OZ Pitch Day - March 23rd
The First Opportunity Zone Fund, One Year Later, with Quinn Palomino
It’s been one year since Virtua Partners launched the very first Qualified Opportunity Fund. Since then, they have raised $100 million, roughly half of which has already been deployed; they’ve broken ground on numerous projects, and have a pipeline of about 100 more.
Quinn Palomino is principal at Virtua Partners, a global private equity firm that specializes in commercial real estate, and manager of four Opportunity Zone funds.
Click the play button below to listen to my conversation with Quinn.
- The potential for the Opportunity Zone program to create a new language for municipalities and investors to facilitate investment in low-income areas.
- How Opportunity Zones can help mitigate investment risk.
- The responsibility of employers in Opportunity Zones to create positive social impact and a pathway to the middle class.
- How workforce development should be measured.
- How Virtua Partners works with municipal government and local communities to set aside 10-25% of residential units as affordable or workforce housing.
- The importance in developing a common standard for measurement that is easy to quantify and analyze.
- The challenge of educating all Opportunity Zones stakeholders — investors, municipalities, sponsors, developers, management, and community.
- A look into Virtua Partners’ fee structure.
Featured on This Episode
- Quinn Palomino on LinkedIn
- Virtua Partners
- Lloyd Kendall Jr.
- Chicanos Por La Causa
- PBS NewsHour episode: Will ‘opportunity zone’ tax breaks help low-income communities?
- Hotel Equities
- Mayor William A. Bell
- OZ Framework
- Opportunity Funds Association
- Senate Bill 1344: OZ Data and Reporting
- Shay Hawkins podcast episode
- Senator Tim Scott (R-SC)
Industry Spotlight: Virtua Partners
Headquartered in Scottsdale, AZ, Virtua Partners is a global private equity firm specializing in commercial real estate. They have been one of the pioneers in Opportunity Zone investing since the program launched in 2018 and are the charter member of the Opportunity Funds Association. They currently have 16 million square feet of assets under management or development.
Learn more about Virtua Partners
- Visit VirtuaPartners.com
- Social Media: Instagram | Facebook | LinkedIn
- Call (520) 689-7095
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.
Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. Virtua Partners was one of the earliest investors in Opportunity Zones. They launched the first ever qualified opportunity fund back in June of 2018 just after the Opportunity Zone designations were made official, and they have been one of the leaders in Opportunity Zone education ever since. Here to speak with me today is one of Virtual Partners’ principals, Quinn Palomino. Quinn joins us from her office in Scottsdale, Arizona. Quinn, thank you for taking the time to talk with me today and welcome to the show.
Quinn: Hi, Jimmy. Thank you. Thank you for inviting me.
Jimmy: Absolutely. Well, it’s a pleasure to have you on it. You know, as I mentioned in the intro, Virtua really was one of the earliest educational leaders in this space and I personally learned a lot about Opportunity Zones from your websites and the webinars that you guys put on back in the early days last year when I was first hearing and learning about the program. So I thank you for all your work in that regard. Can you tell me a little bit more about Virtua? When it was founded and what its mission is?
Quinn: First, Jimmy, I just wanna say thank you. I love hearing that people heard some of our early webinars when we had followed the legislation for Opportunity Zones throughout 2017, and incredibly excited when it was signed by the president, and just excited about how amazing the legislation was and shocked by how great it was for investors. But we have worked in tax-centric investments since the crash. So in 2008, we actually helped salvage a lot of properties for our high net-worth and ultra-high net-worth investors and just focusing on tax solutions for them. And Opportunity Zones really fell in our wheelhouse. We have nine different companies from cradle to grave, from asset management to development, to management, property management of our investment properties.
Jimmy: Yeah. Before we dive in and start talking Opportunity Zones, I want to get your background story. Can you tell our listeners where you’re from, and how did you come to be principal at a global private equity firm?
Quinn: I think I’m pretty humble beginnings, and I think there are many here in the U.S. who share similar backgrounds. I was born in Vietnam right at the end of the Vietnam War, and my family came here. So I’m a first generation, and grew up at the refugee camps that the U.S. set up at Fort Chaffee in Arkansas.
Jimmy: How old were you when you first came over?
Quinn: Two years old. So, pretty young. But this country is home to me, and I think incredible opportunities that this country has given to myself, to my family, I look back and think there’s no other country…I’ve had the opportunity and the privilege to be able to travel around the world, and there’s nowhere quite like this. So, happy to see this type of legislation where we could give back to our communities as well.
