Sasha Favelukis: Activating OZ Communities with Business Container Parks

Sasha Favelukis

How can incubating local businesses in shipping containers achieve Opportunity Zone community activation and gentrification without displacement?

Sasha Favelukis is founder of CoPlace, a San Diego-based investment and advisory firm that performs a mix of real estate and local business investing. They specialize in community activation in Opportunity Zones.

Click the play button below to listen to my conversation with Sasha.

Episode Highlights

  • Working with the local community to create an entrepreneurial ecosystem and achieve inclusive gentrification.
  • The importance of identifying a community’s assets and how to determine what a community’s needs.
  • CoPlace’s modular shipping container strategy for incubating local business.
  • Social impact and what’s wrong with how it’s measured.
  • How the Opportunity Zones policy has accelerated the progress of CoPlace’s projects.
  • Getting all of the different project participants (developer, investor, community, city) together in one place to facilitate communication.
  • The types of businesses that work under the CoPlace model.
  • The role of community leaders and municipal government in creating successful developments.

Featured on This Episode

Industry Spotlight: CoPlace

CoPlace

Headquartered in San Diego, CoPlace is an investment firm that specializes in community activation, using modular shipping containers to incubate local businesses. Their Quartyard development transformed a blighted block in downtown San Diego into an activated community space which led to construction of a 34-story residential tower that will open next year.

Learn more about CoPlace

The Artist

This is the photo of the artist and his sculpture that Sasha referenced toward the end of this podcast episode.

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: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. And today, I’m speaking with Sasha Favelukis. Sasha is founder of CoPlace, an investment and advisory firm that specializes in community activation, particularly in Opportunity Zones. CoPlace performs a mix of real estate and startup business investing. Sasha joins us today from his office in San Diego, California. Sasha, great to be with you. Welcome to the show.

Sasha: And great to be with you, too. Thank you very much.

Jimmy: Awesome. Well, Sasha, just for the sake of our listeners, I want to tell them how we met. I met you at the SALT Conference in Las Vegas a few weeks ago. And you spoke on a panel titled “community revitalization through impact venture investing.” And that’s pretty much what I want our conversation to focus on today. Another interesting note was that Chris Schultz was on your speaking panel, regular “Opportunity Zones Podcast” listeners may remember Chris from Episode Number 15. He is the founder of Launch Pad. And if you like this conversation today that I’m having with Sasha, you should definitely check out that episode next, Number 15 with Chris Schultz. But back to Sasha now. Sasha, tell me about CoPlace. At a very high level, what is CoPlace’s purpose and mission?

Sasha: So, CoPlace is an activation of a community. We utilize real estate, either land or adaptive reuse of what’s currently there, to activate a community so that it gets ready over a time horizon for building. And when you build something, at the end of the time horizon, in this particular case, I’m always looking at a 10-year horizon, which makes it very, very easy for me, the property will then be ready to build and not displace the residents that live in that area. So, in essence, being able to build for that community, even though it’s not ready for building currently.

Jimmy: And how is your approach different from other developers, as opposed to just constructing buildings perhaps? What are you guys doing that’s different?

Sasha: The most important thing for us is to work with a community, to give the community the tools that are needed in order to create entrepreneurs. What I found is that a lot of these areas, these underserved areas, they have a lot of unrealized talent. And that talent, a lot of times, goes unseen because they don’t have the tools necessary to really get it out and to form a business and to really have anybody know anything about them. And on top of that, they don’t have the ability to take on any risk at all, as far as trying to start something different, trying to start something new, trying to start a business, and trying to really do what they’re very good at, which is, like makers. There’s a lot of makers in these areas. What we do is we either create a little incubator, like a retail incubation of sorts, where we pre-seed it with some existing businesses from the surrounding area or we just incubate new businesses, for people that have an ability, have a talent, that aren’t really utilizing it.

Jimmy: What is your background, Sasha? And I wanna back up a second here and get your story. How did you get involved with CoPlace? What was the impetus for you founding it? Where did you come from exactly?

Sasha: So, I’m originally from the Soviet Union, from Ukraine, but when I left it was the Soviet Union. And my family, we came here…

Jimmy: How old were you when you came over?

Sasha: I was six years old. And we didn’t know anything. We didn’t know any English, didn’t know much of anything. And it was very much the community that helped us crawl out of where we were into something more meaningful and find ourselves in this country. I grew up here in San Diego, went to college and realized that whatever education I’m gonna get in college is probably not gonna do a lot for me. I’m not particularly the studious type. I wasn’t gonna get a Ph.D. And so I went into the mortgage industry. I worked in the secondary market, where we were packaging up loans and selling them to banks, and then went into the retail mortgage industry. We had a mortgage real estate company. Then, from there in January, 2007, we closed up shop, and I started lending hard money because I thought there was a really great market for it, just because there were very qualified people that were buying stuff. And the bank’s started seizing up. And I was doing that until 2010 when I decided to start buying properties.

In 2010, I was buying projects and I was competing with a lot of people that were flipping, or investors, or whatever. And I wanted to be competitive in the market. And so I went back to lending hard money to these flippers and saying, “Look, I’m not a standard hard money lender,” because my goal was always to buy the properties. So, I would lend them what I would be willing to pay for the property. And that was very earth-shattering in 2010, just because most lenders didn’t wanna end up with the properties. And I didn’t particularly wanna end up with the properties. That was my goal. I was buying them regardless. And so, started a new hard money lending business in San Diego. And it kind of spiraled from there. In 2016, we were a San Diego Business Journal’s fastest growing company. We’d done over 600 loans locally that we funded serviced. And what was really remarkable was that, over that whole time, we only had one foreclosure, and still to this day. Now I think we have two. And it was just unavoidable, somebody wouldn’t return the phone call.

Jimmy: I wanna talk more about community activation. I think you touched upon it a little and I mentioned it in the intro. But that’s really what your focus is. And it’s a central tenet of your investment thesis. But can you tell me a little bit more about what that means exactly, community activation?

Sasha: Yeah. It means going into a community and finding the assets of that community. So, when you look at a lot of areas that are gentrifying, you see some artists moving in, some, you know, I guess they’re called hipsters… I don’t know. That term seems to have some connotation. But, you know, basically, people are moving out of another area to move into that area where it’s cheaper, and then it goes to this process. It’s just because there’s cheaper rent. So, what we do is we go into the community and we identify who the community leaders are, who are the people that draw the crowd? Whether it’s, you know, an art gallery, or a brewery. You know, in every community, it’s very, very different. And what we do then is, we do a survey of the community. We go around, we ask people, especially the community leaders, you know, what do you guys want here? When we identify a property that has the proper zoning, designation, where it’s worthwhile to buy the property and work on it, then we go to the municipal authority, we say, “What do you guys want here? What do you guys need here?”

And then, we take a lot of data as far as demographic data, a lot of what people are searching on social media, what people are liking on social media, what people are searching on Google, you know, this is all within this geo-fence that we create. And then we look at the surrounding areas. Who lives there, that are outside of that Opportunity Zone? Where we really target areas where there’s spenders in another zone, that’s, let’s say, within 10 minutes drive of the project, and then we find the businesses in that area that are performing in the Opportunity Zone, in the project area. And we build out, you know, this little incubation center, where there the draw, for areas surrounding to come in, and then we go in and activate new businesses. And the question always is, what is the structure in that particular zone? So we take those three layers of, what does the community want? What does the municipality want? And what are people actually searching for? And when there’s an alignment between the three of those, that’s usually what is needed in that area.

Jimmy: I wanna dig into CoPlace’s strategy a little bit more. Can you tell me about your modular strategy, and your use of shipping containers, and your incubation strategy?

Sasha: Yeah. Absolutely. So, there’s a lot of different strategies that we utilize in areas like this. One of them is an incubation strategy, where you have a lot of creatives locally that live in an area, and we incubate a business from start to, not finish, but to a point where they can go out on the main street and utilize a larger space and hire from the neighborhood. If there is a property there, we can restructure that property to achieve the goals. If there is not a property there, what we do is we use a combination of re-utilizing what is there, and some modular shipping containers. We really focus on commercial, just because that is what we do, My feeling is that the businesses are the heart of the U.S. And without entrepreneurs, without businesses in an area, you can build all the affordable housing you want, but the people that live in those areas aren’t really gonna be able to afford them. The whole point of our project is to not keep people in the project, but push them out the mainstream, to get them to a point where they can rent that two, three-year, triple-net, or whatever the lease is, and start hiring from the neighborhood because that’s the natural progression.

If you start a business in an area, you want people that work in that or that live in that area to work there. And it removes a lot of friction, you know, in these communities, because all of a sudden, the businesses that sprout up are from the community by the community, and a lot of people will have their family working there. And what I found is a lot of these new businesses, they won’t pay minimum wage. They pay, you know, whatever they want. It’s usually significantly above minimum wage because it’s usually their family, their friends that work there. And that kind of economic activity then keeps the money that is spent in those areas. In those areas. It stays in those areas. And you get this gentrification without displacement effect.

Jimmy: Wow. Gentrification without displacement. I think that’s incredible. Can you provide me an example of a project that works under this model?

Sasha: So, there’s a property that we worked on as a private-public partnership in downtown, San Diego. It was a blighted block. Our team went in and activated it with a bar, a restaurant, a dog park, event space, coffee shop, and it turned the lights on in an area of downtown, San Diego, which is generally pretty nice. It’s just one of these blocks that happened to be very underutilized. And what happened is there was a lot of homeless people hanging around, a lot of people doing drugs and, you know, dissuading people from even going into that area. And that particular one block was undeveloped, but it was zone for 40 stories. And the city tried to take it out for RFP, but it had a lot of challenges. And every time a developer would come to the block, they would just see the scene of what was happening, people just hanging out and doing not great stuff around this one block. We activated it for two-and-a-half years. And then when the city went out for RFP on that block… Right now it’s being built into 34 stories of residential, and then 56,000 square feet of commercial, which is going to be rented by UCSD extension campus. And universities, in general, don’t generally rent blighted areas, so I would say it was a successful use. But, really, the most interesting thing about this particular deal is that we were able to move the whole project to the next blighted block and activate that one. It took us about eight hours to move the whole thing.

Jimmy: You physically picked up the shipping containers and rolled them down the street somewhere else?

Sasha: Correct. Even though they were permanently affixed, they were permitted to be there. They were attached to sewer, water, electrical. Everything as far as it was concerned, it was a permanent project. And what was interesting is that a lot of these commercial shipping container projects are… There’s a lot of them all over the place. But when they build them there, they tell everybody, “Hey, you know, this is permanent. You’re not gonna have shipping containers here forever.” But when they get built, they never move, just because the community loves them so much. In fact, when that property that we were working on went out for RFP, the community came together and they had a petition of 3,000 people within a couple of days that went out to the city. They didn’t wanna move it, even though we really didn’t ask for them to do that. In fact, we dissuaded them from doing that, and they did it anyways, just because they wanted their community space. And I was a big community activation, especially with, you know, you had a 2,000, 3,000 person concert one day and the next day you had a little makers market, and the next day you had a wedding. And it was a very multi-use space.

Jimmy: Now that community, in that case, when the RFP went out to…and UC, San Diego ended up becoming the occupier of their property, they petitioned against that. What did you do to compensate them, so to speak, for lack of a better phrase? What did you do for that community going forward? You mentioned that you picked up the development and you moved it somewhere else. You picked up that community space and moved it, but where did it move to?

Sasha: It moved about two blocks away to the next blight of block because the city asked us to do that. We weren’t necessarily planning to have that community space in downtown. But with the community support, really, it was the community demand, the city said, “Hey, would you mind doing this again, just over here to get the next area ready for development?”

Jimmy: And it sounds like there was a lot of demand for that. Anyway, they didn’t want you to leave in the first place right?

Sasha: No. They didn’t want us to leave in the first place. And they weren’t against UCSD being there. They just didn’t want us to leave.

Jimmy: Right. They just loved you so much. And they understand the community space that you have provided.

Sasha: Yes. That’s correct.

Jimmy: Good. What was the name of that project?

Sasha: I was called Quartyard. If you go on the CoPlace website, coplace.com, you can see a few case studies of active projects. And one of them is Quartyard. And I have a really great, great thing that we’ve put together, which is these sliders. You see the before and afters of, you know, blight a block before, activated block, then activated to what’s being built now. And what the render looks like for when it will be complete, which is not far away from that right now.

Jimmy: And is it still named Quartyard the new development or did it take on a new name?

Sasha: No. It’s called Quartyard II.

Jimmy: Gotcha. Very good. So, Sasha, the intent of the Opportunity Zones Program is to create social impact in a lot of these blighted communities around the country. But you have kind of an interesting story as to how you stumbled upon social impact after doing it for a while. And I think you have a different way of measuring social impact on, and you have a theory as to what’s wrong with how we’re measuring it currently. Can you go into that a little bit?

Sasha: What I come to find, after these Opportunity Zones came out is that, we were always lending and buying in the Opportunity Zones. And we always did that thing, the bringing the cool factor, which now, I’m realizing, in the last two years, I’ve really come to figure out that it’s a social impact. So there’s a name for it. And I have a little bit of a different take on social impact, just because of what I just told you. I didn’t wanna wait for the area to get better, I needed to make it better. And the problem with the way that social impact is measured in the U.S., in my opinion, is not quite right, just because they usually measure how many jobs did you create within this property, for the most part. And, I mean, the jobs that are created, you can build a target and create a bunch of jobs, but they’re not really quality jobs. So, I feel like they don’t make a lot of social impact because, you know, let’s face it, they’re not really a living wage. My social impact was always measured, outward facing. So, rather than how many jobs do I make inside of my project, I look at how many jobs are created or actually entrepreneurs are created outside of my project? Because that’s a measurement of the effects on an area.

Jimmy: So you were doing Opportunity Zone investing before Opportunity Zones became a thing, essentially?

Sasha: Yes.

Jimmy: Has the Opportunity Zones initiative done anything to accelerate the progress of your projects?

Sasha: Yes. It definitely has. Just because in the past, when we were doing these projects, they were all self-funded. There’s no comps for what we do. And generally, shorter term leases is something that investors don’t necessarily like, just because they’re looking at it from the wrong angle of, this is very management-intensive, and so on and so forth. They want that mailbox money. But what we’ve learned out of the way that we do it is that you end up having more stable tenants and higher quality tenants. And these types of tenants that we’re really focusing on, they have a big effect on the surrounding neighborhoods. And I found that a lot of these Opportunity Zones, let’s just call them, underserved areas. The standard investor will come in and buy a property and then they put in, you know, a national tenant, like Food 4 Less, or MetroPCS, or something like that. And they get the mailbox money, and they get a long-term lease. But what they’re not really looking at is the long-term effect of the surrounding area, which is when another investor drives into that area, and they see those types of tenants, they immediately think, “Oh, this is a bad area.” And I think that with a 10-year horizon, which is what everybody’s focusing on with Opportunity Zones, you’d really need to look at it more long-term, and understand that, hey, putting one of these A-rated tenants is maybe not the best thing for the area. It’s not the best thing for your long-term game plan.

Jimmy: CoPlace recently hosted an Opportunity Zone conference in San Diego, a few weeks back. It was a learning and networking event for the San Diego Investment Community. And Steve Glickman was one of the speakers that you had invited to be there. Can you tell me a little bit more about that event, Sasha? And what are some of the biggest challenges or questions about Opportunity Zones that your attendees had?

Sasha: Yes. And it was more of an event than a conference. We had Steve Glickman come in. And we did a Q&A panel. It was very interesting. We’re pretty connected to the San Diego Community on multiple levels, on the investment side, on the community side, and on the city side. We have really good relationships here. And when we threw together this event, it was very different than any event that I’ve been to because when you look at it in groups, you have the community groups, which is a lot of times small businesses. We had some small businesses. There are three different coffee shop owners that showed up to this thing. Then we had fund managers, like hedge fund managers. We had people there from UBS. We had people there from the city of San Diego. We had people there from the economic development. We had people there from CDC. We had people there that had nothing to do with development or business. We had just a multitude of people. And the idea was that, “Look, we live in this city, in a city, and there’s a lot of different layers to that.” And there is no communication between those layers. The way that this is gonna work, these Opportunity Zone deals, is that there is some communication, where, we’re so far into this digital life, that you’re not really gonna get away with much as a developer, as far as, you know, doing a project and no one knows. Everyone knows.

And then, on the flip side, there’s a lot of community people that are just…informally community, they live in a community, and they do an event. And they will not get a permit for the event because they don’t even know where to start. And they’re scared to get a permit because they’re afraid that it’s not gonna get approved, and who’s gonna pay for it. And so, you know, this community event closed down the street and have, you know, like an Art Walk or a low rider cruise, which is popular here in San Diego, and Barrio Logan specifically. And they don’t know, to get a permit or how to get a permit, or who’s gonna pay for the permit, and they just do it, and then the police show up and break it up. Well, this is something that is a little strange to me because, in essence, they’re not doing anything that’s necessarily illegal or shouldn’t be done. They’re just not following the process. And they don’t have the tools to really make that happen. And because of that, there’s a lot of static and friction between what they wanna do and what’s getting done. And so, we had Steve Glickman on to talk about what the purpose of this incentive is and what it should do, and so on and so forth. It was very macro level of what it should be. And the one side of the audience is the investor side, and they’re like, “Yeah, I get it. Capital gains and this is great. And it should be blah, blah, blah, blah…,” but who’s gonna do it and how do you do it?

And the second part… There was two main parts. There was two question-answer panels. The second part was our team and what we’ve been doing. And it was the community side of it. And it was the small business side of it. And it was the architecture side of it, and the investment side of it. And it was very interesting to see the whole crowd there, kind of get it, the full picture, the full spectrum from end-to-end. And, you know, say, “Oh, is that what it looks like?” And the answer is no. It’s not. There’s not one way for it to look like. And that’s what it looks like in our community, in the projects that we’ve done. But in another project, it will be totally different. And what my message was to the one side, which is the investor side is, “Look, you have a tool right now that encourages business investment, real estate investment.” And normally, for an investor, the business investment means, you know, like a Launch Pad, which is a really great example, one of your previous guests. It’s mostly tech businesses, work businesses, like, creating an office environment. But that is the closest that there is to small business incubation, as far as a tool. And it’s a needed tool because it bridges that gap between when you’re not a business, and when you start hiring employees for an office tech type business. But there is a demographic that’s not really being touched. And that demographic is people that haven’t necessarily gotten an education in, whatever that thing is, to get you to start a tech company. Everybody’s really looking for the next Facebook or Hulu or whatever that may be with these incubators.

But no one’s really looking at the majority of America, which is blue-collar, right? People that work well with their hands, or makers, or creatives, anything that’s not digital, because it doesn’t have the upside at the end, the bump, you know. It’s not gonna go public. It’s most likely not gonna get rolled up by a larger company. It just is what it is, it’s a small business. But small businesses, it’s the backbone of this country. And the further along we get, the further away we are from people having an opportunity and the ability, and being able to take on the risk of starting a new business because one month can make you bankrupt. And that’s was the message is, look, it doesn’t have to be necessarily an incubator or co-working space, even though it could be, and that’s a really great use. But for a lot of these Opportunity Zones, that isn’t what currently lives in those neighborhoods. The type of people that live in those neighborhoods are, you know, hard working, salt of the earth, you know, probably pretty good with their hands, makers. And I could share a story with you of this particular street. But you know what? Let me answer your questions first, and then I’ll share a story with you that touched me a little. And it was about a maker that is in one of these areas.

Jimmy: That sounds great. Yeah. I can’t wait to hear that story. Well, first of all, I wanna ask you, what are some examples of some businesses that you are seeing set up in your projects? Under your model, what types of businesses are you seeing getting set up, if they’re not tech companies? What are we looking at, typically? You mentioned coffee shops as an example. But what are some other examples?

Sasha: Yeah. Coffee shops, little art galleries, little retail. Like, we have one guy that has a store called Beat Box Records. And he started off in our little flea market. And he’s just a guy that goes out and finds cool stuff, you know, records that somebody is selling in bulk, or “Garbage Pail Kids,” remember those. Those cards, he has a ton of them. He finds just these odd little cool things that are collectible. And he sorts through it. And he then opened a store. He’s been there since 2015, I think 2015 or 16. And he’s just killing it. Now, another little store that we had is, we have a little Art Gallery, a little tiny one, somebody that makes these little paintings, and goes out and get some inspiration, makes a painting, puts it up in their gallery. And they also use it as a workspace. And they’re there 100% of the time. Or we have a project right now that we’re working on that has a commercial kitchen and little restaurants built out, kind of like a food hall style. Now, that is more of, like, an incubator for chefs. And so, what we’ve done is we say, “Look, we’re gonna build this out and it’s gonna work for multiple uses. And you try out your product here, and then once you earn your way up, and you prove that, you know, you can make this thing day in, day out, and move it up to the next thing, then we’ll build you out a full storefront on the main street.”

Jimmy: Right. Now I think I have a much better understanding now of what your model looks like and which type of businesses are selling out of your projects. And if I understand correctly, the vast majority, if not all of these projects are in Opportunity Zones. Do you have any Opportunity Zones funds? Can you tell me a little bit about those?

Sasha: Yes. We are putting together an opportunity, a couple of Opportunity Zones funds. One is for a deal specific. It is a property in San Diego, that is… I don’t know if you saw Steve Glickman’s Opportunity Zone index and his…?

Jimmy: I have. Yes.

Sasha: Yeah. And so, I picked the Opportunity Zone according to that index in San Diego, that actually has the lowest score, but it’s only 10 blocks away from the Opportunity Zone that has the highest score. And so, you know, it’s really interesting to see that very short distance of the highest to the lowest, where, you know, you can really make a pretty big impact because it’s pretty close to other projects that we’ve done. We’re very familiar with these areas. And what we’re doing in that one is, it’s a 46,000 square foot lot. It’s got a warehouse on it, currently, on the edge, that’s about 7,000 square feet. We will be building a modular shipping container project that will have some retail uses, some, like, a mini-food hall, entertainment uses, dog park, you know, activation space. So, flex spaces for art galleries, for pop-up little retail shops to come in and try something out. And hopefully, you know, we can graduate them into something bigger for themselves, as far as brick-and-mortars. And that particular property is currently zoned for first floor of retail and 80 units above it. But I just know if I were to build that right now, then, it would be difficult to justify comparables because it’s just far enough to where you don’t have any comps. But more importantly, the area would fight against that kind of development, just because the people that live there, can’t really afford it. And so, with that particular deal, as with a lot of our deals, we’re activating it in the interim, getting the area richer, rather than importing wealth from a different area. And when it’s time to build, that’s when we will build it.

Jimmy: That was one Opportunity Zone fund, that project specific one? You said you had to add two. Is there another Opportunity Zone fund?

Sasha: Yes. Another Opportunity Zone fund that we’re putting together will be a general fund that’ll just target projects, pretty much like that, where the zoning is right, it’s not ready to build. And really, we get the most value at the disposition point, where we can build a property that is suited for the area that will have comps that… Right now, like I said, if you were to build it right now, it would be tougher to get it tenant occupied.

Jimmy: Good. You spoke earlier about sourcing what a community needs from three different places. One was the community, two was the city, three was big data. But I wanna talk about number one. I wanna talk about the community. How do you determine what a community needs, exactly? How do you actually go about asking what the community residents need?

Sasha: It’s this new technology, where you just walk into the community and have a beer with somebody. It’s not super complicated. But you gotta actually hang out there for a little bit and do your research, and spend some time, and start talking to people. And the problem that I see with just going into a community is when normal developer walks into any community, the first thing people think is, “How are you gonna screw me?” You know, even if your intentions are justified and good. It takes time to get over that phase of, “How are you gonna take advantage of me? What do you want?” Even if you’re saying, “Hey, I’m a developer and I have good intentions.” Yeah, that doesn’t translate. It takes time to get past that barrier. And you have to do some stuff that does something for the community without expecting anything back. And when you do that, you kind of prove yourself. You know, it takes time to develop. It takes time to get past those steps. I’ve been able to get around that a lot of times just because everyone knows me in the community or know somebody that knows me, and someone gives me a thumbs up. But it’s really hard to earn that. It takes years to do it, normally, unless you come in with something else, some kind of positive. But even…

Jimmy: Right. So, having boots on the ground for a while, really starts opening up that level of trust that you need?

Sasha: Yeah. Boots on the ground and putting your best foot forward, and really trying to do something positive, not just for yourself, but outward facing.

Jimmy: And who are typically the community leaders that you deal with, that you would sit down in the bar and have a beer with? And I’m not talking about people from the city office or the economic development office. I’m talking about residents within the community. Who are they typically? What roles do they have in the community?

Sasha: So, some of them might be a small business owner that is on the block, that is in whatever area, in the Central District. And I wanna call it a Central Business District, but whatever that is, in that particular zone, that little downtown area. You have a lot of artists that take on that role. And you have a lot of retail shops. You gotta go to these unofficial events, like these little art shows, and really, really just start talking to people for long periods of time, not wearing a suit, and really get to know what the community is. Because there’s things that they won’t tell you that you have to… You have to really, I guess, sell somebody on to… You know, you’re gonna lead them in the conversation of, you know, what do you really want? Because a lot of times they’ll tell you what they want, but they’re not actually telling you the thing they want. They’re trying to tell you, “Well, we don’t want…” Like an example. “We don’t want gentrification.”

I don’t know what that means, you know, from somebody in the community, what they’re saying, “I don’t wanna be displaced.” But what do you want? Do you want another bar? What would be helpful for you here? Do you want a coffee shop? Do you wanna meet people? Do you wanna have a community gathering spot? You know, whatever that is, and it’s different for every community. And getting over those hurdles is often the hardest part, to really understanding what are the community assets. And a lot of times, if you have art shows that happen in a warehouse that aren’t permitted, they’re not gonna tell you, “Hey, we want more art shows like this one that has no permits, come and see it, so you could get it shut down.” You know, it takes earning a level of trust from the community in order to really get there.

Jimmy: And then, how do you get the city involved? Public-private partnerships are crucial for many of these Opportunity Zones investments. When does the city come into play and what role do they end up playing in the project?

Sasha: So, generally, our projects or a lot of them, what we wanna do is not really, within zoning. And when I say that is when you have too many uses, you always need some sort of exception or exemption, or some sort of different use than what it’s zoned for. So, for instance, the Quartyard project, it was sitting on and is sitting on a property that was zoned for residential, and with a minimum floor area ratio. And what we had to do was come in and say, “Look, you guys zoned it this way, but it is not achievable to do this right in the moment. And we would like for that to happen, what you zoned, to actually be built. But if you guys don’t work with us, and give us what the community wants to get this area really moving, then it’s just gonna be built to whatever the minimum is.” And working with the community, and with, let’s say, economic development or the CDC, or whatever the agency is, and proving to them, “Hey, I know you zoned it for this, but the community wants this interim use of this, to get it to the point of that.”

So, the problem is the community people and the city people don’t communicate. And if they do communicate, they’re using different words for the same things. They don’t really know how to properly communicate, “I want this.” And the city people will say or the people of the city will say, “Oh, so let’s do it like this.” Usually, there’s a process. What a lot of developers run into is, you go to the front counter, and you submit a permit for X, and they just say no, instead of, “Well, you know, if you removed a little bit of this, and you add a little bit of that, you can get there.” No one wants to lose their job. And no one wants to wants to think about, how do you achieve something that the customer wants, while still being within the regulation or having to request a change in the regulation or a temporary change in the regulation? Does that make sense?

Jimmy: It absolutely does. It sounds like you act as bridge and translator, so to speak…

Sasha: Yes.

Jimmy:…between the community and the city.

Sasha: Yeah. And it’s not just bridge translator, it’s on a lot of levels because the investor and the city, there’s also a translator needed there. And a developer and an investor, sometimes there’s a translator needed there. And especially, the investor and the community, there is not a translator that works in all of those mediums. So, yeah, there’s just this…

Jimmy: You have to be more believable.

Sasha:…huge disconnect. Yeah. I guess you could call it that. But there’s this huge disconnect in all of these different levels. And it’s gonna be some doing to get everybody, you know, in the same room in the first place. That’s kind of what that Steve Glickman event was about is to have everybody, the whole spectrum: We had, you know, billion dollar fund manager to the little coffee shop on the corner in the same room. Those guys, they would never even know each other, you know.

Jimmy: There’d never be a reason for them to really get together?

Sasha: No. Not at all. But what I found from being at the… When we spoke at the SALT Conference, and the other side of it, which is actually boots on the ground, having a beer with these community leaders, is the goals on the two ends of the spectrum are exactly the same. They want the same things. And it’s all of the middle part, the communication, that part, that breaks it down and doesn’t achieve those goals. So, you know, I don’t know if you remember, but it seemed like, to me, the big worry at SALT was, “Hey, there’s this huge income gap in this divide, and we’re losing a lot of jobs automation, and it’s not sustainable. And we need to figure out how to bridge this somehow.” So, the extremely wealthy are worried that the system is gonna fall apart and they’re gonna lose the ability to make money. And on the other end of it, on the community side, they’re worried that the system’s gonna fall apart and they’re not gonna be able to make money.

Jimmy: Absolutely.

Sasha: You know, it’s the same concerns on different levels, and for some reason, that they can’t seem to bridge it. How do you stimulate economic activity while maintaining those two things? The community side and the investor side, and it’s difficult.

Jimmy: It’s a big challenge. It requires a lot of work. Now, one of your strategies seems to be working so far. You’ve talked to me about your modular strategy of using shipping containers as incubators. What other models are you looking at? There’s different models that you go into. What is your specialty, I guess? Or what are some of your specialties in terms of activating a community?

Sasha: Yeah. So, I think that my specialty is just figuring out what to do with the space. We have these buildings that were built a while ago and, you know, right now, we live in this world that changes so fast. You had large retail, that was a huge component of everything, where I would say, in five years, it just fell apart, you know, with Amazon, with online delivery, with the internet. There was no need anymore for these large spaces, but they’re still there. So you gotta reconfigure them and make them work. The problem is that the only ones that are really being reconfigured are, like, malls. The dying mall is getting this new life, which is, they’re starting to cut up the spaces into smaller spaces. And they can figure that out with data because they can hire the analysts to figure that out. But smaller investors can’t seem to make it work and understand it because it’s a bit of a management nightmare unless you’re already set up for it to manage smaller tenants and manage expectations, and find them, source them. That’s what we seem to really specialize in is these buildings that are…they’re not quite big enough for a multi-tenant investment deal, that is, you know, investment grade that a lot of people are looking for.

But it’s also too big for a single tenant because single tenants don’t need that much space anymore. And people can’t seem to figure out what to do with them, and rightfully so because it’s quite complicated. You have to have the right things there that pull the right people. And the data side is very, very important to understand. What is it that would be good in this community? What is the GDP per business in this community? What is it outside of this community? How far is it to get there? Do people use Uber? Is their public transit? Where are people going to and coming from on a daily basis? What are traffic counts? That kind of stuff is really, really important. And it’s just the stuff that we’ve always had to leverage because a lot of the projects that we do, don’t have comps. And they don’t have comps because, you know, we don’t really focus on the standard deal. We find the deal, that’s a good deal, it might not have comps, but it’s justified. I know it’s a good deal, and I justify it with the numbers with, data.

Jimmy: Beyond impact investing and community revitalization, and putting aside Opportunity Zones, for a minute here, what’s the investment case for the projects that you’re working on? Or in other words, how do you sell your project to a market rate investor? What types of returns are you looking for, for your investors?

Sasha: Yeah. So, the projects that we are working on, actually, without Opportunity Zone and without the impact side, we’re still targeting a 8 to 10 cap rate plus financing, which is the big question. Every deal is very different. So, with modular construction, we have to get the financing on the back end because it has to be built. Banks don’t love… They can’t quite get their head around for now, but that seems to be changing pretty quick too. The idea of it’s not built on site because then how do you do a fund control for all the different disciplines, I think that is very shortlived. I think the banks are gonna figure it out pretty quick because that technology is moving fast. What we’re looking at is probably an 8% to 12% return on investment annually. So, it’s still a pretty good deal. And I’m trying to be conservative on my estimates, just because I know that these deals actually work out much better in year 3, 4, 5 because it accelerates the growth of an area. But it’s something that is difficult to really project because these areas, there’s no comps, right? We’re working off of comps or off of data, or some sort of smaller combination of the two. And I’m pretty conservative in my numbers. So I always try to look at these deals as, you know, this is what it should be, knowing in the back of my mind that it’ll actually perform a lot better, pretty quick into the deal. But I don’t wanna over-promise and under-deliver.

Jimmy: I hear you. Absolutely. What’s your target raise for your two Opportunity Zone funds, if you don’t mind me asking? I don’t know if you have a target amount yet that you’re willing to share publicly. And the second question, follow-up to that is, what’s the investment minimum? If I’m an investor, and I’m interested in this project, what’s the minimum investment that you’re looking at?

Sasha: So, I haven’t decided quite on the minimum investment. On the first fund that we’re gonna be raising, which is the single asset fund, target’s gonna be around 10 million. On the multi-asset, that will be closer to 100 million.

Jimmy: And that second one’s gonna be more a blind pool fund, for lack of a better phrase, I suppose, and it will just follow the strategy wherever it takes you?

Sasha: Of the first one.

Jimmy: Gotcha. Follow the strategy of the first one.

Sasha: Yeah. Yeah. The reason that we’re doing the first one is to really showcase this is what in Opportunity Zone deals should look like, in order to achieve the fact of gentrifying an area without displacement or inclusive gentrification or whatever you wanna call it, stimulating economic activity, in order to be able to develop it to its full potential. And that’s gonna be the model for the larger fund. And the larger fund is gonna go out and find 10 more deals.

Jimmy: Yeah. That makes perfect sense to me. I like that you have a proof of concept that you’re gonna roll out, in addition to having a blind pool fund. I think that makes a lot of sense. Before we go, Sasha, you had teased a story you were gonna tell us about. I’d like to hear that story now.

Sasha: Yes. So, you got an unsolicited text message from me during this podcast, and it’s a picture. I was having a meeting at one of our projects. And there was this guy, he was in a gang at one point and he’d served some time in jail. And, you know, he’s just like, really nice guy. But because of his history, he’s, you know, not really employable to the standard employer. And he’s really good with his hands and he does some odd jobs in the area. You know, he does some cleanup and some gardening and, you know, whatever works in a kitchen, at a restaurant, just to help out, whatever. And I’ve known this guy for, I don’t know, five, six years now. And at one point, I have had so many conversations with him, just a nice guy that had a rough time growing up. And he came in to my friend’s coffee shop, and he had this thing he had in his hand, this statue. And he said, “Hey, man, do you mind if I leave this here for the next art event that you’re gonna do? You know, I wanna showcase. It is the second little statue that I’ve ever made. And I curved it out of this tree trunk that I found in the alleyway.” And I looked at it, and it’s… Too bad this is not a visual show.

Jimmy: Well, I will post this photo. I’m looking at the photo you sent me now. And if we can get your friend’s permission to put it on the website, I absolutely will. So, we’ll have it on the show notes page if people wanna check it out @opportunitydb.com/podcast. But please continue.

Sasha: But yeah, this is the second piece of art that he had made. He hand carved it out of this piece of wood. I looked at him like, “Dude, this is why I’m doing this. It’s for you. You know, because you have so much talent, but no one’s ever going to see it.” And that guy, he wasn’t even gonna try to make anything, but he got inspired by what was going on that street, like all these artists, makers, and all this. He’s like, “Hey, I think I could do that.” You know, and he made this thing, and I was like, “God damn, dude. That’s amazing.”

Jimmy: Yeah. It’s a very impressive piece of art you’ve made from something you found in the alley. That’s for sure. That’s amazing.

Sasha: Yeah. Yeah. And so, there’s a lot of that guy out there, that’s unrealized talent. I think unrealized talent might be the saddest thing, just because, you know, that guy would never know how to even get that out to anybody. But now, there’s a bunch of people coming to that neighborhood to go to an art show, or, you know, an art walk, and they get to see something, you know, that they couldn’t otherwise see. There’s no mechanism for that, you know, for him to get his stuff out. And, you know, I’m not the standard social impact guy. It’s something that happens organically or should happen organically if you do investments right. And at the end of the day, it’s pretty rewarding, other than the warm feeling I get in myself from that guy making that statue. But it actually makes more sense of some more organic way to build a neighborhood and not have a bunch of people freak out at you.

Jimmy: Yeah. More organic way to build a neighborhood and build it for the long-term, not just quick revitalization, that may result in resident displacement.

Sasha: Right.

Jimmy: Well, Sasha, I’ve really enjoyed our conversation today. This has been amazing. And thank you so much for your time. I really appreciate it. Before we go, can you tell our listeners where they can go to learn more about you and CoPlace?

Sasha: The website is www.coplace.com. And feel free to fill out the contact us link if I can do anything or help you in any way, or if you’re in San Diego or come to San Diego, I’m happy to give a tour and or at least point you in the right direction of what to see and what to look for. And this is something that we’ve been working on, regardless of Opportunity Zones. And so, it’s had time to season. And this is the effects, four years in of this type of project. And it’s very impactful, impactful on every level.

Jimmy: Excellent. Well, for our listeners out there, I’ll have show notes on the Opportunity Zones database website. And you’ll find links to all of the resources that Sasha and I discussed on today’s show. I’ll have links to CoPlace. I’ll have a link to their Quartyard project. And I’ll have a photo of the statue that Sasha just texted me to my phone. So, I’ll probably make sure you can see that as well. You can find those show notes at the Opportunity Zones database website, as I mentioned. The URL is opportunitydb.com/podcast. Sasha, thanks again for your time. I really appreciate it.

Sasha: Thank you.

Jimmy Atkinson

Jimmy Atkinson

Hi, I'm Jimmy Atkinson... I founded OpportunityDb in August 2018. I'm a veteran Internet entrepreneur with a background in economics and Web marketing. I previously founded ETFdb.com. These days, I am passionate about impact investing and tax-advantaged investment opportunities. At the crossroads of these two ideals is the opportunity zones program, a place-based tax policy intended to economically transform some of the poorest areas of the United States with new real estate and business development.

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