What are some best practices for packaging an Opportunity Zone real estate deal and raising capital from investors? What are some examples of good deals and bad deals?

Gabriel Fernandez is a real estate investment manager in Brooklyn, NY.

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

Episode Highlights

• Reaction to the recent New York Times article on Opportunity Zones.
• Opportunity Zone development by Brookfield and Lightstone in the Mott Haven neighborhood of the South Bronx.
• Examples of some Opportunity Zone deals that Gabriel has come across — both good and bad.
• The value that asset management brings to real estate deals.
• Why Gabriel believes that multifamily and industrial are the ideal real estate asset classes for Opportunity Zone investment.
• Why Opportunity Zone investors and Qualified Opportunity Fund sponsors are often not aligned on holding periods — and a potential solution to remedy this misalignment.
• Why long holding periods in certain markets can be beneficial.
• How increasing life expectancy may lead to increased demand for income-producing assets in the long term.
• Practical advice for any Opportunity Zone deal sponsor trying to raise capital.

Featured on This Episode

• Gabriel Fernandez on LinkedIn
• Gabriel Fernandez’ website
• New York Times: How a Trump Tax Break to Help Poor Communities Became a Windfall for the Rich
• Podcast episode #52 with Thomas Morgan: The Big Problem with Opportunity Zones
• Mott Haven, Bronx
• Brookfield and Lightstone projects in Mott Haven

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.

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Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. Joining me today is real estate investment manager, Gabriel Fernandez, who specializes in pairing up capital with deals in opportunity zones. Gabriel joins us today from Brooklyn, New York. Gabriel, welcome to the show.

Gabriel: Hey, Jimmy. Thanks for inviting me.

Jimmy: Absolutely, Gabriel. Well, how have you been? We’ve met a couple of times in person. You know, the first time we met was when you invited me to give a talk on opportunity zones at the Harvard Club of New York. And we’ve run into each other at, I think, at least one of the Opportunity Zone Expos a while back. So how is everything going with you so far?

Gabriel: Pretty good. It’s a Friday afternoon here in New York. It’s September. It’s one of the best months to be in New York and it’s a gorgeous afternoon and I’m looking forward to the weekend.

Jimmy: Sounds good, man. Life is good. You’re living the dream, right? So let’s get a little bit of your background first, just so you can introduce yourself to our listeners. Tell us a little bit about your experience in investment management and the role you’re playing in completing deals and what you’ve done during the course of your career if you can just give us a little bit of your background.

Gabriel: Sure. So I got into real estate investment management by going to business school and getting an MBA in finance. And shortly after graduating, I started working at AIG with their in house investment group. This was back in 1998. We were investing insurance company money on the principal side across different property types. And I worked on deals all over the world. I then transitioned into advisory work and worked several years for an international investment bank. And most recently I worked for a closed in real estate private equity fund that was sponsored by Clarion Partners, which is a leading investment manager. And I worked on that fund on an active basis for 11 years. It was a pretty sizable fund. We’d raised over $600 million in equity. Our investors included pension funds and a sovereign wealth fund. And we did a range of acquisitions. We did ground up developments, etc.

In my career, I’ve worked as both an investor and as an asset manager and played an active role in about $1 billion worth of executed transactions. And I’ve done deal sourcing, underwriting, negotiations, project and asset management, and all the time I’ve been managing risk and creating value. Most recently, and this has happened organically, I immersed myself in the opportunity zones space late last year and I started finding myself in the middle of opportunity zone deals and I started connecting deal sponsors with investors. And I did this just through relationships that I have in the industry and also by meeting deal sponsors at conferences, etc.

Jimmy: Good. Yeah, I know you’re diving head first into the opportunity zones space for better or worse. And I wanna ask you a little bit more about the deal making that you’ve done in that space in a little bit here. But first, I wanna talk about that New York Times article that came out a few weeks ago now, end of August, August 31st I believe is when it was published and it caused a little bit of a stir in our industry. On last week’s episode, I was talking with my guest, Thomas Morgan, about it, and he had some good points brought up there. I wanna ask you what your take is on it. The article, as I mentioned with Thomas last week, it pointed out some successes of the program in Erie, Pennsylvania and Birmingham, Alabama to name a couple of spots. But overall, the article was largely critical of the program, you know, possibly rightfully so. It referred to it as a once in a generation bonanza for elite investors. What did you make of the article overall, Gabriel?

Gabriel: So, I’m gonna leave it to others that are, you know, following the OZ program a lot closer than I am to sort of, you know, make a verdict. I do think I would side though that at this point, it’s too early to tell. But my big comment about that article was, and I’m a New Yorker, wow, there was a big hole in it. I don’t recall seeing a discussion of OZ activity here in New York City. And I can tell you and because, you know, there’s been a lot of information about this in the real estate press here in New York, that I was really disappointed that Times did not discuss what was going on in, for example, the Mott Haven section of the Bronx or what is imminent there.

And for folks who don’t really know New York, basically Mott Haven is sort of the southern tip of what is the South Bronx and it’s an old industrial neighborhood. You see it, there’s an elevated highway that bisects the neighborhood and its severs largely residential areas from the waterfront. And there’s very little activity there right now. Certainly, in the old industrial areas, they’re largely obsolete manufacturing uses and/or they’re contaminated industrial sites. And most recently… And that area is entirely an opportunity zone. And most recently, two of the leading investment managers based here in New York, Brookfield and Lightstone have bought large portions of waterfront properties in Mott Haven. And I would wager that 10 years from now, Mott Haven will not be recognizable and in a positive way. And that the opportunity zone program has truly provided the impetus for the turnaround of that neighborhood.

And furthermore, this is an example of an area where there will be no displacement. The redevelopment that is going to take place will be on reclaimed industrial sites or obsolete industrial buildings. There’ll be no displacement of existing residents and there’ll be the creation of amenities like waterfront access and parks. And I believe what’s slated, according to the press, the Brookfield project will deliver 1,300 new residential units to the Bronx, 30% of which will be affordable, the Lightstone project, 2000 new units. And these projects will add to the tax roll of New York City. So I was really disappointed that The Times overlooked that as an example of really what’s gonna be an opportunity zone developments with, I believe, great outcomes.

Jimmy: Yeah, great outcomes and in line with the congressional intent of the program, it sounds like. Well, that’s great. That’s a great anecdote to hear. I was not aware of what was going on in Mott Haven. I’ll have links to more information on Mott Haven and those projects you cited, Gabriel, in the show notes for today’s episode for our listeners. If they wanna learn more, they can head over to opportunitydb.com/podcast. Yeah. So that’s one example of something that they overlooked in their own backyard, I suppose. Largely, though, I would say and I said this last week, I think the article was right to be critical of the program because I think in these early days, the vast majority of the investment has gone to areas where maybe the projects or deals that are receiving the benefit would have been underway already anyway.

But I agree with you that it’s probably too early to really tell. I think the jury is still out on how this is gonna play out over the next, you know, five, six, seven years and beyond. This is just pretty much a recap of year one. If you judge the whole program on just year one, I think you’re kind of missing the big picture. So we’ll have to see how it plays out over the next several years. Gabriel, let’s go ahead and talk a little bit more about opportunity zones now, your experience specifically. I wanna talk about deal making. You’re maybe the first guest I’ve had on who does exactly what you do in terms of matching up project sponsors with capital. So based on your experience, I wanna get a sense of some bad deals, first of all, if we’ll get the bad stuff out of the way. Can you give me some examples of some bad opportunity zone deals that you’ve come across?

Gabriel: Sure. So basically a bad deal is…or it’s a deal where the sponsor has not thought through the risks. So I can give you an example. So earlier this year, a deal sponsor had asked me to help them find some capital for a multifamily development deal in a New York City suburb. And the site was located next to a major transit hub. Those two attributes, having access to transit and proximity to a gateway city with growing employment and population trends like New York City, those are major positive deal attributes.

The problem with the deal as it was presented was that there was also a robust pipeline of competing projects in the development pipeline that would compete with the subject property. And the way the deal was presented, that risk was not fully accounted for. So basically, in the submarket where this project was gonna be developed, the balance of supply and demand was about to change dramatically once the pipeline of new projects came online. And it was surprising and disappointing because these projects had been announced and marketing materials were available for them. So it wasn’t hard for a deal sponsor and/or an investor to find them.

So what’s really needed is an analysis that indicates what will make the project viable and how to position your project vis-a-vis the competition. And I would say that all underwriting includes assumptions about rents and absorptions and there are always unknowns. But a sponsor should do what’s best to work so that they know how a project will compare in terms of price, amenities, and location attributes, etc., unit size. And there should be underwriting that includes an analysis that stresses rent and absorption variables. So that would be an example of a bad deal.

Jimmy: A bad deal, in that case, one that overlooks the effect of competition in the area. Okay. Maybe, you know, right now as it stands, there’s not a lot of competition in the area, but if these other competing deals on adjacent blocks start getting funded, then we’re gonna have some trouble with rents and absorption. Is that your main point there?

Gabriel: Yeah, that’s exactly right. Because, you know, at the end of the day, the project has to be cash flowing and the revenues are gonna come from rents. So the project has to achieve certain rent levels and also you have to achieve a certain occupancy level to increase your top line. And the occupancy comes from absorption. And so it’s all about the velocity by which you can lease up your development. And if there’s a lot of competing product in the marketplace, then it’s very difficult to have pricing power and also it’s difficult to fill up your buildings unless, you know, there’s such strong demand that all of the projects will get filled up. But that’s likely not the case.

Jimmy: Right. Unless, you’ve got a big new corporate center coming into town, maybe an Amazon HQ2 style thing that’s gonna bring a bunch of jobs or a bunch of new people into town, I can imagine. