gotta be mindful of what you’re doing for the benefit of not just the investor, but the ultimate investee.

And I think there’s no question that that whole community focus as we’ll get into is important. So, I think there’s a role to not just be managing a fund, but to really be sensitive to all of the nuances to what’s going on. So, I don’t think it’s for the faint of heart. And I think for those that have successfully managed funds via private equity, venture capital, or what have you, understanding the implications of community stakeholders and keeping them happy as well as balancing the compliance issues is challenging.

And so we wanted to lay out all of that in a really kind of understandable format so that people could appreciate what those nuances were, I think, to the extent that you have that captive fund where it could be as closely held as somebody has their own gain, their own investor, form their own funds. They’ve got to figure out all the things to manage. It gets a whole lot easier if they’re then investing in their own assets. And I think that is certainly something we’re seeing a lot of. But even those folks need to appreciate what the compliance implications might be.

And I think that, as we go back to one of your earlier questions, what this new administration may do, and I think there’s some that have used about whether or not the whole self-certification process is a little too simple and may create, as part of this ecosystem, a lot of folks that are maybe less capable than anybody appreciates. And so, hopefully, either because things get ratcheted up in terms of how certification occurs if that does happen or just the mere fact that the book can be helpful to folks having a greater appreciation for how high the bar may be. I think that’ll be helpful to grow in this space.

Jimmy: Steve, anything else to add there? Or do you wanna move on to the next group of stakeholders?

Steve: I think Ira did a great play by play, so I’ll give the two pieces of color commentary. One is, I think what’s especially complicated about doing this program is the fact that OZs are in an early stage, which means the rules are evolving constantly. And so, we had three rounds of regulations that were ultimately the last round. The final round came in December 2019, so two years into the program. But even since then, if you look at the past year, we’ve had probably three different rounds at least of COVID-related rules that have changed different timing deadlines for the program. And unless you’re paying really close attention to that, that can throw you off pretty quickly.

The good news is most of the… I think all the COVID stuff has provided more flexibility. So, you may have a lot more flexibility as both an investor and as a fund manager than you recognize, but there’s lots to keep track of. And that’s not even on top of a lot of the other things we’re discussing, which is how these rules play into things happening at the state and local level and how they factor into other programs as well.

The other piece, I’d sort of say in thinking through this program as a fund manager, is that for the most part, there are so many new… The OZ marketplace is made up of many, many first-time fund managers. And doing that requires, I think, a great amount of resources upfront. It requires help, the ability to be able to have good accountants, not just because Ira is on the phone, but in general, and tax lawyers and fund administrators and really having a team behind you becomes a really important piece of, I think, doing this well and doing this right. And competing in the marketplace.

And what’s unusual for fund managers, even with that team, is the way you raise capital. Most private equity fundraising is done through tax-exempt sources. That money is raised through endowments, and it’s raised through pension funds, it’s raised through non-tax-sensitive investors. And you’re really doing hand-to-hand combat — as Ira and I think had both described at that time — in raising from retail investors here. And it requires having to do an immense amount of education and talking to lots and lots and lots of people.

So, I think it’s quite challenging. And it’s in some ways amazing then, in the first two years of the program we’ve seen tens of billions of dollars of almost exclusively retail fundraising. I mean, there are no significant, that I’m aware of, or very few at least, significant institutional investors in this program. It’s something I think Ira and I both want to see change this year as some of the more risk-averse investors come in now that we’ve got a little bit of time underneath the program. And still, you’ve seen success all around the country. There are 1,000 funds or more around the country, and growing. And so this is becoming a huge marketplace.

Ira: And I’ll also… I will just quickly add, Jimmy, to Steve’s point about the hand-to-hand combat. I think the most familiar refrain we hear from folks that are fund managers in the space is how much harder it is than they ever thought it would be. And many of us have followed the headlines of all these folks that were gonna raise. It was pretty commonplace for folks to say they were gonna raise somewhere between half a billion dollars and $1 billion or more. And very little of that has actually happened because it is that hard. And I don’t think that’s a bad thing because at this point we’ve seen so much activity on the fundraising side and a good percentage of that being deployed. I think that it makes people a little leery, which is not a bad thing, but hopefully, they have an appreciation for how complicated it is and how important that collaboration is.

