Strategies for Maximizing Opportunity Zone Returns, with Kevin Shields

Kevin Shields

What are some strategies for maximizing Opportunity Zone investment returns? What should investors be aware of and what pitfalls should they avoid?

Kevin Shields is founder, chairman, and CEO of Griffin Capital, an alternative investment firm with over $17 billion in assets under management.

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

Episode Highlights

  • Kevin’s initial reaction to the legislation and when he realized he needed to participate.
  • Griffin Capital’s Opportunity Zone investment strategy, and why they like ground-up multi-family developments in Opportunity Zones.
  • How Opportunity Zone funds source their deals. And advice that Kevin has for real estate developers looking for funding.
  • Trends to consider when making Opportunity Zone investments.
  • Why blind pool funds are a tough sell to investors.
  • When we may expect to see pressure on market prices for properties in Opportunity Zones.
  • The case for investing in Opportunity Zone real estate.
  • A few of the biggest Opportunity Zone misconceptions.
  • What investors should be aware of before they invest in Opportunity Zones, and what they should avoid.
  • Why staying in one asset class may be the optimal exit strategy for Qualified Opportunity Funds.

Featured on This Episode

Industry Spotlight: Griffin Capital

Griffin Capital

Founded in 1995, Griffin Capital is a privately held alternative investment and asset management firm specializing in private equity real estate. Their investment solutions include non-listed REITs, interval funds, and Delaware Statutory Trusts (DSTs).

Learn more about Griffin Capital

About the Opportunity Zones Podcast

Hosted by 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. Joining me today is Kevin Shields, founder, chairman, and CEO of Griffin Capital, an alternative investment asset management company founded in 1995. To date, they have over $17 billion in assets under management. Kevin is a REIT alternatives and opportunity zone expert, with more than 30 years of experience in real estate and investment banking. He joins us today from his office in El Segundo, California. Kevin, thank you for joining me and welcome to the show.

Kevin: Great. Thanks for having me.

Jimmy: Absolutely. So to start us off, could you just tell me a little bit about Griffin Capital? Who are your typical clients? And are you working with individual investors or just RIAs and broker-dealers? And what types of investments are you managing typically?

Kevin: Well, you covered it in the intro. Griffin Capital is an alternative asset manager. We operate in several different verticals, if you will. We have two public non-traded real estate investment trusts, one that buys office and industrial, one that buys clinical, medical real estate, medical office, skilled nursing, assisted living, and hospitals. We have two ’40 Act funds, one that acquires a strategic and diversified mix of private and public real estate securities, and one that originates high-yield corporate debt.

We have two tax-driven strategies. One that buys stabilized core multifamily that syndicates the equity into a Delaware statuary trust wrapper that qualifies as lifetime property for purposes of entering into an exchange, and then the Qualified Opportunity Zone Fund we launched about a month ago. We serve at the privilege and pleasure of our retail investors, but we access them through our clients, really, which are the financial intermediaries, so financial advisors, registered investment advisors. Through all three channels, the independent broker-dealer channel, RIA channel, and the wirehouse channel.

Jimmy: Okay, so you don’t work directly with individual investors, then. If I’m an individual investor, I can’t access your funds directly. I would have to go through my intermediary. Is that correct?

Kevin: Yeah. Griffin Capital Securities is our wholesale broker-dealer. So our external wholesalers and their internal partners are responsible for raising the capital through the registered investment advisor community, the IBD community, the independent broker-dealer community, and the wirehouse community. So you would access our product through your financial advisor.

Jimmy: Good. Understood. And so what is your personal background story? Kevin, can you tell me a little bit about the story about how you got to where you are today?

Kevin: Sure. I went to college and business school and law school all at Berkeley. I spent a very short period of time practicing law. And I spent about a decade on Wall Street, mostly working for Salomon Brothers, which is a name you don’t hear so much about anymore, in downtown Manhattan. And they transferred me to Los Angeles in ’91. I worked for a couple of years, running a structured finance group for Jefferies and Company in Los Angeles, which is largely an outgrowth of half the Beverly Hills Office of Drexel Burnham Lambert, another name you don’t hear much about anymore.

And started Griffin Capital 1995. And we started really with institutional partners doing structured sale-leaseback transactions. We started into the individual investor syndication market, if you will, in 2004. We did 26 or 27 Reg D private placements. We got into the public non-traded real estate investment trust business in 2009. And we just continued to grow ever since, continuing to add a product to serve the needs of our financial advisors and their clients.

Jimmy: And a long history of doing that, it sounds like, dating back to 1995 for your current company that you founded. But I wanna shift our…

Kevin: Yeah, over my career of 30 years. I find it hard to believe I’m that old.

Jimmy: That’s the bio I got on you. So it must be true, right? I wanna shift our conversation now to Opportunity Zones. When did you first hear about Opportunity Zones, and what was your initial reaction?

