188. Opportunity Zones — A Fit for VC? (Steve Glickman)

188. Opportunity Zones --- A Fit for VC? (Steve Glickman)
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Steve Glickman of Develop Advisors joins Nick to discuss Opportunity Zones — A Fit for VC?. In this episode, we cover:

  • Quick overview of your background prior to Develop Advisors?
  • Walk us through the origin story of EIG?
  • You are also the founder & CEO of Develop Advisors – tell us more about the work you do with fund managers.
  • Let’s talk about OZ’s — and we’ll start with the basics — Give us an overview of the $6T OZ program.
  • Incentives aside from tax benefits?
  • Which asset classes are best suited to invest in OZs?
  • How is an Opportunity Zone defined? What credentials make a community an OZ?
  • As governors change — are these OZs going to change with different administrations?
  • Is the expectation that entrepreneurs will actually relocate to these areas for the HQ of their business? It seems like that is a bit of a stretch.
  • Are there statistics on the number and amount of private capital funds that have been raised with a mandate to invest in OZs?
  • In your estimation, what are some risks factors and/or potential unintended consequences that we should be mindful of?
  • Part of my hesitation around this topic and why I’ve waited to cover it until I could get you specifically on the program, is because with any new gov’t incentive program or over-hyped area in general (like we saw with crypto last year), it attracts a lot of “opportunists” or even “charlatans” looking to capitalize on something that’s new and not well understood. How do we avoid and discourage “bad actors” from taking advantage of either LPs or Entrepreneurs?
  • One of the services that Develop Advisor’s provides is the OZI or Opportunity Zone Index. What is this attempting to measure?
  • What do you say to the pundits that claim the majority of the benefits will accrue to the financial services investors and not to the distressed communities?

Guest Links:

Key Takeaways:

  1. The Qualified Opportunity Zone “OZ” Program was architected by the Economic Innovation Group (EIG) and passed by Congress in the Tax Cuts and Jobs Act of 2017
  2. The program’s origin began with discussions between Steve and Shawn Parker (Napster, Facebook) about how to incentivize investment in America’s distressed communities.
  3. Steve is the founder and CEO of Develop—the first independent full-service advisory firm for OZ Funds and co-founder of the Economic Innovation Group (EIG)—the group who architected the OZ program.
  4. The $6 trillion OZ Program is the largest community incentive program in U.S History.  It provides a federal subsidy on capital gains to equity investments of 10+ years in opportunity zones.
  5. The incentive includes a deferral of capital gains tax, a discount on the tax at certain time marks (5 years and 7 years), and a complete capital gains tax exemption after a 10 year holding period.  It is the only part of the tax code which entirely forgives capital gains on a given investment.
  6. Real estate has been the driver of investments, but investment types have grown to include energy and infrastructure, advanced manufacturing, venture capital, life sciences, and education.
  7. Investments must come through Opportunity Funds—special vehicles of which 90% of investments are in OZ’s.
  8. 12% of the United States is classified as an opportunity zone, from Detroit to parts of Atlanta and Brooklyn.  Governors have discretion to select 1/4th of “low income communities” in their state to designate as OZ’s.  These regions are defined by having a median income at 80% of the state’s median annual income or having a poverty rate of > 20%.
  9. Current opportunity zones will stay in place until 2028, when new zones will be selected based on updated data (if the program is successful).
  10. OZ’s are risky investment areas in already risky alternative asset classes; the subsidy is a reflection of that.  With this increased risk, they project to drive higher than median returns in the target asset classes.
  11. The OZI (Opportunity Zone Index) is a tool created by Develop Advisors to support data-based investment decisions and avoid subjectivity.
  12. The legislation was structured in order to align incentives of private investors and the distressed communities in which they will invest.  OZ’s long term time horizon aims to align these interests.

Transcribed with AI:

0:03
welcome to the podcast about investing in startups, where existing investors can learn how to get the best deal possible. And those that have never before invested in startups can learn the keys to success from the venture experts. Your host is Nick Moran and this is the full ratchet

0:23
Welcome back to TFR today opportunity

0:25
zones expert Steve Glickman joins us. Steve is the founder and CEO of develop the first full service independent advisory firm for opportunity’s own funds. He is also the co founder of Ei G, the ideas laboratory and advocacy organization in DC that architected the Ozy program. In today’s interview, we discuss an overview of the $6 trillion opportunity Zone Program, the tax and other incentives that it provides. If a fund needs special classification in order to benefit from an opportunity zone investment, the asset class is best suited to benefit from the program, how Ozs are delineated and chosen, if it’s realistic for founder’s to relocate to Ozs. What happens when a business expands beyond its opportunity zone, the risk factors and potential unintended consequences, avoiding bad actors looking to capitalize on the new legislation, Steve’s opportunity zone index and what it measures. And finally, we wrap up with Steve’s response to the pundits arguing that the majority of the benefit accrues to financial services investors, as opposed to those in the distressed areas. Here’s the interview with Steve Glickman of developer advisors.