Jimmy: Absolutely. And when did your career begin, and where did you get started in your career, and how did you get to where you are today?
Quinn: You know, I laugh because if you’re a first generation Vietnamese girl, and anyone here on the phone who’s a first generation Vietnamese probably knows this, you only have three options. You either become a doctor, marry a doctor, or have a son as soon as possible and he must be a doctor. So with that said, I think I’m a bit of the black sheep in the family when I decided to go to business. My father owned a dry cleaners, came here to the U.S. and worked at a donut shop and a car wash and built himself up. And so I think I got the entrepreneurial bug pretty early on. Got recruited actually during college and worked for a hospital. I worked for children’s Hospital and worked underneath our executive, our CFO, and worked with them on just optimizing revenue.
And then during late ’90s, sorry, late ’90s early 2000s development and construction, and worked on a number of the projects on federal stimulus money to just develop properties in the San Francisco Bay Area and along the coast in California. And during the downturn, the financial crisis in 2008, worked with a number of individuals, high net-worth family offices on salvaging their properties. Many of them had tax liabilities, found themselves with a property that the value was not what they purchased it at, and in some cases losing their properties and finding themselves with a large tax bill. My business partner is Lloyd Kendall JR who is a tax attorney and serial entrepreneur up in the Bay Area. He’s also the founder and chairman of United Business Bank. And so together we were working with many investors on restructuring workouts on their commercial real estate properties. From that grew out our nine different affiliated companies that provide services in commercial real estate.
Jimmy: It’s quite the story. I mean, you definitely did come from humble beginnings to get to where you are today. I think that’s important for our listeners, to know a little bit more about your personal background. So thanks for sharing that with us. I wanna shift our attention to Opportunity Zones now. When exactly was it when you first heard of the Opportunity Zone program? When did you first learn of it and what was your initial reaction to it? And then what was your colleagues’ reaction to your excitement about the program?
Quinn: Yeah, we had followed it throughout mid-2017, followed the legislation throughout the end of 2017 fall and into the winter. It was seeing a solution, a potential solution. And I’ll just back up a little bit, Jimmy, and just to share with you the environment at the time. Many of our investors, both here in the states and outside of the U.S. in Asia and Europe, many were…when they think of investing here in the U.S., many people think Manhattan, San Francisco, Orange County, California, perhaps Austin, just key cities. And then kind of on the other foot, since a lot of our work in development and construction, a lot of city municipalities, you had a lot of cities who, excellent team working on zoning. But when you would pop the investors kind of meet the city municipalities, there was a barrier there. It was many times you would find city municipalities, you know, hoping for what I would say the Taj Mahal for the homeless and trying to find the solution to that, where you found investors looking at that and the underwriting and the financials, and that not working.
When we saw the Opportunity Zone, we thought, “Here is a potential to create a new language,” where what happened is the city started thinking, “Wow, we are not competing with 8,700 other census tracks. And how can we make ourselves more attractive to the investors?” And it changed the language for the investors. You know, many of our investors have seen IRR returns, you know, 8% to 10% cash on cash distributions for investments IRRs in the mid-20s to 30s. And now the language changed. And I thought, “If this is an opportunity, many of them have a very genuine desire for philanthropy and to give back to their communities, but they also have a responsibility to their families, to their shareholders.” And I thought, “Now we can start discussing if we get a decent return, a strong return, a risk mitigated return, and we also have an opportunity for social impact. There was that interest as well. So the language changed, which allow both municipalities and investors to meet and look at other projects that perhaps they wouldn’t have looked at before.
Jimmy: Yeah, it’s interesting you mention risk mitigated return. What do you mean by that exactly? How is the Opportunity Zones program able to mitigate risk on investments of these types?
Quinn: Most of our investments are, we actually had a pipeline of investments prior to the Opportunity Zones. We have about 100 projects that fell into the Opportunity Zones. And after the Opportunity Zones were announced signed at the end of ’17, early ’18, I know many investors sponsors had not really looked into Opportunity Zones. And we combed through the country and built a pipeline after that. There are projects that I would say just pencil out and make sense any day of the week, and those investors are very interested in. There are those investments that may not have worked prior to Opportunity Zones, and Opportunity Zones in and of themselves are not the magic bullet or the magic pill in order to make a project work. But what it’s done is it allows cities to potentially look at subsidies in order to decrease the cost on a particular project.
