Opportunity Zone Deal Flow, with Craig Bernstein

Craig Bernstein

What does Opportunity Zone deal flow actually look like at the deal level, fund level, and investor level? And which Opportunity Zones are seeing the greatest amount of deal flow?

Craig Bernstein is principal at OPZ Bernstein, which recently launched the OPZ Bernstein Opportunity Zone Fund. Craig has over 20 years of real estate experience, and is one of the leaders in the Opportunity Zones industry. He has contributed to stories in the New York Times, Associated Press, and CNBC. And if you’ve ever been to an Opportunity Zone conference, there’s a good chance you’ve heard him speak.

Click the play button below to listen to my conversation with Craig now.

Episode Highlights

  • When we can expect the next round of proposed regulations and the final regulations on Opportunity Zones from Treasury.
  • The biggest regulatory issues that are still outstanding: depreciation recapture, exit structuring, refinance proceeds, treatment of land, promote interest, and private equity transactions.
  • Key data on opportunity zones and which zones are seeing the greatest amount of deal flow.
  • Why Craig’s focus is on secondary and tertiary markets.
  • What deal flow actually looks like — at the deal level, at the fund level, and at the investor level — in terms of cap rates, IRR, yield, and equity splits.
  • Some of Craig’s favorite operators in the Opportunity Zones industry.
  • State tax conformity issues, particularly in high-tax states like California, Pennsylvania, and New Jersey.

Featured on This Episode

Industry Spotlight: OPZ Bernstein

OPZ Bernstein

The Bernstein Companies is a third-generation Washington, DC-based real estate developer that has been in business for over 85 years. The OPZ Bernstein Opportunity Zone Fund is The Bernstein Companies’ subsidiary private equity fund, focused exclusively on making Opportunity Zone Fund investments. OPZ Bernstein’s goal is to provide investors with a fully diversified portfolio of Opportunity Zone Fund investments across a variety of product types, with a specific emphasis on multi-family housing in urban locations.

Learn More About OPZ Bernstein

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About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Hey everyone. Thanks for listening. It’s Jimmy Atkinson, back with another episode of the Opportunity Zones Podcast.

Today, I’m speaking with Craig Bernstein, principal at OPZ Bernstein, which recently launched the OPZ Bernstein Opportunity Zone Fund. Craig has over 20 years of real estate experience, and the Bernstein Companies is a third-generation real estate developer that has been in the business for over 85 years.

Craig is one of the leaders in the Opportunity Zones industry. He has contributed to stories in the New York Times, Associated Press, and CNBC. And if you’ve ever been to an Opportunity Zone conference, there’s a very good chance you’ve heard him speak.

I met him for first time at the Opportunity Zone Expo in Los Angeles just last month. And today, he joins us from his office in Washington DC.

Craig, welcome to the show.

Craig: Thanks, Jimmy, I appreciate it. And pleasure to be here with you today.

Jimmy: Absolutely. We’re happy to have you on. So, Craig, you’re in D.C., and I know you have a lot of contacts on Capitol Hill. So, what have you been hearing? And when do you think we’ll get the next round of regulations from the IRS?

Craig: Sure. So, I think our conversation’s very timely. Right now, the next set of regulations will most likely be out by the end of this month, and there’s actually a public hearing scheduled for February 14th to address, in a public setting, the first set of regulations ever released at the end of October.

Jimmy: Good. That hearing was originally delayed because of the shutdown. Is that right?

Craig: Correct. And my understanding is, and all the feedback that we’ve been hearing here in Washington is, expect to see something, the government obviously opened up a few days ago, and expect to see the second set of regulations approximately four weeks after the government opened, which should lead us to believe that it will be most likely right at the end of February into the first week of March.

Jimmy: Okay. And those won’t be the final regulations yet though, right? How long until we get the final set of regulations? And what still needs to happen in that process?

Craig: Sure. Great question. I think actually that the final set of regulations, by the time everything gets, kind of, run through the proper regulatory channels here in Washington, probably once everything’s finalized till, you know, or late May to early summer at the earliest. I just think when we look back at how long it’s taken to get this far, the program has already been in existence for 13 months now at this point, and we still really even had the second set of clarification regulation. So, I know everyone is anxiously waiting as we are to find out, you know, what the final guidance and regulations are, but I can’t stress enough to that. You know, we’re still right now and one thing we’ve been doing at OPZ Bernstein since we first started working in the opportunity set in space, it was really trying to execute on transactions and hitting the ball, kind of, right down the middle of the fairway, and working within the guise of the current legislation.

Jimmy: Good. So, I know a lot of people are anxiously awaiting these final regs, but some people can’t wait, or they want the funds set up before the regulations go final. What is your advice to them? What should they do?

Craig: Absolutely. I mean, we executed on our first opportunity is on transaction in the middle of January. And we’re currently underwriting and funding several other deals, and should have some other additional announcements about closings in the near future. Right now, you can execute upon… The government would like you to, and you can’t execute a transaction. Again, I think the big thing is, what are the issues that you’re still waiting on as an individual investor or fund manager?