Jimmy: Yeah. Yeah. Well said there, Ira. I have seen several $100 million-plus funds celebrate successful closings and full fund raises, but, yeah, a lot of those half-billion or $1 billion-plus funds did not end up working out quite as they had expected.

Let’s dive into the third type of stakeholder now. Real estate developers and deal sponsors. I think these may have been the first group of people who really first latched onto the program when the Tax Cuts and Jobs Act was passed at the end of 2017. Any lessons or takeaways for them? Steve, I’ll turn to you first.

Steve: Yeah. Real estate developers are a very common constituent stakeholder in the OZ program. I think there’s two big mindset changes that you need to have to be able to do this successfully. One, it relates to time, which is maybe the most important. This is a program where investors expect to stay invested for at least 10 years, in many cases more than that.

And that means not just having a longer-term hold for maybe what a traditional developer’s style investment would be in three or four years, but it means combining the ability to do a lot of different things within one investment doing the development and the construction of the building, stabilizing the asset, finding a tenant, and then managing it successfully over the next few years in the cashflow asset. You’re combining, really, all three major types of real estate investing — development, value-add, and core real estate investing in one product. And that can be a complicated thing for, I think, developers or anyone, and a complicated thing to also explain to investors. So, I think that question of time is one of the key differentiators.

The other thing is, there are a lot of real estate developers who have raised equity for projects before, but they’re typically not doing it within a fund construct. And so the need to be able to do some of the compliance we talked about as we were talking about OZ fund managers, on top of all the complications of doing a real estate deal. I think at least I found in the market it can feel foreign to a lot of real estate developers who haven’t raised money and managed it in that kind of context.

And so, I think what you’ve seen happen in the market as a result, and I think this is increasingly so, even as the rules are made clear that managing, for example, a multi-asset fund is quite doable and will give you all the same benefits as managing one asset, you’ve still seen this move to single-investment funds because they’re much easier for investors to understand and they’re much less complicated from a compliance perspective. And I think that’s how that’s really played out in terms of projects. You’ve seen a lot of OZ funds structured as a set of parallel OZ investments that are all operating on their own timetable. And so that reduces some of the complications, I think, for particularly developer-led deals.

Jimmy: And if we can just move on quickly here because I know we’re running out of time here. We’ll move on to the fourth type of stakeholder business owners and entrepreneurs. Really, it wasn’t clear how Qualified Opportunity Zone Businesses could qualify or be eligible for the tax incentive, really, until the second tranche of IRS regulatory guidance was released in April of 2019, about a year and a half after the program was first rolled out. And then it wasn’t super clear until the final regs came out just December 2019. But certainly, I think we’re seeing a little bit more happen in that arena now with business owners and entrepreneurs. Any key takeaways or lessons there? And Ira, I’ll turn to you for this one.

Ira: Yeah. I mean, I think that our experience is what you described that we’re starting to see a trickle of activity, but it’s not nearly enough. But this, to me, is the Holy Grail. If we can get these entrepreneurs and kind of operating businesses really hooked on this concept and really willing and the acceptance by fund managers and investors to really go in this direction, I think that’s what’s gonna make for success of Opportunity Zones. And I think that it’s directly tied to the real estate piece to Steve’s earlier point about the tenancy. Ultimately, these businesses — notwithstanding what we’re experiencing with the pandemic — they’re still gonna need a place to be and a place to grow their business and a community, a neighborhood to kind of have that to create that multiplier effect in.