1:52
Steve Glickman joins us today from Washington DC. Steve is the founder and CEO of develop advisors, develop provides turnkey solutions for opportunity zone fund managers. Steve is also the co founder of Economic Innovation Group, a bipartisan research and policy organization, which was the architect of the $6 trillion Ozy program, the largest community investment incentive in US history. Previously, he served in the Obama administration as a senior economic adviser. He worked on Capitol Hill as counsel to Chairman Henry Waxman and his legislative aide to Congressman Ed Markey. Steve, welcome to the program. Hey, thanks.

2:32
Thanks for having me.

2:33
Absolutely. So why don’t you start out with a quick overview of your background and, you know, the events prior to develop advisors?

2:42
Yeah, sure. You gave a really great, quick run through of that. But I spent really the last 10 years of my life in economic policy in Washington, DC, about five years in the Obama administration working on manufacturing, small business, trade and investment policy, mostly at the White House. And then I left in 2013 and met kind of serendipitously, Sean Parker, the one of the founders of Napster and the first president of Facebook, and we had a bit of a mind meld over how to tap into private capital to solve for some economic development issues we saw around the country and decided to launch the economic innovation group together. It was at the Economic Innovation Group was an is a bipartisan Think Tank and advocacy group really focused in on how you solve issues around geographic inequality around the country. And that organization, was the architect of the opportunity zones program, which we spent about five years working on with a bipartisan and pretty diverse cast of characters, till the legislation was passed in 2017. And then worked throughout most of 2018 to try to build out the rules and the regulations and the map of where opportunity zones now are. And then I left the IG in September of 2018. To launch develop and develop is the first independent advisory group in the opportunity’s own space. I spend time traveling all around the country, trying to help grow the education around the marketplace, and then more specifically working with a handful of large opportunity’s own fund managers across real estate and business investing in markets all around the country to help them figure out how to strategize structure and ultimately deploy capital in opportunity zones around America. Very

4:36
good is that Mr. Sean Parker is he still involved?

4:41
He’s still the chairman of the of the Economic Innovation Group, which is run by our third co founder who’s now the president bear who took over after I left is a CEO named John materia and they’re still working together on opportunity zones, and then a number of other issues that have since grown their portfolio of things they think are really important for these communities. cuz, like, you know, around immigration and workforce development and other issues that relate to, you know, how places compete for talent and jobs and business growth?

5:09
And how did the two of you link up where you were, you’re both passionate about, you know, distressed areas and sort of forgotten about communities or, you know, what was sort of the awesomeness of your sort of first introduction and meeting?

5:24
Well, like, you know, some things in life was, you know, a habit of circumstance based on who we both know what our network we were originally introduced by ro Khanna, who’s now a congressman from Silicon Valley, and then was a candidate for Congress. And John was a supporter of him. And we were very good friends from having served together. In the Obama administration. Sean was, I think, very passionate about taking a lot of the success he has he had had as an entrepreneur and investor and starting to apply to US policy and politics. And I had, you know, been spending the last few years really focused in on how you help manufacturing communities that had been really devastated after the recession in 2008. And we got to talk to you and found that we shared a lot of the same political outlook, and how you get the two parties to work together, and how you begin to bring in private capital from the sidelines, and thought it would be a compelling enough model, to start to build the foundation for a new type of thing, taking an advocacy group in DC, let me tell you, for the first couple years, there was a lot of padding of heads. Oh, great, another Silicon Valley, venture to save America. Good luck. And you know, to talk a lot to me, this is the same time that Mark Zuckerberg and others have launched for us around immigration, which I don’t think went spectacularly well. And so we’re kind of entering the DC Universe in this weird kind of environment, where people were very skeptical about outside movements to, you know, that could do big things. Got

6:55
it? Got it. Talk a little more about your work at at develop advisors, you know, what, what are you doing with fund managers? Specifically?

7:03
Yeah, well, it’s really the whole range of the aspects of opportunity zones, that are pretty complex for folks to figure out now. So it’s everything from market intelligence and strategy around how the markets forming where it’s forming, what assets class it’s forming, around how how to fundraise around that to really technical work around structuring funds and structuring deals to that they work in this program. And investors can get the tax incentive to a lot of relationships, stuff around working with investors, and wealth managers and mayors, and the media and others, to help fund managers kind of build their place in the marketplace and kind of develop the brand and credibility. And what’s exciting now is, and this the same reason, I think, many groups need help is this is all brand new. I mean, the rules are brand new, the strategies are brand new, a lot of the players are brand new, and everyone’s trying to figure out how the market works. And I you know, this is all I think about and, and do so I’m able to share a lot of that, you know, insight with the relatively small group of fund managers that that I work with. Good,

8:09
good. Yeah. And let’s talk about opportunity zones. You know, that’s the topic for the day, we’ll just start out with the basics. So can you give us an overview of the $6 trillion Ozy program?