Depending on what your situation is with a specific investment, each individual investor, fund advisor or developer has their own set of circumstances that’s specific to their own unique project. So, I really think it’s more of a case-by-case basis, but everything is, I, kind of, iterated a few minutes ago, is we’re trying to execute and hit the ball down the middle of the fairway, and the big thing for us, and I think we’re gonna get into it, and then hopefully in a few minutes, about the regulations. The big thing for us that we’re really waiting for guidance on is refinanced proceeds. And sitting here now at the beginning of February, I think within the next two to three weeks, we’ll have a much better understanding where that stands.

Jimmy: Yeah, I’ll ask you about that in a minute. I wanna get into a lot of the regulatory issues that are still outstanding. But first, I wanna back up for a minute, Craig, and talk about you for a second. Can you give me a little bit of your background? How did you get your start in real estate? And basically, how did you get to where you are today and what differentiates you from everyone else?

Craig: Good question. I started out, actually, in real estate brokerage. I was in Cushman & Wakefield the first half of my career, I was in brokerage for about nine years. And so, the past 11 years, I was running a prominent family office called White Star investments in Bethesda, Maryland. I started out initially as the family’s Director of Real Estate, filled out a director real estate portfolio on behalf of the Bajaj family. And then about three years into my role, I became the family’s chief investment officer. About 18 months ago, I became aware of the opportunities on legislation. And I was really intrigued by it, by the potential benefits, not only from being able to deliver investors with compelling risk adjusted returns in a tax efficient manner, but also being able to positively impact thousands of lives across America, implementing some of the social benefits as well.

So, that really is, kind of, how I got my start in real estate, and the big catalyst for me that was not in the past 40 years have we seen a piece of legislation that is gonna have as much impact as the opportunities and legislation is on the real estate industry. 1031 exchanges were first passed and created in 1979, and this legislation really has the ability to transform the way that communities, investors and developers will look and think about real estate.

Jimmy: Good. And, you specifically, what differentiates you from everyone else in the industry?

Craig: Sure. So, what we’re doing, you kind of mentioned and alluded to, I started the business out initially as OPZ Capital last year. About a month ago, I executed a joint venture transaction with the Bernstein Companies, a Washington D.C.-based, fully integrated real estate investment management firm. The firm has an 85-year-history. They’ve owned, managed and developed over 5 million square feet of commercial space, 4,000 apartments, and 20 hotels across the country.

The one thing that really differentiates us is as a company, they’ve done over a $1.5 billion in new market tax credit transactions. In 38 states, across it, the total of 150 transactions. So when I started to speak with different operators to potentially team up with, no one had the depth, breadth and scale that the Bernstein Companies goes from an infrastructure perspective. And that’s really what, kind of, led me to try to proceed with them and team up and do a joint venture.

Jimmy: Very good. And you share a last name, but there’s no relation there. Is that correct?

Craig: There is no relationship. I’m a third generation Washingtonian, and there’s Adam Bernstein as well, but no relationship.

Jimmy: Okay. I wanna get back to discussing the regulatory issues. I know you have identified the five most important regulatory issues that are still outstanding. Could you briefly list them for our listeners and then maybe go into each one specifically?

Craig: Sure. Everyone, depending on who you ask, you can ask five different people, and get five different answers. And that’s the one thing that’s interesting about the program. It really depends on who you’re talking to, and what lens they’re looking at the individual issues through. As I shared, as a opportunity zone fund manager, funding vesting class operators across the country by providing basically a cheaper source of capital, the main issues that are keeping me up at night, are first, structuring the exit. How are we gonna structure this exit? Is it gonna be a single asset fund, multi-asset fund, reach structure? Second is refinance proceeds.

How are these refinancing proceeds? We all have a clear understanding now that you will be able to utilize debt, that was clarified in the first set of regulations, but how is that debt gonna be classified? Is it gonna be ordinary debt as we would know it from a regular real estate deal? Is it gonna be return of principal, which will potentially taint the initial equity contribution within our opportunity zone fund wrapper? Or, is it gonna be classified as ordinary income, which would be subject to federal and state taxes? That to me is really, kind of, the biggest issue. The next issue is how, is the way I’m gonna be treated.

Fourth issue is depreciation recapture. Fifth is general partnership promote. And last but not least is private equity transactions. For every question we have about real estate, there are 10 about the private equity world.

Jimmy: Right. You actually gave me six there, I think, if I counted right.

Craig: Yeah. This sixth one being really, the kind of private equity transaction.

Jimmy: Yeah. There’s a lot going on there. When I first read about the potential to eliminate depreciation recapture, I thought that was a huge benefit of the program, being able to eliminate the FF&E recapture. But it seems like nobody can really agree on what the intent of the legislation is or the regulations are. Can you speculate on what the final ruling on that’s gonna be?