Now that allows the investors to have a project that hits the returns that they need. On the other side, you also now have a city, a municipality, a community, who is invested in this project. They wanna see this project succeed. They also, in our relationship, just two weeks ago we broke ground on a project in Tempe, Arizona. And here was a project where the city worked closely with our team. They wanted additional workforce housing and they said, “We will look at reducing some of our impact fees, so in lieu of additional units that would allow individuals an affordable workforce housing units.” And by working together, we were able to provide that.
It has also with Opportunity Zones allowed us to partner with nonprofits across the country. Chicano por La Casa is one of our partners, and they have been working in their communities for the last five decades. Credit counseling, health care, childcare. Why is this important? How does this mitigate the risk for the investors? Here’s an organization that has proven by a five decade track record of working in the community, making sure that people have the counseling, the financial knowledge to pay their bills. Now you have those individuals staying in our units, and that has just allowed continual. Now you know that this project is sustainable. And that’s pretty exciting when you have an entire community come together. You know, the cardinal sin or the rule that we tell our investors is, “This project, you need this to be sustainable and you need to finish your construction efficiently, complete it, and on time, on budget, and sustainable for 10 years. You don’t wanna blow your incentive.” So it’s critical to have those close relationships throughout the community. That’s one portion of the risk mitigation.
The second part of it is the diversification. You know, everyone knows the…I know, Jimmy, everyone here on your podcast listening, very familiar with Opportunity Zones, we all know about the deferral, we all know about the stuff up and the reduction in taxes. And then after 10 years, you know, no taxes on the new gain, the depreciation recapture. What we find is many of our investors look at this as a vehicle and an opportunity to diversify their portfolio. Perhaps they’re invested. They see a huge capital gain in stocks and they’re in California, now they can diversify by realizing that I’m putting in an Opportunity Zone and potentially a, for us a hotel, hospitality, or in single family rentals across the country in different regions of the country to continue to diversify themselves. That helps to mitigate the risk.
Jimmy: So two types of risk mitigation, essentially. One, having that community support that enables the projects to be more sustainable, make sure that they’re gonna be there for the next 10 years. Really helps strengthen that investment. And then two, individual investors being able to diversify their portfolios a little bit more. Basically a government subsidy to diversify your portfolio into real estate, private equity, if you haven’t done so already.
Quinn: Absolutely, Jimmy. And then many of our projects across the country, we find that we have such strong relationships with our local cities and municipalities. We see other growth around us, new businesses being brought in, development of retail, other commercial buildings. And that is just revitalizing an entire area. That is incredibly, and you know, for your investors, if you’re investing an area, you want to know that the local community is pouring into that area as well. And that continues to make that area stronger.
Jimmy: Good, good. So you mentioned a few minutes ago that multifamily project in Tempe that you just broke ground on. That was actually featured in a recent episode of “PBS News Hour,” which I’ll link to in the show notes for this episode on the Opportunity Zones database website. Could you tell us a little bit more about Virtua’s Opportunity Zone Funds? How many funds do you have? How many Opportunity Zone Funds do you have, and what is your investment strategy exactly? What types of properties are you building, and where, and what makes Virtua unique?
Quinn: You know, we like the Sun Belt. Anyone investing in Opportunity Zones, if you’re looking at commercial real estate, you really want to look at being able to build. You wanna look at a sponsor who has the experience on building and constructing and stabilizing and managing that property. Opportunity Zones is a green field play, right? So you’re looking at new construction. We like the Sun Belt. Why is that? Because anyone who is familiar with construction and development, you know it’s a bit of a, you know, pain management. Some problem will come up and you wanna make sure that the team you’re working with can address that problem. When I look at the Sun Belt, you look at material and labor shortages. You wanna make sure that you’re in an area that doesn’t have that. We like growth areas. We like areas that have strong fundamentals. You have a pro business, you see the demographics growing a deep labor pool in the area of jobs, economic competitiveness, lower taxes, lower regulations. You know, some areas in California, if you were looking at developing a project, you may be stuck in CEQA for permits for 10 years, and you know, that blows your tax incentive.
So, economies that have legs. And that really is our strategy. What makes Virtua unique? It’s really our expertise across the development, the entire development cycle. We have a team from the acquisition to entitlement, which is zoning, working with municipalities, to vertical development, to management. I’ll give you an example. Hotel Equities is our hotel management arm. We’ve been around for three decades. The original founder of Hotel Equities was one of the original 12 individuals that Mr. Marriott tapped himself to spread his name out there in the hotel industry. We are the only hotel managed company in the world that has been certified by Marriot to train operators. So, Jimmy, if you had a hotel piece of property that you wanted to develop as a Marriott hotel and you had little to zero hotel management experience and you also wanted to be an operator, well, then Marriott would send you to us and you go through our two-year training program and we certify you.