And so I think that this is something that we’re very optimistic about. We’re starting to see some signs in certain industries, Steve alluded to a bunch of them earlier. And we do think that there’s a lot of activity happening, a lot of places that, I think, are gonna push this to a much higher level in 2021. I think that the infrastructure activity and the clean energy… What we’re hearing at least about the clean energy opportunity that the federal government can support. I think that’s gonna have a big impact on this, but I also think the emphasis that the new administration is placing on the small business side of things is gonna be really, really interesting too. And hopefully, this chapter really gives folks a sense of where they fit in.

Jimmy: And our fifth and final stakeholder, which we’ve already talked about at great length, but maybe briefly we can touch on one more time here — Opportunity Zone community leaders. Any key lessons there? Any best practices that you’ve seen?

Steve: I could take a stab at this. I’ll be real short so you can jump in too. I have, I think, one guiding principle here, which is that places that are interested, and I think every place is, in attracting the normal investors beyond their communities. The most successful way to do that is to show that there’s local skin in the game, i.e., to show that there is…that the city is aligned with the program and willing to put its own land use provisions on the table, getting accelerating, getting deals done. And the private sector has to show it’s investing in projects as well. I think places, again, like Erie and Birmingham and others, Colorado… in rural Colorado, who have shown the willingness and ability to do that are now attracting outside investors who are seeing momentum in those markets. But people aren’t just gonna come and invest unless they see that local alignment, and that becomes, I think, the critical way to think about this as a community leader.

Ira: Yeah. I mean, I think the key with the communities is collaborate, collaborate, collaborate. And I think that’s both to and from the community. And I think the stakeholders in most localities are very diverse. And I think there are differences of opinion all over communities in this country and differences of opinion as to what they think of Opportunity Zones often based on what they may misunderstand. And so I think it’s key that community stakeholders come together, take a proactive approach to this, really get to know not just the tenants of the program, but the motivations, the intention, all of which I think, by and large, are very, very good among the other stakeholders.

And so to us, to a large extent, you put the community in the center of this because that’s really what was originally envisioned, and you create an opportunity for the money to make its way through the fund management system, to make its way to businesses, real estate or operating businesses that the community can benefit from. And I think the community has to be put at the center of that, but it means giving them an appreciation for what that means and how to do that sort of prospectus, if you will, to make themselves attractive and to leverage all of their strengths and to shore up their weaknesses. And I think that’s really what we’re hoping to accomplish overall, is to make sure that there is this sort of more equitable recovery in these communities and the communities just has to be at the center of it.

Jimmy: Very good. Ira, I’ll turn to you now. How can all of these parties identified in the book here, these five different stakeholders that you and Steve have identified… How can they all work together to make the most of Opportunity Zones in 2021? Have you seen any best practices that have been most successful?

Ira: Well, we have spent a lot of time talking about it. The best practices exist, I think, in the localities where there’s been a concerted effort, usually starting with a local government kind of making an investment in the public-private partnership and in kind of dedicating some resources. And I think that’s the whole really the point of the book is to say each chapter that speaks to the specifics of a stakeholder is valuable to understand the nuances of that particular stakeholder role, but the key really is the sort of holistic nature of this whole ecosystem. And now everybody needs to just appreciate the challenges everybody else faces and why everybody is sort of in this together. So, I think it’s just that. It’s literally working together. I think that’s a whole lot harder sometimes than people appreciate. So, if it happens, I think we will see success. And the more it happens, the more success we will see.

Jimmy: Let’s hope so. Steve, ultimately, what needs to happen for Opportunity Zones to reach their fullest potential?

Steve: One, I think we should take a pause and stock of the fact that this program is having an enormous amount of success. And in some ways, it’s a shame that the headlines have been so tied into telling the political narrative in this as it relates to the Trump and the Trump Administration. But the fact that you have a brand new community development program that has raised tens of billions of dollars in this first year while at the same time finalizing the regulations of this program is, I think, an amazing achievement of the ability for the government to have a big impact on the market. And to give you context here, the next largest program in the New Markets Tax Credits deployed about $3.5 to maybe up now upwards of $5 billion a year. This program is deploying four or five times that in its first couple of years.