Craig: Yeah. I think that’s a great question. I’ve raised this issue with the administration about a year ago, and at the time they really weren’t even aware of it. And I was fortunate enough to meet with the author of the bill on Capitol Hill right when the legislation was first passed. And to put it in context, the last major piece of legislation he worked on was the Healthcare Act. So, I think what we saw is the whole tax bill, the 2017 Tax Cuts and Jobs Act, which basically enacted section 1400Z, which is the opportunity zone provisions was only five pages. So, the whole bill in a PDF form is 185 pages, page 130 to 135 specifically relates to opportunity zones. So, the way that the law was written, just so the listeners have a clear sense of this is, it says basically upon exit of selling your interest in the qualified opportunity zone fund, at time of sale, your basis is automatically stepped up to the sale price, which would then imply that there’s no recapture.

Just so everyone understands, and I know that we’ve got a variety of listeners today, there are two types of recapture. The short term and long term. Short term being what you mentioned is, kind of, that FF&E, and then kind of 1251 recapture, and then the longer-term traditional depreciation as an example, 39 years on a multifamily building. Everyone that I’m talking to seems to agree and think that the long-term recapture will be an acceptable form with no recapture at the time of sale. The bigger question really is, short term recapture, kind of, for that FF&E. So, how I think it’s gonna shake out, I do believe that you definitely will get, kind of, a pass on the long-term depreciation, meaning that you will be able to take that depreciation with no recapture.

The bigger question for me is on that shorter-term recapture, which is the accelerated, basically, and a real estate transaction for an elevator or HVAC units, any kind of tenant improvements that we might have in a building that might traditionally be classified as short life items. And it’s ironic because typically, we try to, in a regular traditional real estate transaction, jam as much money as we can into their short-term deductions versus long term, because you’re able to accelerate it faster and get the benefit. And fortunately, in this program, I think it might be the exact opposite. We’re gonna find people trying to take advantage of the long-term recapture, and not put as much into that short-term bucket.

Jimmy: Right, that makes sense because if they’re able to completely eliminate the depreciation recapture on the long term, then that absolutely makes sense. Are there any other of those regulatory issues that you wanna speculate on as to what the final ruling will be?

Craig: Yeah, it’s hard. I think as we sit today, and you and I talked about it last week when we ran into each other in LA. The big thing is, you know, it’s a waiting game. So, I think, you know, if I were speculating, it’d be just that, a speculation, and I’d rather wait before I pine on any further issues, but those are the biggest issues right now. And what I’m, kind of, looking forward here, really is on the refinancing proceeds, any additional information as it relates to structuring the exit, and last but not least, that depreciation recapture.

Jimmy: Yep. Yeah, definitely a wait and see game at this point. I wanna talk with you now about the opportunity zones themselves. So, there are over 8,700 opportunity zones. Can you give me some data or some background on these zones? And in which zones are you seeing the greatest amount of deal flow?

Craig: Good question and interesting. And I think as time progresses, we’re getting a better sense from, kind of, a micro analysis of where deals are being done, where we’re seeing transactions and where are you gonna see the dollars flow into this? As you just mentioned, there are over 8,700 zones across America. That’s really, I think it’s about 11% of the United States is in a zone. Thirty-one million Americans live in within these zones, approximately one and a half million businesses. And the breakdown between urban, suburban and rural is pretty close. Approximately 40%, 38% to be exact, the zones are urban, 22% are suburban and 40% are rural.

I don’t think it’s any surprise, but the areas where we’re seeing the most amount of interest are the most densely populated, larger, kind of, metropolitan areas. So we’ve seen a great deal for New York, Los Angeles, South Florida, and Houston, to name a few. What we’re particularly excited about is, kind of, the higher end, and we’ve done a great deal of quantitative analysis on the market, looking at a variety of factors. I think it’s gonna be very hard, and we’re very strategic in terms of how we’re trying to think about the process in moving forward. The areas that we’re very excited about are higher-powered tertiary markets. So, Nashville, Charleston, South Carolina, Savannah, Georgia, Austin, Texas, Colorado Springs, Portland, Oregon, Columbus, Ohio. I think you’re gonna see a tremendous amount of interest and activity go to some of these… With some people may consider to be tertiary markets, but I actually think that that’s where the greatest amount of opportunity lies. And also the ability for us to provide compelling risk adjusted returns to our investors.

Jimmy: And why is that? That you’re focusing on those secondary and tertiary markets as opposed to primary markets?

Craig: Good question. The biggest thing really is supply. I think when you look at the supply demand dynamics in these major markets, that my primary focus is I’m a fiduciary, and at the end of the day, we’re a wealth management solution focused first and foremost on capital preservation, but providing steady, recurring income stream, and then providing, hopefully providing tax free capital appreciation. So, when we look at these markets, we’re looking at it from an investor…wearing an investor hat saying, “Where can we get the best thing for our buck?” And we truly believe that these secondary markets are gonna deliver the best risk adjusted returns for our investors.

Jimmy: So we talk a little bit now about deal flow. Can you tell me and my listeners about some of the conversations you’ve been having with real estate developers? What are these deals looking like? And, I mean, what do they look like at the deal level? What are they looking like at the fund level? And what are they looking like at the investor level?