So that allows us an incredible level of expertise to make sure that the successful execution, not only of the development, but also the ongoing management of that property. Yeah. Just to give you an idea, hotel management, it is a 24 hours, 7 days a week business. And in that particular asset class retention for staffing is 24%. Our retention rate is 71%. And why should that matter to investors? The reason is you and I can’t be at a hotel at 3:00 a.m. in the morning when the pipe breaks. And on average, we’ve measured this, it takes about three years for someone to be trained at the hotel to be able to address that 3:00 a.m. pipe break for you. So, it is critically important to have a team that has been with you, has stayed with you. You have better guest scores, you’re able to charge higher fees, you have higher occupancy. And that’s just, I guess part of our secret sauce. Because at the end of the day, it’s boots on the ground and getting in there and managing these properties, working closely with municipalities, keeping our costs down. And that’s really been part of the secret sauce that has made many of our investments attractive to our investors.
Jimmy: And that’s obviously impacting your financial bottom line, that workforce development program at your hotel properties. And that’s impressive that your retention rate is as high as it is, nearly triple what the industry average is. But in addition to that workforce development program impacting your financial bottom line, that also plays into delivering social impact in your community, does it not? And can you talk a little bit about that?
Quinn: Yeah. This is something, and, Jimmy, thank you for asking that. It’s something very close to my heart. As I shared with you earlier, my father worked at a donut shop and the opportunities I was given here, I wouldn’t have had in any other country in this world. And I think that as I travel, you know, we have over 2100 associates across 30 states. We’re in three provinces in Canada. We have over 23 hotels just in Canada alone, over 130 here in the U.S.. And as I travel across the country, I find that sometimes those opportunities I was given, you know, three decades ago, they’re not available to everyone. And if you don’t have an opportunity at a college education, there’s just no path to the middleclass. So if you have some financial problem, some drug problem, family problems, teenage pregnancy and here, you can’t get to the middle class. It’s heartbreaking.
And yet I see an incredible talent pool across the country. And what we say in our organization, it’s not a handout, it is a hand up. And what does that mean? Show us that you’re driven. We have six month, one year, two year training programs, and 25% of our management team has come through a training program with us. Our retention rate, that’s critical. And I think…and why I’ve shared with Senator Scott and others back in DC and in our federal government is, you know, here’s an opportunity for us not only to create a number of new jobs, but also let’s look at this potential salary of those jobs as well. You know, years ago, decades ago, I worked on projects were part of the federal stimulus plan. And some of those jobs were, sadly, were just sweeping.
I mean, and I’ll be honest with you. And those were counted as new jobs created. And those are not jobs. People wanna be able to go home and at dinner share with their family what they do for a living. We spend time early in the morning to late at night away from our families. We sacrifice that time. You wanna know that there is a reason why, you know, you earn a dollar, but you also wanna know that there’s a purpose to what you do. And I find that that is a purpose that many people across the country want. And in this day and age where a lot of people are saying, you know, there’s a lot of, I know, frustration and anger at the environment here in our country, I still believe that there are so many opportunities here. And if we could provide those jobs, and as employers in these Opportunity Zones, I think we have a responsibility to look very closely at our training programs and how we can give opportunities for those who have come in to become supervisors, managers, executive managers. And here they now have a pathway to the middleclass.
So that’s been something that I’ve shared with, well, not only local elected officials, statewide. I had an opportunity to be at the White House and with treasury Mnuchin back in DC and just sharing how critically important for these metrics to measure. Well, on workforce development, but also on our housing side, on our single family rental units and multifamily. We not only need to measure entry level, but also how many units can we provide for workforce and affordable housing. I know there are a lot of luxury homes, they’re beautiful, that are being built in some of the zones, we focus on entry level. Partially, you know, we look at it as, you know, we can keep those occupancies no matter what the economy is at high, almost completely full. Which, bottom line, is what the investors want because it mitigates risk. But also luxury homes really don’t have that much to offer when it comes to social impact.
And at the end of the day, we need to realize that this needs to be sustainable and that we are getting a public subsidy, and that we need to perform a public good for that subsidy. So there needs to be a measurable standard. We’re working closely right now with a number of nonprofits. Again, Chicano por La Casa with their data, as well as ASU University to better develop those metrics. We already have an internal set of metrics in order to measure social impact. Whenever we look at a property, it needs to make financial sense to get the mid, the 5%, 8% cash on cash return, if not higher, for the investors monthly distribution, but also 15% to 20% IRR. And then it also needs to have a social impact component. We kind of stay in our lanes. You know, we know hospitality and we know residential housing. And in those two areas, we measure workforce development and we measure number of units. I think we all know that there’s a crisis across the country right now for affordable housing. You know, two people can work and yet still not afford a safe, clean place to live in, and we wanna be a part of that solution.