Jimmy: And NMTC is capped whereas OZs theoretically is limitless.

Steve: Well, yeah. And that was the whole… That’s the trade-off in the program when the government has… One, we’re not talking about tax credit at the frontend and you’re really trying to align these long-term backend goals. It is unlimited. Government has a bit less control over what actually gets invested in, but it can create and it has created and shown it will create a much larger marketplace.

I think we need to continue the alignment. We need to see, one, I think more institutional and corporate investors, banks, insurance companies, large companies that, can benefit from the program and should be more invested in it. And I think we need to see more aggressive public policymaking to align state and federal priorities around where government money is being spent to these nodes. If we do, I think, those two set of things, I think you’re gonna see an enormous turnaround. In communities people had written off for the last couple of decades and it may be one of the most remarkable public-private policy achievements I’d say we’ve had in 50 years.

Jimmy: Agreed. Let’s hope so. Ira, what about you? Do you have anything else to add there? Ultimately, what needs to happen for OZs to reach their fullest potential?

Ira: Well, I think that, to a large extent, it’s gonna be getting beyond the rhetoric and getting into just everybody rolling up their sleeves and making good things happen. I think that I’ve been all over the country listening to people talk about and talking with them about Opportunity Zones among other economic development efforts. And I think that we’re at a time when I think we can really make a difference. I think a lot of things are really lining up, unfortunately, came maybe largely out of the pandemic and the racial unrest over the summer.

But I think that we’re at a point where we can really see people being a little bit more socially responsible, wanting to have a greater impact, wanting to work together. And that means institutions and individuals. And so I’m incredibly optimistic about what will happen in the year and years ahead and the way in which I think a lot of these stakeholders will work together and will have great success and make this a pretty democratized thing.

It’d be wonderful if we could look back 10 years out and see situations where anybody that had even a little bit of capital gain could find a way to have that be accumulated and reinvest in their own community or something cool happening in another community that happens to be an Opportunity Zone. And that to me would be really, really cool. And if it was holistic where the kinds of things you saw were incredibly diverse, that would be even better.

Jimmy: That would be, absolutely, Ira. I agree. Well, Steve and Ira, I really appreciate the time that you’ve spent with me today. Before we go today, can you tell our listeners where they can go to learn more about you and Develop Advisors and CohnReznick and, of course, where we can go to purchase the book?

Steve: Well, the good news is that I work very closely together with CohnReznick and vice versa. So, you can find both of us, I think, through the other. But Develop has a website, Develop Advisors. I encourage everyone to go to CohnReznick’s website to buy the book. It will get you directly to the link through Amazon where the book has seen a lot of success in a short period of time. I think we’re leading a bunch of different categories around regional development and urban planning and tax and other issues. So, a big credit to the CohnReznick team that really drove the book and we’re super proud of it. Thanks for giving us time to talk about it.

Ira: So, the book is on Amazon and our website, cohnreznick.com, has a link to the Amazon spot. And Steve mentioned a little bit about what we’re seeing in a short period of time around some success with the book. And we’re excited about that. We’re really excited mostly because if we can play a small part in helping to get folks better educated, bring more people to this marketplace, and dispel some of the misinformation, then I think we’ll have made a small contribution to making this a much more effective effort.

Jimmy: Well, I love the book. It’s not very technical. It’s not terribly long either. I think it comes in at under 100 pages. It’s really a very nice introductory guide, a high-level overview of the Opportunity Zones program for each of these different stakeholders that you and Steve identified. Really appreciate the job that both of you did in putting this book together.

For our listeners today, as always, it will have show notes for this episode on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast. And there, you’ll find links to all of the resources that Steve, Ira, and I discussed on today’s show. And of course, I’ll be sure to link to Steve and Ira’s book, The Guide to Making Opportunity Zones Work.

Steve, Ira, I really appreciate both of you joining me today. Thanks for coming on.

Ira: Our pleasure. Thanks for having us.

Steve: Thanks. Good talking to you, Jimmy.