Craig: Absolutely. I mean, we’ve been having conversations on a daily basis with a variety of developers. It really runs the gamut. There’s some smaller people that are looking for people that traditionally do $1 or $2 million deals all the way up to institutional type of developers that are doing $200, $300, $400 million projects. Today we’ve looked at well over 200 opportunity zone fund investments, and as a total now, well north of $5 billion. I haven’t had it up on my spreadsheet, but if I had to take a guess, probably closer to 7 billion at this point. The deal, so we’re saying it’s a great question. I mean, the biggest thing is, and I know and I would assume that majority of listeners are developers. At the end of the day, what these programs can allow is for us to provide a cheaper source of capital.

So, our whole business plan is, we are providing capital, at, kind of, 150 to 250 bps cheaper than a traditional source of equity. So, to answer your question about where we’re seeing things at both the deal level, fund level, and investor level. Let’s first start with the deal level. A majority of deals that we’re seeing, and again, these are deals that I’m looking at and closely underwriting. At the deal level, we’re seeing, kind of, returns in the 15% to 18% IRR range. These have traditional leverage, you know, call it 65% to 75%. Again, 10-year hold periods, and then the yield on cost, I mean, for achieving qualified and make it past, kind of, our first blush review, we’ve got to be 150 to 250 bps over current cap rates. If not, I could make the argument say, “Why wouldn’t I just buy an existing product type?”

I need to be rewarded at this point in time late in the cycle for the risk obviously, of potential rising interest rates, and cap rates that could potentially arise. So, at the deal level, again, 150 to 250 bps over current cap rates at the fund level moving down to the next year. Once we get the developer paid out, what we’re seeing for our first waterfall when we’re providing the equity is really an 8 to 10 percent range versus traditional equity now in the market between 10% and 13%. We’re seeing splits anywhere in terms of, we’re obviously coming in as the LP equity, but the developer being the GP of that “Fund” at the development level, anywhere from 70% all the way up to 90%.

So we’re seeing deals between the developer and OPZ Bernstein of a 70/30 split all up to 90/10 on the equity. And, again, the first waterfall, it kind of in that 8% to 10%, and then working our way up there. At the investor level, a majority of the investors that we’re speaking with are, kind of, ultra-high net worth investors, and they’re really looking for, again, to focus on capital preservation, secondary risk on your, kind of, focus on appreciation. But first and foremost, they wanna ensure that their capital is protected for the long term. So, we’re trading location and working with best in class operators for some of that higher upside of maybe going to a deeper tertiary market.

We’re willing to give up some upside to being more of a stable market with a great operating partner. At the investor level, at the end of the day, we’re seeing IRRs between 9% and 12% with a current on-going yield upon stabilization of 4% to 6% at the investor level.

Jimmy: Good. Thank you for all that level of detail. That’s great to see what deals look like at all those different levels, those different layers. We shift gears a little bit now and discuss the universe of opportunity zone funds. I have a database that lists a lot of them, I have signed it, the opportunity zones database, but I wanted to get some data from you now. How many are there and how much money are they all looking to raise?

Craig: Well, it really depends. I think right now since the industry is so new, how many people are you tracking out as an example? How many people are you currently tracking in your database?

Jimmy: I, in my database now, by the time this airs, I’ll have over 100 funds in there.

Craig: Yeah. I think that’s probably accurate. I mean, I’ve seen numbers up to 100 and anything, kind of, in between 25 to 100. So, my understanding right now of adding everything up is about $18 to $19 billion that people are saying that they wanna raise. From a reality perspective, I think the opportunity set is much larger, then the numbers at the Treasury is indicated as, you will see, $100 billion flow into the space. There was an article that came out the other day called “OZ Overload” that’s gonna appear in this month’s “The Real Deal” magazine. And I stated in the article, and I think this is no different than any other industry, but at the end of the day, you’re gonna see 10% of the managers with 90% of the capital.

A majority of funds that are currently out there really are ranging from looking to raise as little as $5 million all the way up to $3 billion. Some of those, actually, now I guess CIMs looking to raise $5 billion, but when you look at some of the larger funds, and I think that Anthony Scaramucci Skybridge, kind of, EJF is a perfect example. The big thing in U.S. at the top of the show, what really differentiates us is our experience. We’re seeing a large number of firms, great operators in our respective business, but people that just say, “Oh my God, this is a great opportunity. I should be raising an opportunity zone fund.” And what I mean by that is, I think EJF is a perfect example. They’ve been having a little bit of difficult time, and I think that that’s been now widely covered in the press meeting with people because they really had been focused on the bond space and debt space as it relates to real estate versus physically operating in this space.

The other thing is, you’re seeing a lot of wealth management professionals getting into this space. So, they’re going out hiring two or three people, and then just creating their own internal branded opportunity zone fund. The Bernstein Companies has over 200 employees, and we’ve got 12 people right now working full time both on underwriting, structure, and on investor relations. So, I think, you know, the groups that you see that will succeed are gonna be real estate focus groups. Starwood just announced the fund last week. I think that’s an excellent example. Same with CIM and RXR. These are three operators that are, you know, well known, established brands, and at the end of the day, I think those are gonna be the groups that are gonna be successful in this new and exciting universe.