Jimmy: Oh, absolutely. So, you went into great detail with your workforce development program. I wanna talk with you a little bit more about the housing that you’re creating. Your bread and butter, as you said, is hospitality, hotel and multifamily. Getting to your multifamily properties, what percentage of your units are going to be affordable housing or workforce housing? Can you talk about that a little bit, and who exactly your target market is for those types of units.
Quinn: Absolutely. We work on multifamily, but also we’re known for our single family rentals. What we’re finding across the country, millennials for example, there used to be a time where a lot of people thought millennials wanted to live downtown in a loft type of setting. But interestingly, as soon as they get married, have the dog and have the child, people still want the American dream, a two, three bedroom home with a little bit of a yard in the back. What has changed though in our demographics across the country, is those graduating college, many times there are kind of three things that come up. One, they don’t get the job at the salary they thought they would. Too many couples are strapped by student debt. And finally, the third one is they don’t get promoted as quickly as they would expect.
And what that has caused is a much more transient population. Unlike, Jimmy, perhaps our parents who bought a home and stayed in it for three decades, it’s the house you grew up in, your parents may still live in it, many times now one of the ways that the next generation gets a promotion or a raise is literally leaving a job and taking another job. So, moving around the country. So we find that our single family rental product has been incredibly popular. So, that entry level product, and I just wanted to give you kind of a breadth and kind of color of the space, how can we meet some of these numbers? It really comes down to, one, the numbers have to make sense for us. Areas of the country, the southeast, the southwest, that Sun Belt area, why those states are growth. You see a lot of people moving to those states. They are lower taxes, lower regulations, more jobs are being created. So you see a lot of influx of population going to those areas.
How do you get the workforce housing and affordable housing? This is when it is critically important to work with municipalities who have an open ear to this. And we’ve found with Opportunity Zones, we have. We work very closely with Mayor Bell who was the previous mayor of Birmingham, Alabama, who used to head up the African American Mayors Association, and just sharing, how can we work together? We are very transparent with within the communities we work with across the country, and we’ll show them, these are how many units this area can support. And usually, we develop a open dialogue with the community saying, “How many units do you need for workforce housing? How many do you need for affordable housing?” And at that time, you have cities who work with us and say, “Hey, these are the subsidies. We can decrease the impact fees. Perhaps we can look at HUD section eight, Lytec.”
And then you start layering the subsidies in order to provide anywhere from 10% to 25% of the product or the number of units can be set aside for workforce housing and affordable housing. And as more of those subsidies are stacked on so that you can still get the decent return that investors demand, you can start reaching deeper down into the economic stack and providing units. One of the big questions, and I think the next question I think many of the listeners will ask, well, what about gentrification? We work so closely with our cities and our nonprofit groups and community leaders on gentri…It is a real problem.
So how can you make sure that every unit you displace you can replace them right in the new project? Well, you measure that. You know exactly how many units you’re displacing, and you quantify what that will cost in materials and labor in order to provide that. And then you work backwards with the city municipalities. What additional subsidies can we layer on here to make sure that we can provide this? And that’s how we’ve been able to provide between 10% to 25% of the total units setting aside for workforce and affordable housing.
Jimmy: That’s good. Yeah. As my listeners surely know, there’s no requirement for social benefit. There is no requirement that you do any of the workforce development or workforce housing or affordable housing units that you’re building. So it’s good to see that you are doing that because it is important. And I think it’s the only way that this program has a chance of succeeding and potentially getting extended or renewed if we can show our leaders in government and the citizens of this country that this program is doing good.
Quinn: Jimmy, I agree with you. You know, at the end of the day, I feel like there’s two basic needs that people need in order to grow and thrive. And that is they need to have a home that is safe, that’s clean, that they know that they can leave their kids there and they can go off to work and know that that’s a safe place, and that they can come home and put their feet up. And two, people need to have a sense of pride in what they do, knowing that it is for a purpose and that there is a value in what they do. It’s not just collecting a paycheck. And it’s also important that that paycheck be able to sustain and care for their families. So I think those two components when we look at, you know, at least for us when we measure it, if we can provide those two very, very basic needs, it can allow others to thrive and be more creative.