8:22
I think the easiest way to think about this is, this is a incentive that’s meant to change where investors both large and small, look at their next investment. And by providing a very strong federal subsidy, if you’re willing to take on the risk of doing a few things, one, investing in a low income community opportunity zones are built out of low income communities around the country to over a long period of time. So really, you get the full incentive of opportunity zones, which is the largest incentive in the in the tax code for capital gains, if you’re invested for 10 years or more. Three, you’ve got to make an equity investment, which means you’re taking more risk, you know, then then a lot of other incentives, which are really facilitating bet, and for you’re doing it in a either in a real estate project that requires a lot of development, or with a company that’s high growth, and looking to raise capital to expand what you can do. And what that all boils down to, is this is a pretty risky asset class. They are growth companies or development real estate projects in second tier markets that you’ve got to hold for a long period of time. And because of that, the federal government has provided this subsidy which basically works in two ways. At the front end, it starts with having capital gains, so you have to already be invested in the market to use the program and let’s say you’ve got a million dollars of capital gains and you know, Apple stock and you sell it. Normally you pay 24% in federal capital gains taxes the next year, and what this program enables you to do is defer or put off that tax bill until, you know, paying it in 2027. So that’s the first part of the incentive is that deferral. And then if you hold it for long enough, there’s two marks at five years and seven years, you get a discount on that tax bill. So instead of having to pay what would be $240,000, at today’s tax rates, you’re now paying 20 $40,000 minus 15%. So you only owe $200,000. But the big part of the incentive is you put that money to work during that whole period of time. And it’s all pre tax money you’re putting to work. And if that a million dollars, that you’ve invested in an opportunity zone fun, let’s say you put in a real estate project, downtown St. Louis, and that project is now worth $3 million, at the end of 10 years, you’ve got $2 million of profit to made, which if you’ve held your stake in it for 10 years, or more now all tax free. And it’s really the only part of the tax code that enables you to totally forgive capital gains. And that means you get a huge boost on the returns on your investment. But that, of course, means you’ve made a profitable investment to begin with. So there’s, this is really a incentive that, you know, ensures that investors are carrying a lot of risk, but they’re also getting a lot of the reward for making long term investments in places that really need capital.

11:17
Got it? Got it. So a huge requirement here then is that 10 year hold period, is that right? Well,

11:24
you can sell whenever you you want, as you know, the investor based on whatever your agreement is with the manager of your fun. But getting that back in incentive, which is the majority of the tax incentive here requires you to be invested for 10 years or more. So it is a long term. You know, generally illiquid investment. And that’s, you know, part of the deal. Good

11:43
incentive, though, I mean, good incentive for long term investing long term focus, instead of, you know, what we’re commonly used to with quarterlies and fast transactions and everyone trying to sort of optimize for the short term. Yeah,

11:59
I think that’s right. I mean, there’s all sorts of organic reasons to want to be a long term investor to, you know, particularly given the fact we’re, you know, at least many people think we’re at the end of the cycle, in terms of the markets, and, you know, you want investments that can outlast us, you’re not hesitant about a, you know, led to, to kind of sell at the, at the bottom of the market. So I think there’s a lot of value now and making being a long term investor. But yeah, it’s meant to change the mindset of investors and developers, and, you know, venture capitalists. So from the developer perspective, it’s, instead of thinking about development in three to five year increments, where you’re looking to sell as soon as you complete it, and don’t really care what happens in the long term, let’s take a long term approach to how your investments are affecting their community. And, you know, whether or not they’re likely to be a win win for everyone and, you know, the be mutually successful in as the venture capitalists, it’s, you know, don’t take every company that you invest in, and, you know, decide when they when they get to their next round of funding, they need to come out to San Francisco or LA, or New York or Boston to be based because it’s too hard to support their growth, where they’re located. So this is really meant to drive place based development, whether it’s through company investments, or or through real estate once and a lot of funds already structured to have 10 year horizon. So that’s not totally different than the way a lot of, you know, alternative investment models already work.

13:29
Are there incentives, aside from from the tax benefits?