Jimmy: Yeah, experience is key when it comes to real estate investing, especially since this is a new program and a lot of interested parties have a lot of questions beyond just real estate developers, but who have been the best-in-class leaders when it comes to education about this program? Who were some of the leading operators?

Craig: Yeah. I mean, one thing, and I can’t stress it enough, the first and foremost is, at the end of the day, this is a real estate deal. And we just touched on it at the fund level of who are the operators? Who are we seeing? Who’s getting the capital? Who’s getting good looks at the deal flow? At the end of the day, what this is gonna come down to, is identifying the best deals. Under no circumstances can you let the tail wag the dog. A crappy real estate deal is a crappy real estate deal. If someone’s selling their Apple stock and we’re able to get them, the deferral taxes for, you know, until December 2026, a 15% step up in basis equal to their initial gain. Okay? But then, put them into a subpar real estate transaction. We’re doing nobody any favors. So, you know, I can’t stress enough.

I mean, as we talk about the funds is, stay focused. It’s a real estate deal, and you wanna make sure you do a good transaction. Answering question about who were some of the, kind of, players that are in the space. One thing I always say, and we’ve seen each other at a few events now and, you know, you heard me speak is, I really stress the education and trying to link up with best-in-class consultants. And what I mean by that is, you have to talk with, if you’re a lawyer, there’s a lot of people I’m talking to that say, “Craig, I’ve had my lawyer for 20 years. He’s the greatest guy.” I’m sure he’s wonderful, but if he hasn’t dug deep into this, and coordinated and triangulated information between other players in the space, he’s operating in a vacuum right now. And the majority of the law firms aren’t open either working in a closed vacuum. They’re not sharing their thought process, and the work that they have completed to date with their competitors.

So I would highly recommend, I mean, the groups that we’re seeing that are very active on the legal side of the equation is Duval & Stachenfeld, New York. Jessica Millett has been very active. She’s the head of the tax program there. Olivia Byrne at K&L Gates. Olivia is based in Washington D.C., unbelievable. Ron Fieldstone, Ron is an attorney and partner at Saul Ewing based out of Miami. And Daniel Cullen at Baker McKenzie. This is just an example, and I’m not saying that they’re the end-all be-all, but that’s like four or five people that have been really active in this space.

On the accounting side of the equation, you’re seeing teams now, and both this applies for law firms and accounting firms, both establishing dedicated groups focused exclusively on opportunity zones. So, KPMG is an example. Richard Blumenreich, Joe Scalio, Ruth Tang, Phil Marra. These are people, as an example of KPMG, that are leading their efforts, and they’re all experts in the field. EY, Tony Brown, he works in McLean, Virginia. Excellent. CohnReznick, Tim Trifilo is in Bethesda, Maryland, phenomenal. Novogradac, Mike Novogradac, who’s based out in California in San Francisco, a leader in the New Markets Tax Credit space, and is very involved in the opportunity zone space.

I can’t stress it enough. Team up with one of these excellent providers, do not try to cut corners and try to educate yourself and learn as much as possible about the entire process.

Jimmy: Yeah, Novogradac in particular for me personally, at least, is where I started learning a lot about this program when I first became aware of it. They have a lot of great resources on their website. So, I wanna talk to you about what you said earlier that this is a real estate program, and most of these funds have been real estate deals so far, but what about private equity investing? I know you mentioned that that was one of the, one of the key issues that’s still outstanding in the IRS regulations for venture startups and operating businesses located in opportunity zones.

The eligibility is unclear. What are you expecting the IRS to do to determine eligibility?

Craig: Great, great question. And I’ve been speaking with, and a majority of the venture capital and private equity people that are interested on this are based on the West Coast. So, a lot of the larger operators, there are some on the East Coast. I don’t wanna downplay that. As an example, Steve Case’s Revolution has been actively involved with rise of the rest. And they are looking at potentially utilizing opportunities and investments within and kind of coupling it with some of their venture capital dollars. And they’re also focused on the same kind of markets I mentioned in these tertiary markets, trying to identify emerging managers. Right now the way that the law’s written, it states that you have to derive 50% of your revenues from inside of the zone. So, what does that mean? If we set up a location in, let’s say, Nashville, Tennessee, okay? And, we would have to… We’re setting up as a software company, 50% of our software sales would have to deal within the zone.

Well, from a practical perspective, if we’re a large scale operator, at the end of the day, there might only be 2% or 3% of our revenues derived from inside of the zone. The feedback that I’ve received from both the private equity world as well as the administration stand, they’re well aware of this issue, and the government’s intent is to have the program…the government wants the program to succeed and wants there to be significant uptake and dollars invested in to these communities. That was the goal of the legislation, and they’re gonna do everything in their power to ensure the program’s success.