It’s hard to be creative if you’re worried about where you’re sleeping every night. It’s hard to be creative when the job you work for over eight hours a day, you see no pathway for improvement or to grow into the middle class. So, incredibly important. And that’s why I feel so strongly about all of us as sponsors. You know, last count, I know we work closely with “The New York Times.” In the last count that the team over there came up with was there’s about a hundred, and I know this number has probably gone up, about a hundred new sponsors for Opportunity Zones. 60% of them have never had experience in a fund before this, which is just frightening. So you wanna make sure that we can measure how we’re gonna impact you. You can’t get there without measuring it.
I think I know you and I both talked briefly, and this is what I share with my own team here at Virtua is, you know, if we’re not very specific on where we wanna go, we won’t go there. But if we told everyone on the listening today, “Let’s all meet each other in the center of Europe,” you know, half the people show up in Rome, the other group will show up in Berlin. We have to be very specific. And that’s why a metrics, a common standard by which not only municipalities, but elected officials, the federal government, and us as sponsors can say, “Great, this is how many jobs we created. We’re measuring jobs, we’re looking at the salaries of those jobs. These are the programs, and how effective are our programs training the individuals working at the jobs that we’ve created.
And on the housing side, this is how many units. Now, these are how many entry level units, these are how many workforce units, and how many affordable units. And even deeper down to ELI, which is the Extremely Low Income, if we’re having subsidy stacked up where that continues to make financial sense. But unless we have that social impact, how will we know in 10 years when we look back that this has actually made an impact on our communities and our neighborhoods? And it also gives an incredible transparency for investors to know, this is a group that my dollars, I’m getting the return and it’s actually giving back to the community as well.
Jimmy: Oh, that’s great. That’s great. And let’s talk about that a little bit more actually. Let’s talk about positive social impact and measuring the impact. As longtime listeners of this show already know, I’m sure, the original Investing in Opportunity Act included a mandate to treasury to collect data and report on that data. That provision of the statute was pulled out of the final bill that got passed as the Tax Cuts and Jobs Act at the end of 2017, but there has been some effort by several groups around the country. The OZ framework comes to mind and the Opportunity Funds Association is another group that comes to mind, which I know you’re involved with. And they are attempting to develop frameworks for measuring the impact in Opportunity Zones. There’s also a Senate bill that was introduced by senator Scott and senator Booker a couple months back that is looking to restore the treasury mandate to measure impact and report on impact and Opportunity Zones. So to you I ask this, and you already alluded to this a little bit earlier, so you may repeat yourself now and that’s fine, it’s definitely important to show that this program is working. Which metrics specifically are you looking at and how are you measuring impact? And can you characterize your relationship with the Opportunity Funds Association, and maybe talk about some of the meetings that you’ve had on Capitol Hill and with our policymakers?
Quinn: Yeah. In early January, 2018, our team sat around and said, “How can we measure this?” Because if we can’t measure it, we don’t even know if we’re doing social impact. When we do an underwriting of a project, we can measure if this has the returns, you know, the 15% to 20% IRR on project level returns for our investors. But how can we show investors that this truly has a social impact? So we started looking at what I’d shared with you before, number of jobs, quality of the jobs halfway. How do you measure by looking at titles and salaries, a pathway to the middle class, training for those jobs, housing, the units?
My recommendation to those I know both back in DC, and I had an opportunity at the White House as well, you know, remember, Jimmy, that the goal the White House they had shared when I was there was that they wanted the Opportunity Zones to create jobs, to spur entrepreneurship, and to reduce crime. I mean, those were the three goals that the White House wanted to hit. So, you know, looking at that and knowing that that’s the spirit of it. I just find in business, sometimes it’s easier to keep the numbers fairly simple. What we don’t want is so like spreadsheet after spreadsheet of data where you, you know, you and I can’t sit down and look at it and say, “Is this improving it?” So we wanna make sure that we can quantify it. We wanna keep it easy for anyone to look at and say, “I get it. That’s creation of number of jobs. I get it. Look at the salary and the quality of the jobs that are coming.”
We’re also working closely with ASU and Academia and opening pretty much all of our underwriting doc records as well as our nonprofit partners so that they can see it and help us to better measure that. And we’ve been sharing that with Shay Hawkins. You know, Shay’s started an Opportunity Funds Association. I know he’s got an incredible heart to make sure that this is successful. I know Senator Scott, a month ago when I was with him and he invited us out to DC to speak with others, you know, he wants…he said…you know, this…what’s the point? We need to be able to have that social impact and give back to our communities. This needs to work. And what is gonna make it work? Part of it is if we have these metrics…we’ve been sharing with Shay, and he’s been such an incredible voice to get that message across the country both to our elected officials and also to sponsors, developers across the country.