13:34
Well, those are really the big ones, although, increasingly, you’re seeing other incentives layered on top of it. So I’ll tell you what I’m what I mean, I mean, the crux of this program, and what’s in the legislation relates to all those capital gains incentives I described. But increasingly, there are a number of states and cities that are putting their own incentives on top of it. So in 30, states, their state capital gains rates are now treated exactly like the federal rate is that includes a fairly high tech state like New York. And, you know, on the other hand, California, they’re still figuring it out. So they’ve got the highest capital gains rate in the country at 13%, which is like half the federal rate. And they’re looking at conforming the treatment to their opportunity zones, but it looks like only for alternative energy and affordable housing investment. So every place is going to have a different nuance. Many states are offering expedited, you know, land use rules around permitting and zoning, providing other incentives like workforce incentives or state and local grants. And then increasingly, that’s happening in the federal government as well. There’s now in an inner agency Council, run out of the White House, led by HUD housing and urban development, and they’re tying low income housing tax credits and economic development dollars in small business lending and rural development dollars. Now they’re incentives to projects and opportunity zones. So I do think you’re seeing a lot of positive alignment in trying to take as many tools as we have, you know, in the Public Sector and apply it alongside the private investment incentive.

15:04
And is, is everything structured at the specific investment level. So could a fund like mine, for instance, make an investment, it happens to be in an opportunity zone, I hold the equity for 10 years, I can benefit from the program, or doesn’t need to be a fund that has special designation and some approvals to invest in opportunity zone opportunities.

15:31
So it’s really more the ladder, you have to invest through a special investment vehicle called a qualified Opportunity Fund. But those can be structured in a lot of different ways. So in the simplest form, it’s really just an LLC, that may have one investor or one asset, or both. And can, you know, can be structured through any any lawyer and set up pretty quickly, or they can be very complex vehicles that involve lots of investors and lots of assets, and complicated investor and partnership documentation. So there’s a pretty wide range, but you’ve got to set up this, this qualified Opportunity Fund, and certify it with the Treasury Department what you know, whatever structure and whatever comp level of complication, you decide on, and report every six months to the Treasury Department, that you’ve deployed 90% of your capital, in qualifying assets and opportunities out. And there’s, you know, the the program is really designed to ensure that there’s a separate strategy, where you’re deploying capital fairly quickly and over a longer period of time in these zones. So it can’t just be one investment out of your portfolio, or you can invest directly, you got to create a vehicle to do it, even if that vehicle is just a simple kind of passper structure. Got

16:53
it. So I could, in theory, spin up an SPV and make sure that I’ve worked with the attorneys so that it qualifies, and then and then make the investment and follow all the reporting requirements.

17:05
Yeah, that’s right. And you know, right now, the reporting requirements, and the compliance isn’t, isn’t that complicated. And SPVs are very common model, whether it’s for one single real estate asset, or it’s one company, looking to raise it, you know, A or B, or C Round of, of capital, looking to do it through a structure that will give its investors this benefit. This is really a tool, a fundraising tool for fund managers, or for companies or real estate developers, or whomever and the incentive is really going to their investors. And it’s really, you’re creating this this vehicle as a sort of fiduciary to help ensure your investors are compliant with what are now 250 pages of federal regulations around, you know, how this program works. You

17:47
know, we’ve kind of touched on this already, you’ve talked about real estate, we’ve talked about startups a little bit, broadly speaking, you know, this applies to alternatives and long term equity hold periods. But what are some of the asset classes that you’ve seen that are sort of best suited to this piece of legislation? Well,

18:05
you know, technically you can, it really applies to any type of investments, with a couple exceptions. And I’m seeing all of those models in real time, real estate was certainly the Marines of this program, they were the first in, they have a lot of muscle memory, in the tax advantaged kind of investing space. And these are, you know, physical, tangible assets and opportunity zones that aren’t going anywhere. So it’s a fairly intuitive way to invest. But increasingly, and this is largely because we got a lot of regulatory clarity from the Treasury Department in April, that made clear that investing in businesses will also be quite easy, particularly for creating a new business and an opportunity zone, or you’re relocating a business into an opportunity zone, they basically qualify the moment, you know, it arrives in that zone. And so increasingly, I’m seeing both funds and individual companies in the energy and infrastructure space, in advanced manufacturing, in film and studio production, in venture capital, in healthcare and education, technology, including, like, you know, financing the building of charter schools, really anything you can make an equity investment on, that has either some level of appreciation to it, or even if it’s depreciating, in this program, that depreciation, you never have to pay the taxes back on if you hold 10 years or more. There’s a lot of interesting structures that can work well. There’s only really two categories of exceptions. You can’t invest in essentially a financial services company that’s, you know, making loans or making equity investments, and you can’t do like a fund to fund investment. And then the other big category is what the tax code calls thin businesses. So they’re delineated in the tax code, but it’s things like casinos and country clubs, and massage parlors and liquor stores, and otherwise you couldn’t really do anything else. And I think we’re just beginning to see the creativity in this As of how people are thinking about applying this to all sorts of models, both big and small, like, you know, franchises, of restaurants and grocery stores, and, you know, other other businesses in many of these communities.