So, I think at the end of the day, they’re gonna probably state that 90% or 95% of your revenues can be derived outside of the zone, but 50% of your “net income” would be derived inside of the zone. So, what does that mean? I think what the government is looking for is, they wanna make sure that you have your employees, your accounting department, your human resources, your IT department, your fulfillment centers located and physically housed inside of the zone. So, I do think that that will get cleaned up, and there’s a tremendous amount of opportunity moving forward.

The one thing though that I don’t think can be stressed enough is, if it is, in fact, and we’re doing, let’s use venture capital as an example. If we’re lucky enough to invest in the next, kind of, unicorn company, whether it’s Airbnb, Uber as an example, Lyft, most likely those companies are sold prior to 10 years. So, to maximize the big benefits that are afforded to us under the legislation, you’d have to hold that investment for 10 years. And everyone I’ve talked to, that’s been the biggest concern, both from investors as well as fund managers.

Jimmy: Yeah, that’s interesting there. And just to be clear, we’re still not really sure what the IRS is gonna rule on. We’re speculating. Well, we’re making educated guesses at least.

Craig: Correct. And that’s an issue that by no stretch of imagination, this is front and center for Treasury, and I think it’s important to note, I mean, I said it before, but for every question we have about real estate, there are 10 about private equity.

Jimmy: Yeah, absolutely. It’s good to hear that Treasury wants this program to succeed, and they’re working on doing so. One potential threat to the program, success actually comes from the states. Not all of the states are conforming with the federal tax incentive. So, California might be the most classic example since they have the highest capital gains tax rate in the U.S. at 13.3% and the highest tax bracket. Which states are problematic, and what are you expecting on the conformity front? I know some states have conformed, but there’s others that are still waffling or haven’t decided yet. What are you hearing? And can you just speak to that a little bit?

Craig: Absolutely. I mean, there are just over 35 states now that are currently conforming, and this is one little known fact that really isn’t being addressed publicly, or I should say widely known. So, when we’re talking to people, and we bring this up, they say, “Well, what are you talking about?” They didn’t even know it is conforming, it’s not conforming, it isn’t on their radar. You mentioned California, and I think that’s a great example. Let’s just start by saying California, I was just told last week by the treasurer of California that she’s working on regulations right now with Governor Newsom to put forward within this year’s budget to allow for coupling. And what that would mean, so, for all the listeners to have a clear understanding, the state governments and legislators would follow the same rules and regulations as the federal government. So basically, the same benefits would apply at the state level.

There’s some states that only offer some of the benefits, but there are, like I said, these 35 states that are riding along and conforming for the heat with, kind of, like the whole kitten caboodle for all the benefits. So, you mentioned California, that’s a perfect example. At a 13.3% net effect to factory, that’s a major head wound. New Jersey is another state, 8.97% at the highest bracket. Also, an example like Wisconsin, 7.65%, Pennsylvania. So, the areas right now that we’re a little bit kind of skeptical on, and again, I’m based more on the East Coast, but California obviously, New York, New Jersey, and, I’m sorry, New York does conform, New Jersey, Pennsylvania and California are three states that were, kind of, trying to stay away from at this point in time.

Jimmy: Until their state assemblies, or other state legislative bodies can pass legislation that allows them to conform. Is that right? But sometimes that’s a question mark as to whether or not that’ll be achieved.

Craig: Correct. I mean, as you know, we all know what the current environment is, both from a legislative and regulatory perspective, especially some of these states that are having deep, deep, you know, budgetary concerns. So, I really think it’s gonna come down to a state-by-state issue. And, again, it’s such a fluid situation. Everyday I’m hearing, you know, different things about each state. That’s its own nuance within a program. But that goes back to, like, KPMG. Like we mentioned before, KPMG’s spending great deal of time focused on the state side of the equation, and they’ve got an excellent person working on the state rules. And, again, that’s all that she’s focused specifically on.

Jimmy: Yeah. It’s a big topic that definitely doesn’t receive enough attention and not enough people and even experts in the industry are really aware of it or educated well on it. So, thanks for offering some color there on that topic.

Craig: Yeah, it’s Leighanne Scott at KPMG. She’s based in McLean, Virginia, and she’s really been, I mean, the only people in the country that’s been really, you know, brought this up, and she was talking about it in the fall.

Jimmy: Good. So, she’s been on it for a little while. That’s good. Now, I want to talk with you about your company and the opportunity zone fund that you’re working on. We discussed a little bit earlier that you recently teamed up with the Bernstein Companies. Again, you have no familial relation with them, just the same last name coincidentally, and you guys just launched the OPZ Bernstein Opportunity Zone Fund. What is the fund’s Investment Strategy? Where are you guys… I guess you’ve already spoken a little bit about your strategy in the tertiary markets, and how much are you looking to raise?

Craig: Sure. Great question. So what we’re looking to do, and I alluded to it earlier, is we’re trying to provide a wealth management solution for ultra-high net worth individuals by providing investors with a fully diversified portfolio of opportunity zone investments. And this portfolio is gonna be diversified both by product type and geographically. We’re gonna have a majority of the portfolio and probably 60% in multifamily, and then, kind of, round the portfolio up with all their product types: student housing, office, retail, mixed use, industrial self-storage, assisted living. And then, geographically focused.