So we really applaud him in any way we can help support and give him kind of boots on the ground numbers of what we find working, what we find not working. But my recommendation, and you know, how we’ve kind of outlined, we continue to give feedback as we look at measuring our numbers. What can we measure short term? What can we measure long term? But I also like to keep it so that people can read it, and they don’t have to read 30 spreadsheets to look at the data collected. It can be…because there’s more accountability that way, when it’s a metrics that you can measure.
I would like to see a committee formed including local investors and local developers and sponsors so that we can continue to give that feedback and develop that metrics so that we can reach that goal. You know, in anything, you need to very clearly identify what win is. I tell the team that. We could spin our wheels all day long and work on our projects, but until you really clearly identify what win is, you won’t get there. So this is the same thing, an Opportunity Zone investment is a new investment class. And so we need to clearly identify what is a win. Is a win, for us, we identify project level rate of return, 15% to 20%. Social impact, workforce development, number of jobs, quality of the jobs, workforce training, entry level units, workforce housing, affordable. So that is what win looks like. And I think if we can continue to put more concrete numbers on what win looks like, that’s what’s needed.
Jimmy: Define what a win is, and then you’ll know whether or not you get there. I like that. Yeah, Shay Hawkins, founder and CEO of the Opportunity Funds Association, he was Senator Tim Scott’s former tax advisor and he was my guest on the June 12th episode of this podcast, episode number 35 if listeners of this episode wanna check that one out next, I would highly encourage you. Quinn, I wanted to talk a little bit more about Virtua’s Opportunity Zones funds. How many Opportunity Zone funds have you created so far? How much are you looking to raise overall? And how much have you raised so far?
Quinn: Well, you know, we have $3 billion of assets under management. So even outside of our Opportunity Zone funds, and we’re across 30 states, and as I shared earlier, three Canadian provinces, we’ve raised 100 million in OZ’s. Half of that is deployed. We have a pipeline of about a hundred projects in different stages across the country. We’ve got the first one to break ground, Opportunity Zone project to break ground was Avondale, which was a Marriott SpringHill suites, 130 rooms. I know Senator Scott, Senator McSally, former Governor Brewer, Mayor Bell, all joined us to celebrate, and that was great. Tempe, that’s 90 units in Arizona, a multifamily that just broke ground about two weeks ago. We have about three other projects breaking ground in North Carolina, all the way…I’m gonna be in two weeks headed out to Florida. We have projects out there breaking ground as well.
We have four funds. We have identified, you know, right now we’re just queuing up our projects because they’re in different stage. Some in entitlement stage, so going through zoning. Some working still closely with municipalities to identify what the right mix is. I always tell the team, you can’t make a square peg fit into a round hole. We need to work with our communities and work with our cities and identify what the need is there. You don’t build luxury homes where there is no driver for luxury homes. You don’t put a hotel where there’s no driver or need. The hotel doesn’t create drivers. The drivers are there and you place a product that fits that need, and that’s how you create a sustainable project. That’s how you mitigate risk on a project that’s critically important.
So, a lot of our investors are ultra-high net-worth family offices. Many of them have worked with us over the years. We’ve worked on their other commercial real estate assets over the years and work closely with them. So, gives you a little color on our different funds. And, again, we’re regional in southeast, southwest, and we also have some in the northeastern region, some in the west area, really kind of identified according to what our investors in order to better diversify our investors portfolio as well. Hospitality and single family rentals, residential, multifamily town homes.
Jimmy: Good. You said you have four Opportunity Zone funds currently?
Quinn: We do. We do.
Jimmy: What’s the target raise on each of them?
Quinn: We have two, a number of them are 200 million. And so we’re about…we have a couple other smaller funds, but 900 million. So just short of $1 billion is our overall raise when we look at all 100 projects coming through the pipeline. Not all of them are ready to go yet.
Jimmy: Across all four Opportunity Zone funds.
Quinn: Yeah, exactly.
Jimmy: A hundred different projects, that’s quite a bit.
Quinn: It’s still a drop in the bucket compared to what our country needs, right? Housing. Critical crisis right now.
Jimmy: That’s true. But you’ve actually broken ground on several of them already, which is impressive.
Quinn: Oh, well, thank you.