Kevin: Well, we heard the rumblings of Opportunity Zones coming up to the end of 2017. And ultimately, the Invest in Opportunities Act got folded into or subsumed into the Tax and Jobs Cuts Act that was passed in December of 2017. We really started to dig deep into this really that following month, in January or February of 2018. And I gotta tell you, it’s probably were the most phenomenal piece of tax legislation I’ve seen in the 30 years that I’ve been in this business. So we’re very excited to wrap a fund and a fund structure around this to give individual investors the opportunity to take full advantage of the tax benefits associated with subchapter Z and section 1400 of the code.

I was amazed, I guess. And I gotta tell you, I was reading the legislation literally in my dining room table, sitting across from my wife. My mouth was somewhat agape with respect to what the true power of this legislation is. And I think you’ve had other podcasts that really explain what the legislation is about, so I’m not gonna go through that. But that 100% fair market value basis step-up in your holding period is just an incredibly powerful vehicle that’s gonna generate a significant amount of wealth and redirect a lot of capital gains dollars into low-income communities.

So it’s exciting, really, on both ends of the spectrum. But ultimately, as I was sitting there in February, I realized that this is something that we have to participate in personally. So as we think about or thought about structuring a fund around this, it really was stemmed from a personal motivation to generate some capital gains myself by liquidating some low-basis, highly appreciated stock and investing it into our own funds.

So I did that this year, generated about a $7.5 million gain that we invested in our own Qualified Opportunity Funds just because I personally wanted to take advantage of everything that this legislation has to offer.

Jimmy: Good. So you’re putting your money where your mouth is, you have a little bit of skin in the game personally, that’s good to see.

Kevin: Literally and figuratively.

Jimmy: Absolutely. So the Griffin Capital Opportunity Zone Fund, you mentioned that that launched just a few weeks ago, I guess. It’s seeking a $275 million raise if I’m not mistaken. What is its investment strategy, and how much have you raised and deployed so far?

Kevin: Yes. It’s funny that you should know that because we try to keep that under wraps. I think it’s interesting that people go so loud and proud with respect to what they’re doing. Fundamentally, this is a Reg D offering and there are securities law implications with respect to general solicitation. So we’re trying to not really advertise the fact that we have this fund available. In fact, the people that need to know are the financial advisors through whom we sell the product.

So I can’t talk much about the specifics of the fund just because I’ve been trained. But I tell you, if I were doing an Opportunity Fund, we would focus specifically on ground-up multifamily development, really for a few different reasons. One is, it’s fundamentally leaseable, and it’s got a high propensity to rent, both from the millennial side of the equation, which is where my kids are. I’ve got kids that are 31 and 24 and they live in California. So, unless I wanna start buying homes for them, they’ll be in apartments for quite a while.

And then on the other side, you’re seeing it from the opposite end of the spectrum, the baby boomer generation is in the position, my compatriots, whose kids are kind of off and doing their own thing are inclined to downsize and move into a multi-family environment. So you’re kinda seeing at both ends, you know? Multi-families as an asset class relative to office, industrial, or retail has got the highest total return over an extended period of time with the lowest relative standard deviations. If you combine those things and you get the highest relative risk-adjusted return with respect to that asset class.

The absolute sizes of the transactions are large. So, you know, if we think about multifamily development, we’d be building anything between $50 million and $150 million. So it’s very scalable from that perspective. You can actually assemble a $600 million, $700 million, $800 million portfolios of assets with a small handful of property, 6, 7, 8 different properties. So it’s very scalable.

And probably the most critical reason, even though if we look at this in terms of a fund environment or fund context, and you are providing diversification because you’ve got multiple assets in the fund. You’re still only talking about six, seven, or eight different assets. So the thing we like about multifamily the most is, the exposure to capital expenses is the most programmatic of any the asset class.

So you generally know that 30% or 35% of your units are gonna roll over in any given period. You know how much it costs to repaint and carpet those units and occasionally throw in a refrigerator or a new countertop. You know what your footprint is for the combinatory entity. Since you wanna maintain a combinatory in a certain quality, you know how much you’ve gotta reserve on a fairly consistent basis.

So it’s very programmatic, it’s very consistent. The capital expense charge is important when you’re talking about a small portfolio of assets to remain consistent to create consistency with respect to the distribution you make out of that partnership. As opposed to in an office building or an industrial building, and we own close to $5 billion worth of office and industrial. And I can tell you that you lose a big tenant in an office building, it creates a certain amount of disruption in the cash flow with respect to that particular building.