We’re really agnostic on location, but first and foremost, we’re not gonna have any concentration in one specific city. We’re having a very open mind right now, but like I said, we’ve got our target markets that we’re focused on that I alluded to, the Nashville, Charleston, Colorado Springs, Columbus, Ohio, over the world. And we think that those areas are gonna able to deliver to our investors that compelling risk adjusted returns that the market will bear.

Jimmy: Okay. How much is your fund seeking to raise?

Craig: Yeah. We initially set a target of $500 million, but we’ve been very fortunate. We’ve been working on this for quite some time. I’ve been in the opportunity zone space for almost a year now, and I think at the end of the day, we’ll probably be between $700 to $800 million with a total race.

Jimmy: Do you anticipate you may have additional funds that you’ll launch as the years progress?

Craig: Yeah. I mean, that’s something right now where we’re focused on allocating capital that’s already been committed to us by our investors. And right now, that’s our primary focus. We’ll cross that bridge when we get there.

Jimmy: What’s been the biggest challenge for you? Has it been finding deals? Or has it been raising the money?

Craig: Yeah. I mean, there’s a great deal, as you know, a great deal of excitement around the space and the program. The capital is gonna be there at the end of the day, but I still believe and I can’t stress it enough. Like any business, the top 10% of managers are gonna capture 90% of these dollars. At the end of the day, first and foremost, it’s a real estate deal. So for us, right now where we stand, the hardest part for us is finding deals that work. And we just have a very, very high bar in terms of allocating capital. And the last thing we wanna do is raise more capital than we can successfully deploy. Under no circumstances would we do a bad deal just to get the money out the door. We’d rather…you know, that’s part of the reason why we’re saying $700 to $800 million, just given where we are in terms of, you know, we’re looking at 100 deals and executing upon one. So, we’re just very, very patient and trying to be a student also about the process of underwriting transactions.

Jimmy: That’s incredible. You’re able to be that selective. You must be getting a lot of calls every week that you have to turn down.

Craig: Yeah, it’s been busy, to say the least. And, you know, as I mentioned, we had 12 people working on a full-time, kind of, full acquisitions team right now, and have got an incredible team, very fortunate. And everyone’s excited about our prospects moving forward. But first and foremost, I mean, we wanna, you know, we’re focused on executing excellent real estate deals to what the Bernstein Companies is known for. They’ve raised four commingled funds, historically, run money for JP Morgan and Morgan Stanley and some of the largest banks in the world. And right now, our primary focus is on making quality investments for our investors.

Jimmy: One of the outstanding issues in the final regs is exit strategy. I wanted to ask you, what is your exit strategy for your investors in the opportunity zone fund?

Craig: Yup. Well, we’re right now, and I don’t wanna talk too much about structure, because some of it is proprietary, but right now we’re looking at a variety of different structures, and it really is on a case-by-case basis depending on who our investors are. Some of our deals that we’re currently capitalizing are with single investors, meaning the larger ultra-high net worth investors that are taking the whole deal down, where other deals are, when I say commingled, having multiple investors in a transaction. So, it really varies on a case-by-case basis, but in all the deals, all the structures work out and provide us with the flexibility to exit a transaction as we deem fit in your tent.

Jimmy: Thank very good. Near the top of the show, you were talking about how this program attracted your attention in one small part due to the social benefits that it’s entitled to provide, what is your fund doing to account for positive social impact in the areas where it invests?

Craig: We are making individual investments, the principals here at the firm, into the communities in which we invest in. That’s something we’re heavily involved philanthropically and we’re really excited about the opportunity to continue some of the work that we’ve already started in these areas. So, from a fund level, I mean that’s something that we’re doing. To add on to not only the benefit that we’re doing by allocating capital into these areas. But I think that the social impact, these, you know, we are long term investors, and we’re not looking to flip out of a deal in two or three or four years. So, the dollars that we’re doing into these communities, we’re being very cognizant and trying to be good stewards of capital, to make sure that not only do we have our investors financial interests at heart, first and foremost, but also making sure that we’re using the capital in an efficient manner and trying to do the greatest amount of good that we can with each one of these individual investments into these opportunity zones.

Jimmy: So, a big picture question now as it relates to that, actually, what is your overall take on the opportunity zone programming? Do you believe that it will succeed in creating positive social impact as originally intended?

Craig: Absolutely. I mean, investors that I’m talking to, that are allocating capital right now into opportunity zone deals would not be investing in these areas if there were not the economic benefits associated with the program. So, first and foremost, I think the answer’s absolutely yes. A lot of these areas are impoverished areas that were left behind in the last economic recovery coming out of the recession in 2008 and 2009 that were left behind. So, when you look at some of these communities that have a poverty rate in excess of 30% or now coming in and able to do a $30, $40, $50 million real estate project in these communities, they bring new jobs along, they provide a safer environment, they provide new playgrounds, places and we’ve got rooms that we’re doing in some of our multifamily buildings as an example of study areas. And that’s something too when you mentioned like, on the community aspect, that scenario we’re looking at where we have these kinds of homework rooms, or we can then come in afterwards and then donate computers as an example or provide tutoring services within these projects. So, those are some of the ideas and some of the work that we’re doing within our portfolio.