20:14
You know, just to back up a bit here, how, how are these opportunities zones to find, you know, what credentials and what sort of specific characteristics make an area an opportunity zone,

20:26
essentially, what the Census Bureau calls low income community census tracts, and I’ll walk you back on how the process works. So this all happened. In the first six months of last year, the federal government, Congress created a designation which had been used in other programs, and applied it to this program of low income communities. And those communities are defined economically by having a medium income at about 80% of the state’s income, or having a poverty rate above 20%. And when you look at the map of the country, in the aggregate, about 40% of the country, is a low income community census track. And so that means in every state, roughly about 40% of the state is a low income community. And what Congress did was empower the governors to choose one out of every four of these low income communities in their state, to become an opportunity zone, and so on net, you’ve got, you know, roughly about 12% of the country. That’s now an opportunity zone. And they’re about 75%, urban about 25%, rural, where they’re located is different, depending on the kind of the baseline economics of the state and how governors selected because they had a pretty broad discretion and make these selections. But in the middle of the country, you have the downtown’s of many big cities or opportunity zones. So all of downtown, you know, Detroit, and Cleveland and St. Louis, and places in the south, like Atlanta, and Birmingham, and other places have a huge concentration of opportunity zones in the center of the city. And some of the highest higher performing cities economically, like San Francisco and DC in Manhattan, and Boston, you don’t see a lot of zones in the middle of the city, they’re more on the outskirts, but you have a pretty big geographic diversity. And you know, opportunity zones are not mostly out of the way places, I think they’re mostly places that would be very attractive to investors and companies and developers. But often these are overlooked parts of the country anyhow. Because, you know, there’s very much a herd mentality when it comes to being an investor, either in real estate or business investing. And there’s been such a concentration, particularly in the business investing side, and just a handful of markets. I mean, 75% of venture capital goes to San Francisco, LA Boston in New York, that there hasn’t been a lot of stretching beyond that, to find entrepreneurs and businesses in the rest of the country.

22:52
So as, as governors of the states change, are the opportunity zones also going to change with different administrations? Good

23:00
question. No, so the program has been structured to lock in a lot of these choices for a long period of time. So in terms of the census tracts that were chosen as opportunity zones, that map was to stay in place until the end of 2028, you know, around 10 years or so give or take. And then the idea is, if this program is successful, and it’s successfully deploying capital, and you know, the various stakeholders are, are fairly happy, you’ll see a new round of opportunity zones be selected, because there’s, there’s always going to be a bottom 40% of the country economically. And there’s always going to be tranche of those that are prime for investment, but just not getting the capital. And the idea to make this a permanent part of how we do economic development in America in a way that taps into the largest source of capital we have right now, which is those private dollars. And this is really a reaction to the fact that the way we make big investments in this country has changed dramatically over the last few decades. The federal government is in you know, $20 trillion of debt, many state and local governments are broke or barely staying above water. And large companies have, you know, less than less invested locally, because they consider themselves to be global companies. And you’ve got a tax code that’s very favorable to individual investors. And so they’re sitting on, as you mentioned, towards the beginning $6 trillion of capital gains, just in equities, and business investment, not even including the real estate market. So there’s a tremendous amount of passive capital, that we’re, you know, trying to tie into and empower investors to utilize to build a future for many more of these cities.

24:44
Is the expectation here that entrepreneurs or new business owners will relocate to these areas to headquarter their new businesses? I mean, that seems like a bit of a stretch or is it? Is it more that you know, more businesses will be started in these regions because they can do attract the right sorts of funding that otherwise they couldn’t get?

25:02
Well, both, but I’m not sure, I think it’s a stretch. I mean, listen, you’re already seeing people relocate businesses, you know, to capital centers, like New York, San Francisco, Seattle, Boston, DC, a lot of these other places we’re talking about, when there’s a lot of reasons people don’t want to be there. I mean, they’re really expensive. Housing in particular, is really expensive. Look at the story of San Francisco and Seattle, which has so many companies, they don’t even want more companies, they just want housing for people to live in, where it costs four times as much to hire talent than in other parts of the country. So people are already relocating to be close to capital, the idea is to, you know, bring the capital closer to them. And ultimately, the thesis of this program, which I happen to think is true, and a lot of, it has a lot of resonance to our politics, as well, as people really want to be able to develop their, their company, and their future, you know, in and around the communities where they grew up, where they’ve got family, where they have friends, where they’re culturally comfortable, and they don’t want to have to go to a big expensive city. And that’s, I think, why San Francisco loses far more people than it takes in every year, because it’s increasingly unaffordable, which I think is the other side of this coin. It’s it’s not just that this is a program that benefits, you know, the former industrial powerhouses that are in decline or rural communities. But there’s a huge overcrowding problem now in the handful of cities that have robust capital markets and investor presence. And, you know, I think it benefits everyone to see some of this, the more equally spread around the country. So I do think businesses are going to relocate, and businesses are going to start in different places, but it’s going to take a while, right thing for the education to seep through. So that this, this becomes a, you know, a more common practice over time.

26:50
What about, you know, the startup sort of thinking through this practically, you know, a new business emerges in an opportunity zone, distress region, it grows, it expands, maybe they keep their headquarters there, but you know, they have other offices in major urban centers and in major cities, and sort of the, the proportion of employees, you know, the balance kind of shifts to non opportunity zones? And maybe this can’t be predicted yet. I don’t know, but how do you see this playing out, you know, as, as businesses grow and expand beyond the opportunity zones that they were founded in?

27:26
Well, I mean, you know, practically speaking, this is a conversation for companies and their investors. And, you know, they, to the extent they’re being set up to be good opportunity’s own investors, they need to be cognizant of the fact that staying in compliance with the program, which means, you know, growing is fine, but growing in opportunities zones is an important piece of this. But I think with a, you know, kind of a strategy that’s focused on this, it’s not that challenging to do. I mean, you’ve got opportunity zones. And in downtown San Jose, in downtown Los Angeles, you’ve got opportunity zones in, in Brooklyn, and Queens, you’ve got opportunity zones, and, you know, Austin and Denver, so a lot of the same places companies may want to be now they’re gonna have opportunities to grow into, you know, the specific neighborhoods within those cities. And, you know, we should be seeing more development of those places. And both in terms of the housing options, and the office options, and co working spaces and incubators and accelerators, all models I’m seeing early in this program, that will be kind of hospitable places, for these these businesses to grow. And that’s why it’s so important that the both the real estate and the business side is firing on all cylinders, because they really need each other for this all to work, but it’s not gonna work for every business. There’s, I think, a big question around, or at least a big perception of a question around talent and where you can access talent pools. And I don’t think all business models are gonna work in all places. But look, we’ve got, even if you’re just talking about, you know, tech, we’ve got amazing tech universities all over the country, and, you know, University of Illinois, in downstate, part of, of Illinois, and, you know, an arbor just outside of Detroit, Carnegie Mellon, in Pittsburgh. And you know, and on and on. There’s other major research hubs, train training engineers and computer scientists and others that are far more diverse than where businesses are actually being created and growing. So even if we just start with that circle of talent pool, and I’d argue there’s three, four or five dozen other examples of places like the three I described, you’re going to see a far bigger spread to where businesses are sprouting up, even in a really technical, heavy space, you know, like high tech growth companies.

29:46
Do you have some some of the early statistics on the number and the amount of private capital funds that have been raised and or deployed with a mandate around opportunity zones?

29:56
So not exactly and this is one of the nitpicky issues in this program, there was initially, a group of reporting requirements we built into the legislation so that the Treasury Department would have an obligation to tell us who is investing in where and it was stripped out of the process stripped out of the legislation in the process of getting the bill passed for mostly technical, not political reasons. So there is no great single database of where these funds are. On the real estate side, which again, has been the most active part of this space. There are, you know, databases, like costar that is collecting early data on this program. And they found there were about 300 or so, opportunity’s own funds created, you know, up through the first quarter, so this year, and we’re just now seeing the business side of this universe take off. But there is no comprehensive database of what we’re talking about, you know, I think we’re talking about easily at least a few 100 opportunity’s own funds, and several billion dollars of deals that have already been done. And then this year is the big year for capital raising, and to see the capital come off the sidelines and deployed into these funds and new vehicles. So I think you’re going to at least hear anecdotally about a far more number of different types of deals being done around the country.

31:10
In your estimation, Steve, what are some of the risk factors and or potential unintended consequences that that we should all be mindful of? Well,

31:18
as an investor, I think the most important thing to realize is that this is still a fairly risky asset class. And that’s why there’s a federal subsidy, I mean, you’re talking about second tier markets, projects that on the business side, are going to be more likely to fail, on the real estate side are more difficult to develop, and my set of now fairly complex rules that will, I think, become less less complex over time, that you have to understand and operate under, to really deploy capital successfully in this program. And it’s hard to do. And I think the fund managers in this program matter a lot. And as they develop credibility and track record, that will start to sort out who’s real in this market and who’s not. But I think investors now have have to do a lot of work and due diligence on both the program and the fund managers, and their strategies, to know that at the end of the day, they’re making smart investments even beyond the tax credit. I think there are concerns beyond that in certain communities about the impact of too much investment in places that have already done well, and whether that will cause displacement. And I think that’s a really issue for certain places. Although fourth, you know, 96% of the country, according to the Urban Institute, which study this recently, in relation to opportunity zones, 96% of these zones, aren’t really experiencing gentrification or at risk of it, they’re still experiencing displacement. But it really comes from too little investment, not too much. So I do think the Seattle’s and San Francisco’s and Brooklyn’s of the world have to think hard about, just like they would right now, about really, at the end of the day, how to build more housing, so that people can affordably live in those cities. And that’s a challenge, regardless of this program. You know, my goal is to see an enormous amount of capital flow into these communities, let’s call it $100 million a year, which I think is in the realm of the possible as the as the program develops out. And that’s a transformative level of capital. For places that will change, I think, the map of how the economy works. And so I’m, you know, I’m not every one of these deals are going to be the deal that is that this program was envisioned to create, and it’s gonna be some low hanging fruit at the beginning. But I do think it will lead towards a much bigger development of deals, you know, far beyond what we’re seeing, you know, this year. Yeah,