Jimmy: Good. And, of course, Virtua has to make some money as well along the way. Do you mind if I ask you what your fee structure is on your funds?
Quinn: We have for our QP or qualified, it’s a 1.5% on the management by our fund managers, and then 2% on just accredited investors coming in.
Jimmy: And do you have a promote structure as well?
Quinn: On our development project it’s per deal, so, you know, I don’t have it right in front of me, Jimmy.
Jimmy: Well no, that’s great though, Quinn. Thanks for sharing some of that information. Because I know my listeners always like getting like some real numbers, and I know you shared with me your cash on cash return numbers and your IRR numbers that you’re projecting. It’s also important to keep in mind what the fees are. So thank you for giving me some transparency into that.
Quinn: Absolutely. And I would do the promote, only because…and the only thing is depending on the project, right? Because what I find is that different projects, if investors take anything away, they need to make sure that they are getting the return and they compare it to the amount of risk that they’re taking. If you find yourself getting…it’s riskier, you should be getting an equivalent return that compensates you for that risk. So when you talk about a promote, when you talk about…it’s something that we look at deal by deal, because we need to know that that 15% to 20% IRR, in some of our projects, you get a 30% IRR because it’s riskier. You know, we think it’s…and those projects that are, you know, we feel that are not that risky, you know, you’re in an area that, you know, you see all of these different drivers, well, then the return is less. And so, you know, it’s really project by project.
Jimmy: Yeah, no, that makes sense. So that’s kind of hard to quantify then if it’s on a project by project basis and you have about a hundred of them. There’s no one number you can give us. That’s fine. I understand that. Following up on that, what do you see as the biggest challenge or the biggest threat to the Opportunity Zones program?
Quinn: I think perhaps educating the public. You know, a lot of…you can open a newspaper or a magazine or on the news and not hear about Opportunity Zones. There was a long wait for the regulations, so that was a challenge, and so a lot of people are also asking about regulations. It needs to be sustainable. We need to, again, we need to measure this in order to ensure of its success, and we need to educate in order for this to be successful. We need to educate investors. That’s why I applaud you, and I know PBS did a, you know, just helping to educate everyone, “The New York Times,” “The Wall Street Journal,” that we’ve spoken to. And I think there’s a true heart out there to educate not only the investors on what this legislation and this tax incentive provides, but also educating local municipalities so that the project can be successful and also educating the nonprofits.
I’ll give you just a little, you know, in the early days of 2018, when no one was talking about Opportunity Zones and we were sharing it with our shareholders and we were putting together the educational webinars just to get the education out there for people, we were flooded by calls from city municipalities. And I remember the team would get calls sometimes from a local city saying, “Well, how do you contact the federal government to get our check for this?” We had to explain, “No, there’s no check that comes from the federal government.” And I think that education, you know, that’s just an anecdotal story to share, you know, some of the…perhaps the misinformation that is out there.
So, I think that is a huge undertaking because we can only become more effective, we can only reduce the potential for bad actors, we can only increase the number of projects that have strong social impact if we can better educate all the stakeholders. And that includes everyone from the investors, to city municipalities, to sponsors, you know, the development team, the management team, the local community. So that is a lot of people to educate. And part of the reason, you know, I thank you for putting the program, this podcast, so that people can get this message.
Jimmy: Oh, it’s my pleasure. It’s a lot of work, but I’m having a lot of fun doing it. So then thank you for joining me today. This has been a great conversation. I think it’s been very informative for our guests. Before we go, can you tell our listeners where they can go to learn more about you and Virtua?
Quinn: Yeah, virtuapartners.com. And we have…I know we’re also on Facebook and LinkedIn. And Virtua, I know sometimes the spelling of that, I know we chuckled about, it’s V-I-R-T-U-A. So Virtua Partners, plural and our number is listed there as well. So, any questions or any additional feedback anyone needs. And, Jimmy, thank you so much for allowing me to share this time with you on the line with your listeners.
Jimmy: Oh, you’re welcome. And thank you. And for our listeners out there, I’ll have show notes for this episode on the Opportunity Zones database website. You can find those show notes at opportunitydb.com/podcast, and you’ll find links to all of the resources that Quinn and I discussed on today’s show. I’ll have links to Virtua Partners’ website as well as their Facebook and LinkedIn profiles. I’ll also have links to Chicano por La Casa and to Opportunity Funds Association, and the episode I did with Shay Hawkins a few weeks ago. Quinn, again, thank you so much for joining me today. I appreciate it.
Quinn: Great. Thank you, Jimmy.