Jimmy: That’s tremendous. And I think you’re right. These types of capital injections into these communities wouldn’t have happened without this program, otherwise. So that’s…

Craig: Absolutely.

Jimmy: …that’s great to hear some examples. Well, Craig, we’re getting toward the end of our time here today, but I had a couple of retrospective questions for you before we go. I wanted to know if you’re willing to share. What are some of the biggest mistakes that you’ve made along the course of your career or biggest lessons that you’ve learned?

Craig: Yeah, it’s a great question. Nothing is ever perfect, and no deal is ever perfect. The biggest lesson that I’ve learned so far from this process is, how many people, and I stressed it, talk to an expert? Make sure you are aware of what you’re doing in executing one of these transactions. Once a week, I get someone calling me saying, “Craig, I made a mistake.” They didn’t know to talk to someone. Well, I talked to my lawyer. The biggest thing that I would stress about errors, is make sure that you’re talking to qualified professionals: accountants, lawyers, fund managers, developers, someone like yourself, Jimmy, that is familiar with the space and can point people in the right direction.

In terms of me personally, the biggest regret I have is not spending more time with my family, which I think all of us wish we could do. It’s very hectic, it’s exciting times, but that’s something I’ve got two little ones at home, and, you know, I’m cognizant of it is trying to spend more time with my family, that’s one thing. And then the second thing is realizing that it’s critical, and I think we’re seeing that now with some managers. Whoever’s executing upon this, if they want to try to do, I spent a lot of time in, kind of, the first beginning stages of OPZ Capital with the smaller team in place. Not until recently, you know, I just added on to the Bernstein Companies and provided me with the necessary infrastructure that’s critical to scale the business.

For me personally, I wish I would have…it wasn’t a matter of caving, I was trying to do it on my own, but I wish I would have realized that to be able to fully scale a business, I would’ve known sooner that to know what I didn’t have, which was the necessary resources and infrastructure in place to be able to successfully run $200, $300, $400, $500 million of capital.

Jimmy: Yeah. That’s some great lessons there. That’s good advice too. Time is the one truly limited resource. We all are in the same boat there when it comes to that. If you want to speak to some of your successes now, what’s been your most memorable investment? Or maybe most memorable investments that you’ve been involved with? Is there anything that really stands out?

Craig: Yeah. I’ve been fortunate. I’ve had some great transactions in one deal that took a lot of work, and I think it was really more community-related is, I did a re-development of a shopping center here in the D.C. Metro area, and one thing that was challenging was, it was in a small community, and it was a Walgreens anchored shopping center, at Walgreens a BB&T bank out there, and it was very difficult. It took a great deal of time, and more so dealing with architectural boards, review boards, getting through, kind of, you know, town councils. And it was frustrating when I was going through the process, but it was rewarding at the end of the day to finally get it done, and to see how happy the community was with the project we did.

It was an older shopping center and really redeveloping it. I wish I had another great, kind of, you know, ra, ra, story that impacted people, but for me, just given the time and blood, sweat, and tears that went into it, to finally get over the finish line and see it be successful, to me, it was probably one of the highlights of my real estate career being involved on the equity allocation and the development side of the business.

Jimmy: Awesome. You’re always good when that deal finally gets across the finish line.

Craig: I think that’s for everyone.

Jimmy: Absolutely. Well, Craig, where can my listeners go to learn more about you and your opportunity zone fund?

Craig: Yeah, absolutely. I’m more than willing to speak with anyone, any of your listeners that have any questions, don’t ever hesitate to give me a call. My email address is [email protected]. So, it’s [email protected]. And you can find The Bernstein Companies online at thebernsteincompanies.com. And also, I’m active on LinkedIn to get little tidbits, and little articles and stories as we begin this journey into this crazy world called opportunity zones.

Jimmy: That’s great. So for my listeners, I’ll have links to all of the resources that Craig and I discussed on today’s show on my show notes page on The Opportunity Zones Database website. You can find those at opportunitydb.com/podcast. Craig, thank you for joining me today. I really appreciate your time, and I hope to see you at an upcoming OZ event soon.

Craig: Yeah. Jimmy, thank you for your time. It’s an honor to be here with you today and thank you for all the work that you’re doing. I think you’ve just done an excellent job so far, and as I mentioned to you earlier, the podcast have been great, and you know, we need more people like you spreading the word and I mean, I think we’d beat on a pretty good here. I mean, this is new and exciting and everyone’s jazzed up about it. I just wanna make sure the pool doesn’t get tainted, and you know, that everyone’s educated, especially for our investors and the community members to ensure the success of the program. So, thank you again for having me, and thank you again for all the work you’ve completed as well.

Jimmy: Oh, absolutely. It’s been my pleasure, thank you.

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