33:38
I couldn’t agree more. And I think I think part of my hesitation around around this topic and why I’ve waited to cover it until I could get used specifically on the program, is because with any new government incentive program, or, or even, you know, overhyped areas in general, like we saw with with crypto, you know, as recently as last year, it attracts a lot of opportunists. In some cases, charlatans, you know, looking to capitalize on something that’s new and hot, but maybe not well understood. How do you think we avoid and discourage bad actors from taking advantage of either LPS or or entrepreneurs?

34:17
I think that’s a really good point. I mean, in some ways, the answer that question is that these underlying opportunity’s own funds are really, you know, private equity or venture capital vehicles at the core, that are investing in certain places, there’s certain ways to get this incentive. And you should treat them like evaluating any other private equity and venture capital fund. Yep. And look at the fund manager and look at their track record and look at their strategy and look at their deals and look at, you know, how they’re dealing with risk and what their return profile is, and make an informed decision, just like he wants, you know, throw money to any investor who claims to be a VC or claims to have the next hot real estate deal. And so I think you still have to do that. It’s more challenging because it’s a new program with new players and new funds. And so there isn’t the The same kind of set of established market leaders that you might expect to see in private equity venture capital. Now, although some of those players are in the game, I do think the degree of difficulty is more difficult. And yes, I’ve seen the funds in this program, too, that are selling, you know, deals that don’t make any sense or really, and I think this is more common than not, don’t really understand how the program works, or how the rules work. And that’s, you know, part of the growing pains of being a new industry, so I worry about that. But I don’t worry about it a ton, because, in general, the investors unlike crypto, which really anyone could come in and buy, you know, Bitcoin or ether, and put in 10, or $25,000, or more on, you know, on an exchange, you could download on your phone access and have the opportunity to market is more complex than that, first and foremost, it starts with, you got to have capital gains, and you got to have a meaningful enough capital gains for tobacco, which means you’re already an investor in the market, and typically a pretty sophisticated investor. So these are funds that are typically being marketed just for practical reasons, if you know if for compliance reasons to you know, qualified investors and qualified purchasers that are pretty sophisticated. But yeah, this should be a small part of anyone’s portfolio, because it’s still a risky asset class, although for the funds to do well, the returns are going to be astronomical, you’re talking about funds that are, we’re looking at pre tax 10 to 15% returns and post tax could be looking at returns that are, you know, in the 20s over the course of 10 years, which is as competitive as any other product in the market. And I think that’s what makes it attractive and interesting for folks. Even if you weren’t thinking about which I think a lot of people are the impact and how it kind of fit into the, you know, impactful investment you’re looking to do out of your portfolio.

36:47
Steve, one of the services that develop advisors provides is the OCI or the opportunity zone index. What is this index? And what are you attempting to measure?

36:57
The opportunity zones index is really the first comprehensive economic analysis of all of those opportunities zones around the country, at least in the US. It doesn’t include a Puerto Rico and the territories based on census data. So it’s not really an advocacy piece, as much as it’s a data piece. We’ve taken a number of different variables, home prices, household income, you know, job creation, unemployment rate, education and other factors. And we’ve compiled it into an index that rates and scores and ranks every opportunity zone in America and boils it up at the county, city and state level in one big interactive map that gives people a feel for what opportunity zones feel like visa vie each other. And, you know, if some level, the data is not that surprising, and that a lot of these coastal markets that are already doing economically, well, their zones are doing proportionally economically better than other parts of the country. But what I thought was really interesting is as you dive into many cities, and you get down into their downtown’s, places, people may not be thinking about investing in downtown St. Louis, or Indianapolis or other places, you see zones that are as economically attractive as any of these big coastal cities. And they may not have, you know, 30 of those tracks, they may just have five or six. But there’s five or six tracks. Camino may encompass a number of very interesting companies, and you know, in real estate assets and others. So it’s really meant to open people’s eyes to what an opportunity zone looks and feels like. And I think beat back some of the stereotypes, that unless you’re investing in, you know, Oakland or San Jose, you’re investing in somewhere that’s economically hopeless. And that’s just not what the data shows us. It shows that there’s much less of a concentration of that economic vitality in places, but it shows that there’s plenty of places that have potential that have just been underappreciated or overlooked by capital markets for for a long time. Yep.