If you only have six, or seven, or eight assets in a portfolio, that could impair your ability to generate consistent distributions without a partnership. So for a number of reasons, we focus on multifamily and we focus on assets all around the country, depending on our development partners. So this is a development program, if you will, it’s either gotta be a good ground-up development…

If you look at Qualified Opportunity Zone legislation through the lens of a real estate developer and operator, clearly, and I’m sure you have other podcasts that are focused on the whole other side of the Qualified Opportunity Zones, which is investment in business and the private equity component. We’re just focused on the real estate side. So we have created a series of joint venture relationships with six of the most prominent national multifamily developers in the country.

And we’ve had the opportunity, over the last year, to really mine through their forward development pipeline and identify assets that are suitable for development, that are suitable and create the kind of risk adjusted returns you need to create that just happen to fall into a Qualified Opportunity Zone. Assets that they were pursuing on their own, independently of the legislation. Because if you think about it in the context of development, you know, the development partner is gonna tie up a piece of land to put it under contract or letter of intent. Take it through the entitlement process, which, depending on where you are in the country, it could be a matter of months, or, in the case of California, a matter of years, trying to get something fully entitled.

So they’re controlling a piece of land for an extended period of time while they’re going through that entitlement process. So, you know, when you think about sourcing transactions, we’re only really looking at transactions that were in the forward pipeline, that they were already pursuing on an economic basis, independent of the fact that subchapter Z and section 1400 of the code, you know, blessed us with its presence.

Because we didn’t actually have the map until April, so that’s really the focus. The focus is on ground-up multifamily development, the focus is on getting a portfolio of six, seven, eight different assets, and in getting some geographic diversification, and really focusing specifically on the economic return. The tax benefits are a nice addon, but we’re really focused, first and foremost, on the economics of the transaction.

Jimmy: Very good. And, yeah, just so you know, the $275 million raise number that I cited, I found that from your publicly available SEC filings. So that’s all I know about the fund myself before asking you about it. I wanna ask you a little bit about deal sourcing. You touched on it briefly toward the end of your last answer. But how do you source your real estate deals? And maybe if you could speak to a broad segment of our listeners, which are real estate developers who would love to get their project in front of someone like you, what advice do you have for them?

Kevin: Well, when I was first looking through legislation in February, clearly, there was not enough proverbial meat on the bone to actually structure a fund, right? We got the first release of proposed regulations in October. That got us probably 80% of the way there. And then we really got to 95% of the way there with respect to the release that was delivered to us from Treasury on April 17th of this year.

So now, we’ve got enough to really structure and intelligently structure a fund. So while we were waiting for those proposed regs to be released, we thought first, what asset class we wanna focus on. For the reasons that we had articulated earlier, we’re focused on ground-up multifamily development. The second leg is really to go through our own Rolodex, if you will, and pick out high-quality, high-caliber national multifamily developers.

Travel around the country and speak directly to those with whom we have pre-existing relationships, and educate them in the front-end about this legislation, and what it entails and what the nature of the opportunity is. We identified six partners with whom we have partnered up in the first fund. As I said earlier, we started to source transactions just by going through the forward pipeline of those six multifamily developers and identifying assets that we wanted to pursue.

You know, you think about the juxtaposition between ourselves and the partners. For the most part, our development partners are merchant builders, so they wanna build it, stabilize it, and sell it. So, you know, we don’t see the opportunity, unless it makes it through their screen, and they feel comfortable that on a merchant build situation, they can generate an appropriate risk-adjusted returned for themselves, recognizing that they are agnostic as to whether or not the assets are in the Qualified Opportunity Zone or not. They would just as soon build across the street from a QOZ if they can generate a higher return. So that’s really the first basket of assets that we look at are those that have already been screened by our joint venture developer. And then we’ve got a different perspective, right? Our lens, or our horizon, is much longer because we’ve gotta hold it for at least 10 years to get the benefit of the 100% fair market value basis step-up.

So we’re looking at more long-term trends, long-term demographics, you know, employment trends, demand and supply trends, where we are in the path of growth with respect to an individual asset. Because, as you know, the Qualified Opportunity Zones, in order to qualify, has got to satisfy a couple of different constraints, right? It’s either gotta have a poverty rate greater than 20%, or an unemployment rate, or a median family income at or less than 80% of the prevailing metropolitan median family income. So that’s really the screen. So we’re looking at it from a much longer duration.

So other developers out there, so, you know, we’ve picked three. We picked seven assets from three of our six developers. And that’s how we identified and sourced our first identified deals. We’d love to do another series. We’re committed to get the capital in the fund, the first fund, by the end of this year. So the investors that get in this year into our fund get the full benefit of the 15% basis step-up for a 7-year holding period prior to December 31, 2026.

We’d love to do a series-two and a series-three in 2020 and 2021, but then we’re kinda done. Because, you know, we’re not really focused on doing anything beyond 2021 in this space, because you at least wanna get the benefit of the 10% basis step-up for the 5-year hold. So for real estate developers who are listening in and are trying to seek some of this capitals, there are a number of us that are in the market consistently looking at underwriting assets. I think we have $3.5 billion to identify the $600 million or so that are in the first series, if you will.

So, you know, it seems like every day a new fund is raising its hand and popping its head above the surface. I can tell you that people have looked at this and considered doing it from a blind pool perspective. Our takeaway from the market is it’s very difficult to motivate investors to invest in a blind pool, so it’s better to have an identified asset. So if you’re an individual developer that’s got an asset under control, then there are, you know, plenty of people out there. You can just Google them now, there’s I don’t know how many hundreds of funds or operators are out there now that are scouring the market looking for product.

As I said, we’re focused on identifying assets where the price is locked and was locked prior to the legislation coming through. I do worry, as I think about 2020, 2021, that some of the best pieces of land and the best Opportunity Zones are gonna start to get bid up and squeeze out the economics. Although frankly, as I said earlier, we would never see those opportunities from our developers in the first instance, because they’re underwriting based on their own criteria and generating their own ideal risk-adjusted return. And again, they’re indifferent as to whether it’s in a QOZ or not.

Jimmy: Right. Yeah. You mentioned the end of 2021 as being an important date. Do you suppose that middle or beginning of 2023 may be important? Also, I’ve just been kinda thinking about this myself. I actually haven’t brought this up with anybody. But considering that the funds have a, what was it, a 30 or 31-month safe harbor working capital, you know, that takes you out until, you know, about 2023 or so, where you actually have to start deploying that capital. Do you see that as being an important date as well?

Kevin: Well, I don’t. And the reason is, you know, you’ve whittled away some of the benefits associated with the legislation if you wait past 2021. The time to act is right now. The time to get into a fund is right now so you get the full advantage of the 15% based step-up. Because in order to get the 15% based step-up, you have to have held your interest in the fund for 7 years prior to the end of 2026.

If I push out to 2021, the maximum holding period I’m gonna have is 5 years, which gets me to 10% basis step-up. If I wait till 2023, then the only thing I’m getting is a 3-year deferral.

Jimmy: Absolutely. Yeah. And I’m with you there. But I’m speaking about, you know, from an investor level, get your money into the fund by the end of 2021, at least you get the 10% step-up. But then the fund has an additional 30 months or was it 31 months, I can’t remember now, to deploy the capital.

Kevin: Correct.

Jimmy: So that kinda takes us to 2023. That’s what I was talking to about. At the fund level, might there be some pressure on market prices in 2023 as the funds are looking to deploy the capital? Is that anything you’ve thought of?

Kevin: I gotta tell you, the answer is no. And you’re gonna see the pressure long before that, because, for instance, if we can call all of our capital in today, I have to demonstrate within six months of formation of the fund and every year thereafter that I can pass the 90% test, which means that 90% of the equity is invested in Qualified Opportunity Zone business property. If I’m sitting on cash, which inevitably I will be to fund future development, I have to write my deployment plan today.

I have to know today where I’m going to deploy that capital over the next 31 months in order to take advantage of the working capital safe harbor rule that allows me to really effectively treat that cash as Qualified Opportunity Zone business property. So you’d be really hard pressed to raise capital at the end of 2021 and then start to figure out where it’s gonna go. When you’re sitting on the cash in order to comply with the 90%, you have to know then, as soon as you raise the cash, where that cash is going.

Now there’s some flexibility in terms of how you address the written deployment plan, but you can’t sit on cash and then wait 30 months to figure out where it’s gonna go. Otherwise, you’ll blow up on the 90% test. Does that make sense?

Jimmy: Fair enough. Yes, that does make sense. Thanks for clarifying that. What would you say to someone who asks you, an investor, who asks you, “Why should I invest in low-income real estate, Opportunity Zone real estate?” Beyond the tax incentive right now, what’s the business case for your investments?

Kevin: Well, listen, you know, it’s the same reason I invested. I think that there are…and I’ll put it to you this way. There are plenty of “low-income communities” that did not need tax legislation to stimulate economic activity and development activity. A perfect example of this, we’ve identified assets in the forward pipelines of our development partners that they were already pursuing independent of the legislation. They were pursuing it on an economic basis independent of the legislation.

So why should you invest in real estate, in an Opportunity Zone? You would do it for the same reasons you would invest in any other development real estate fund, which is the economics are compelling. What I think is interesting is, I look at a development fund or a development opportunity that is more merchant built as opposed to one that’s gonna be held for a duration. Because you know, if you look at it and say, you know, “We think we can generate, over a 10-year holding period, an 8% to 10% internal rate of return.”

Well, that 8% to 10% internal rate of return doesn’t sound particularly exciting. Because normally, if I invest in a development fund, I would expect, you know, a 14%, 15%, 16% internal rate of return, but my horizon is a lot shorter. So in this instance, you know you’ve gotta hold it for at least a 10-year period. You can hold it all the way through 2047, but you gotta hold it for at least a 10-year period. And if I look at it from a multiple perspective, if I own a piece of real estate and I built a 300-unit apartment building, it took 2 years to build the building and 18 months to stabilize it and then I sell it over a 4-year period, if I generate a 15% internal rate of return, that’s the equivalent of about a 1.8 multiple on my equity.

But in the instance of a Qualified Opportunity Zone, you know you gotta hold it for 10 years. So the bad news is, now you’re holding a stabilized asset for five or six years. So you’re diluting your internal rate of return because it’s a stabilized asset. But if you generate a 9% internal rate of return over 10 years, that’s… So even through your IRR, your absolute internal rate of return is going down, your multiple is going up.

And that’s really what you want. You want that multiple to go up so you can take advantage of that hundred percent fair market value basis step-up after 10 years. But first and foremost, you should invest in real estate in an Opportunity Zone where you like the economic profile of the transaction. And if you don’t like the economics, forget about the taxes. The tax benefits are not worth the struggle of investing in something that’s not gonna generate a fair risk-adjusted return independent of the tax benefits.

Jimmy: And then if the value of the property doesn’t appreciate enough, it kinda nullifies the tax benefit anyway.

Kevin: Yeah.

Jimmy: So definitely make sure it makes sense from a business and investing standpoint before you even consider the tax benefit. Absolutely.

Kevin: Absolutely. And you know what, frankly, people pay a lot of lip service to that. I’ve been on a number…I don’t know how many panel discussions I’ve been on regarding Opportunity Zones over the last six months, more than I can count. And it seems like every sponsor is singing from the same song sheet saying, “Hey, we focused on the economics. We focused on the economics. The tax benefits are a nice addition.”

I can tell you, that’s not gonna be the case, you know? I don’t know how many hundreds of emails I get every day, but I can tell you, I probably get 100 direct solicitations from the brokerage community on any given day just because I’ve been in this business for 30 years as you admitted in the frontend of this discussion. And it seems like, over the last six months, the tagline is, “Land in an Opportunity Zone.”

So I can tell you, anecdotally, I’m already starting to see pressure build with respect to land appreciation in the best Opportunity Zones available. And if you’re a real estate transaction broker, you know, you’re out there mining for opportunities and identifying, calling on landowners that have land in Opportunity Zones to try and to push up that pricing and, you know, squeeze out with the economic benefit of the asset and try to appeal to the tax benefits.

So it’s gonna be tricky to watch over the next couple of years. So that’s why we’d love to have a series-two and a series-three. I don’t frankly know if the market is gonna hold up in the better Qualified Opportunity Zones to support development going forward. We’re just as comfortable just doing the one fund on the day if that should come to pass.

Jimmy: Right. We kinda have to wait and see at this point, I guess.

Kevin: Yeah.

Jimmy: Kevin, you’ve had your finger on the pulse of the Opportunity Zone space for over a year now and you’ve spoken on numerous panels. In your time speaking to different people, what have you found to be the biggest points of confusion or areas of misconception for investors when it comes to Opportunity Zone investing?

Kevin: You know, a couple of things. The first is, this whole construct of low investment communities and how that’s defined. The mindset is, hey, we’re building in really lousy areas. And the fact of the matter is, there are 8,700 and change Qualified Opportunity Zones. And each governor had the opportunity, and I’m just thinking about the bigger states, they had the opportunity to elect up to 25% of the census tracts that qualified.

So there are, as I indicated earlier, and I would submit to you, there are a number of communities that did not need tax legislation to drive economic activity and development activity. And the perfect case in point is, we’re picking and identifying assets that were being pursued by our joint venture partners independent of the legislation. So the misconception really is that you’re developing in lousy areas, but it’s just not the case.

I mean, half of Austin, all of downtown Portland, you know, in our community, you know, Culver City, big areas in Culver City, you know, big chunks of Brooklyn, there are 57 districts in Manhattan. The governors had the choice of picking 25% of those census tracts that qualified. They also had the ability to identify up to 5% census tract that happened to be adjacent to a Qualified Opportunity Zone or a census tract that otherwise qualified.

That’s how Long Island City in New York became a Qualified Opportunity Zone. I think Governor Cuomo was thinking strategically about identifying Long Island City, at the same time, they’re negotiating with Amazon to move their headquarters there. I mean, just in retrospect, it’s unbelievable to think about how incredibly transformative it would have been for Long Island City to have Amazon plopped in the middle of a Qualified Opportunity Zone. I look back in amazement as to how New York blew that transaction. It would have been unbelievable.

So, you know, the misconception among investors is that you’re just not building in desirable parts of town, it’s just flat out wrong. The other misconception is, “Boy, this is really complex legislation, it’s really tough to get your arms around.” And it really isn’t. It’s very, very straightforward. You sell any asset, you generate a capital gain, you invest that capital gain within 180 days. You can invest the whole amount, but the tax benefit is really only attached to the capital gain.

You keep it invested for 5 years, you get a 10% basis step-up. You can even invest it for 7, you get another 5% basis step-up. If you keep it in there for 10 years, you get 100% fair market value basis step-up. It’s an incredible combination of tax benefits that’s really intended to pre-up, if you will, no matter…whatever number, you know? I hear numbers all times all the time. It’s the $6 trillion worth of capital gains that are embedded and trapped on the balance sheets of Americans to stimulate a response to liquidate those assets, trigger the capital gain, and redirect that capital into these low-income communities.

And regardless of whether or not you’re developing in the inner city or you’re developing, you know, in the path of growth, it doesn’t really matter. Either way, it’s gonna have a very stimulative effect on those communities. You’re bringing jobs into those communities, you’re bringing development into those communities, it’s transformative and it’s not that complicated. And if you’ve got the right sponsor that actually knows how to raise capital, knows how to raise capital in the retail market, because this is a retail product, that’s got the infrastructure to report over an extended period of time, and the discipline to exit at the appropriate time, you’re gonna have a very good experience.

It’s not that complicated. It gets more complicated from the sponsor’s perspective because we’ve gotta wrap a fairly rigorous compliance protocol around the legislation. But, you know, in our instance, we use Baker McKenzie as our tax and securities counsel, the largest law firm in the world. We use Novogradac as our auditor and our tax preparer. The Novogradac & Company firm had got a long big footprint in tax-driven legislation.

In fact, if you wanna pick up some educational material along the way, you would jump on their website, which is, they’ve got a lot of stuff on their portal that addresses Opportunity Zones. So it’s not as complicated and scary as people make it out to be, it’s actually relatively straightforward.

And I will tell you this, after having spent time in Washington, both in our capacity at Griffin Capital or, you know, I’m in the board of the Institute for, you know, Portfolio Alternatives, we, and Baker, and Novogradac, and the National Association of Real Estate Investment Trusts, and the Real Estate Roundtable, we’ve all spent time in Washington, advocating and educating our legislators on how this could work in the real world.

I mean, it’s nice to have this legislation, but when you’re talking to Treasury and the Internal Revenue Service, they need real-time input from sponsors, such as ourselves, to educate them and get them to understand what it is we need to make this work in the context of the fund, to generate the kind of outcome they’re looking to generate. And I will tell you, unlike other issues that I’ve spent the last decade advocating on the Hill, the reception has been unbelievably positive, and they’ve been very receptive.

And as a result, the first round of regs that came out in October, the second set that came out in April, are, for the most part, very fund and investor-friendly. Because, ultimately, they really want this legislation to work. They really wanna direct these capital dollars into the communities that need economic stimulus. And so they’re doing what they can to accommodate what it is we need from a fund management perspective and a development perspective.

And that whole working capital safe harbor is a great example. I mean, when the legislation came out, we were looking at it and saying, “Well, it’s a development transaction. I’m sitting on cash. And I’ve gotta have 90% invested in Qualified Opportunity Zone business property. Does cash qualify?” And ultimately, in October, they came out and said, “Okay, we hear you and we understand. I tell you what, why don’t you give us a written deployment plan that shows how you’re gonna utilize that capital over the next 31 months? We will deem that working capital safe harbor and give you a free pass with respect that cash relative to the 90% test.”

It’s just emblematic of how cooperative they’re being, they, the Treasury Department, the Internal Revenue Service, to get something on the books that allows this phenomenal piece of legislation to actually work and operate in the real-world environment.

Jimmy: Yeah, I agree. I think the Treasury Department, the IRS, has done a very good job of interpreting the statute favorably for taxpayers and for investors. And thanks, in no small part, to people like you and folks at Baker McKenzie and Novogradac who have testified at the IRS hearings along the way as well. So that Novogradac Opportunity Zone center, I’ve used it myself. It helped get me up to speed on Opportunity Zones when I was first learning about the program last year. That’s at And I’ll be sure to link to that in the show notes for this episode as well.

Kevin, what should investors look for in an Opportunity Zone fund? If I’m an individual investor and I’m looking to, you know, roll over some capital gains into an Opportunity Zone fund, what should I look for exactly, and what should I avoid?

Kevin: Well, we kinda touched on this a second ago, you know? If you are trying to analyze an Opportunity Zone fund, first of all, you know, pick a product that you like, pick an asset class that you like and I’ve articulated the reasons why we are favorably disposed and constructive on multifamily. And then, ultimately, it’s you’re making a long-term bet, if you will, on the sponsor. You’re making a long-term bet on the sponsor’s ability to raise the capital, put the compliance protocol in place, and execute.

So who is the sponsor? What kinda track record do they have? What have they been doing the last couple of decades, you know? How many assets do they actually manage? Who are their development partners if they’re not a developer in and of themselves? What do those people do? What kind of track record do they have? That’s all part of the fundamental due diligence. But beyond that, you know, does that sponsor have a track record and experience raising retail capital?

And I can tell you, that is a specialty unto itself. And we’ve raised over $13 billion retail capital since January of 2012. And with that, we have a very robust infrastructure and advisory services infrastructure. So when those investors have questions, there’s somebody they can call, and are they gonna be around for the next decade or more? I mean, you know, you’ve gotta attach yourself to the financial advisors, and their investors, and their clients, for an extended period of time.

So I get a little nervous, I gotta tell you, when I see all these funds popping up all over the place. And there are sponsors that are coming out of the woodwork, for want of a better term, that, hey, this is their whole focus. They just started a new firm around this concept. They may or may not have experienced… They may be a developer with a lot of development experience, but they may not have the skills of raising and deploying, you know, retail equity capital.

They may not have an infrastructure around servicing that capital for an extended period of time, you know? They may come out into the market with a single asset fund, you know? All those things that make people a little bit nervous. I mean, it could be a great single asset, it’s not a criticism to those that have single asset funds. But you really gotta realize that ground-up development, whether or not it’s multifamily, office, industrial, or retail is the heaviest lift from a risk-return perspective in the real estate business.

So not only do you have to have a great development partner, but you gotta have a great asset. And I get a little nervous when I look at single asset fund. I’d rather have a fund that’s got six, seven, eight assets, so I can spread some of that risk across a diversified portfolio of property. So, you know, I would tend to avoid… And again, it’s not a criticism, I’m sure there are great firms that have come out and decided they wanna pursue this.

But the things that made me a little nervous are some of these single asset funds, some of these sponsors that come out with no real experience of having raised retail capital, how to service that capital over an extended period of time. Those are the things that, as an investor, I’d wanna get a clear view in terms of who it is that’s sponsoring these funds, and make sure that you’re effectively getting in bed with the right person or the right firm.

Jimmy: All good advice, all very sound advice for anyone looking to roll over capital gains into Opportunity Zones. So you brought this up previously that these funds, these investments, require a hold of at least 10 years. And having an exit strategy after that 10-year period is crucial to being able to take full advantage OZ tax benefit. What is your exit strategy, or what should be the most funds’ exit strategy? What do you like to see?

Kevin: Yeah. So and there are some great fund sponsors out there that are doing all things to all people, developers that will substantially renovate, you know, retail, or office, or industrial, or multifamily, they’ll do it all, or hospitality, you know, there are a lot of good firms out there. But if you start mixing asset classes in the same fund, your exit strategy is really limited to selling those assets back one off. We are focused on strictly ground-up multifamily development. To the extent that you stay true to a single asset class, that is your only opportunity to generate a portfolio premium, as opposed to breaking it apart and selling the assets individually.

So, you know, if I look forward 10 years and I’ve got 7 assets, I’ve got a billion dollars’ worth of property, I’ve developed them sequentially, I’ve delivered my asset in 2025 or 2026, I’ve got a fully stabilized portfolio of assets by 2025 or 2026, at that point, I could entertain the… You know, we started out as a partnership, which makes the most sense. In fact, they referred our structure as a two-tier structure, which means the individual investor invests in the Opportunity Fund up top, it’s an umbrella really, and then the Opportunity Fund drops the equity into a series of joint venture development partnerships.

So the fund is really comprised of a bunch of limited partnership interests across the seven different assets. And as a result, I have one subscription document, I have one K1, it makes the administration of moving capital around between the funds much easier and much more elegant from a structural perspective. But I’m only focused on a single asset class. So once that portfolio stabilizes, I always have the option of doing a tax-deferred conversion into a real estate investment trust, and that gives you, you know, three more arrows in your quiver if you will.

You could list the portfolio if you have enough size and scale. Although if it’s only a billion dollars, it’s probably too small of a list. You could engage in a tax-deferred 721 exchange, which basically is an ability for you, as a REIT, to swap your REIT stock for the operating partnership units of the publicly traded multifamily REITs. So I could go to, you know, Avalon Bay or any of the other big multi-billion, $25 billion, $26 billion REITs and say, “Hey, here’s seven assets, they’re all stabilized, they’re all core, you know, they fit into your portfolio, it’s a billion dollars for the property.”