38:55
Steve, what would you say to the pundits that claim that the majority of the benefits will accrue to the Financial Services investors and not to the distressed communities?

39:05
Well, I view the fates of the investors in the communities as being fairly linked. If you’re going to do wellness program, it’s because you’re making a long term, profitable investment that gives you skin in the game, to ensure other things are happening in those communities that will benefit your investment that you know, there’s workers are being traded and businesses are coming in to fill up their real estate space crime is being reduced. When you align the interests of the private and public sectors. You get a lot of similar goals that people want places that have a lot of economic vitality and a good quality of life and that are safe and offer good education. Everyone wants that. And now investors will care about a far bigger chunk of America, and how well they do along those lines. So I think those, those two stakeholder groups are far more linked than maybe either one of those groups thinks they’re linked. I mean, there’s I think there is some justifiable skepticism among communities that we, you know, these investors come in. And they don’t really care about us then from investors of like, you know, why should we bother with all this other stuff. But when you change your, your lens from a short term investor, to a long term investor, there’s a much greater alignment, and this program was designed, so you didn’t have to, you know, want to be an impact investor, necessarily, although you could be to use this program and have a huge amount of impact, it could just be that you’re looking for returns, and you’ve got a fund manager that needs to go to an increasingly large part of the country to find those deals and work harder at it. Because now they’ve got the cap on, that’s when you know, the program’s working now, funds are really competing for capital, and they’ve got plenty of access to deals. As overtime, as more and more capital comes into the program, there’s gonna be a pressure on finding more and more quality deals. And that’s going to push people into, you know, neighborhoods and places and types of projects that they may not be thinking about right now. So I think you’re going to see an alignment and two people who really push on that. I think that the the most obvious pushback is, the status quo isn’t working either. I mean, we can’t, we can’t live with the current state of affairs where 20 big cities benefit from economic growth and trade and immigration and technology, and the rest of the country doesn’t. And, you know, I think anyone who’s really paying attention sees how dangerously it plays out in our politics and how it starts to divide people based on all sorts of other lines, when they don’t feel like they’re going to benefit with not connected with positive things happening with America. And that leads to, I think, a lot of bad outcomes for our country. So I think we don’t have a lot to lose. I think the biggest failure for this program will be if people don’t invest out if they invest too much, Steve,

41:52
if we could cover any topic on the program? What topics do you think should be addressed? And who would you like to hear speak about it?

42:00
Is this like living or dead? Well, hopefully

42:01
living if we’re gonna, we’re gonna interview them here on the show. I’ve

42:05
gotten very into Buddhism. So I believe in Hinduism. So I believe in reincarnation. So who knows what’s possible, to me, most important topic is because I’m, you know, very politically minded, and how the public and private sector work together, is how the role of large companies in America changes in a number of different ways. Whether that’s the breakup of large companies, the ways companies reinvest in communities, the way they think about their short term and long term incentives, you know, the way they treat workers? To me, that’s the quintessential question of our of our time, and whether we get to a place where I think there’s more of an equilibrium between the needs of workers and communities and the profit motives of businesses. You know, I think we got to solve that question effectively, to, to get America to a place it needs to be. And, you know, I think you’re gonna see this as a huge issue running up in the in the 2020. campaign. So so to me, that’s, that’s endlessly fascinating.

43:07
Agreed. And finally, here, what’s the best way for listeners to connect with you?

43:11
Yeah, so I’m actually super active on on LinkedIn, which was probably the only social media source I can’t live without. And I’m also easy to find, it’d be at my website, developer advisors.com, where you can find a pretty good overview of the program and some of those interactive maps that we talked about in the index, and there’s email contact information that, you know, gets to me, for those interested in, you know, talking to learn more.

43:38
Well, of all the folks that, you know, we could have gotten to talk about opportunity zones, I feel pretty fortunate that we had you on the show today, you know, the brain drain is real, we’ve talked about it before, you know, people leaving some of these distressed areas and go into big cities and go into, you know, economically successful areas and the Capitol following them. And so, I am cautiously optimistic and hopeful that, you know, this program really does a lot for places across the nation.

44:07
So much and watch, do you think this will be a transformative model for American communities, and if it doesn’t work, we don’t have a lot of plan B as a country, so so we should all be working to make sure it does work, whatever that wherever you fall in the marketplace, whether you’re a community leader or an investor, or developer or an entrepreneur, to the extent we’re collectively aligned to, you know, focusing in on making these places successful, I think we’re all gonna be better off

44:33
here again. Well, Steve, thanks so much again for the time and I look forward to the next one. Thanks, talk to you.

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