It helps you move your needle a little bit. Very tough for a $25 billion REIT to build assets, one-off, that are $50 million or $60 million and actually have it to be impactful to their shareholders. And I could do a tax-free conversion into an OP unit, and then give the individual investors, as I distribute partnership units, the ability to figure out when for themselves they wanna actually monetize by converting their OP into the stock and then hopefully selling.

Or you file a plan of liquidation. You sell the whole portfolio in total if you can extract the premium from the market that way, or you break up the portfolio and sell the assets individually. So you’ve got a lot more latitude and flexibility. And I can tell you, for in the fund at the end of 2019, the first day that you can contemplate monetizing that fund would be January 1, 2030, right, your 10-year holding period.

So one of the things that keeps me up at night thinking about this is, while if everybody’s got the same attitude, and if everybody wants to get in a fund by 2019, is everybody gonna be wanting to get out in 2030? And do I have to worry about the proverbial rat movement through the snake, and it’s supplied to a lot of assets, it’s gonna drag down pricing? This is one of the things you’ve gotta be contemplative about and figure out how you wanna manage around it.

Well, I can tell you, if I’m sitting on a core portfolio of seven multifamily assets that are all stable, I can continue to manage that portfolio for another year or two and wait for that supply wave to work itself out and ultimately monetize. Really, the best time to monetize is when the publicly traded multifamily market is trading at a premium to net asset value. I can affect a greater premium by transacting in a 721-exchange framework or selling the assets in a portfolio or individually.

That’s the best time to sell if you can kinda time that market if you will. But I have the ability to be patient and time that market to the extent that I’ve got a robust portfolio of assets that I can continue to manage for a duration. And while I’m waiting for the market to present itself, if you will, as those assets continue to appreciate, I’m continuing to have them appreciate tax-free. Because I get the 100% fair market value basis step-up when I actually transact and sell the asset or sell the fund.

Jimmy: Oh, that makes perfect sense. And thank you for the level of detail there with your exit strategy. That was very helpful. And, you know, that affords you the opportunity to kinda wait out any changes in the market, any dips that the market may incur if everybody’s rushing to the exit at the same time. Maybe you go ahead and hold on to your properties until the mid-2030s or maybe even 2040. Who knows?

Kevin: Yeah. But theoretically, you could hold on to them until the end of 2047, because that is the time which that the QOZ designation starts to lapse.

Jimmy: That’s right. But then that may lead to another rush to the exits and a downturn in the market, is what I may suspect.

Kevin: Yeah. Frankly, in a retail environment, you wouldn’t wanna go to the market and say, “By the way, we’re gonna hold onto these assets for 28 years.”

Jimmy: Right.

Kevin: But really, the intention is to liquidate as soon after the 10-year holding period as you can, provided the market will be supportive.

Jimmy: Right. Absolutely. Well, Kevin, we’re getting toward the end of our conversation today. But there’s a question I posed to a lot of my guests on the show, and I’m gonna pose it to you now. Over the course of your career, what has been your favorite or most memorable investment that you’ve ever made? Is there anything that stands out?

Kevin: Oh, so many. You know what I’ll tell you, you indicated before we started that you have family in El Segundo, which is we’re headquartered. I think, probably, one of the most fun things that I’ve done in my career is actually building our headquarters office building in El Segundo. It’s a very edgy, creative office space. And, you know, we used to be over in a high-rise building and there was nothing special about being in a classy high-rise.

But a building that’s really hip, I think, you know, and I say that as a 61-year-old guy, and hip is not really the biggest part of my vocabulary, but it’s amazing. It’s amazing to me when we moved here, and, you know, when you move your employees into really just a cool environment, how positively impactful it is on the psychology and the mentality of your employees and how much they really like coming to work here. Independent of the work itself, just the environment that we’ve created here is pretty special. So I invite you next time you’re out visiting your family to stop by and say hello.

Jimmy: Yeah, I may even do that. I think I’ll be out there later this summer. So I’ll have to have to ring you up if that’s the case. That’s very cool. Thanks for sharing that story. And thank you for joining us today. But before we go, can you tell our listeners where they can go to learn more about you and Griffin Capital?

Kevin: Yeah, our website,, G-R-I-F-F-I-N. And by the way, a griffin is the legendary protector of the king’s wealth in lore. It’s got the head, and the full body, and the vision of an eagle, and the strength and stability and hindquarters of a lion. That’s what a griffin is.

Jimmy: So a very opt mascot for your firm, obviously. Very good. Well, for our listeners out there today, I’ll have show notes for this episode on the Opportunity Zones Database website. I’ll have links to Griffin Capital and to the Novogradac Opportunity Zone Center that we previously mentioned and to all of the other resources that Kevin and I discussed on today’s show. You can find those show notes at

Kevin, again, thanks for joining us. I really appreciate your time.

Kevin: My pleasure. Thanks for having me, Jimmy.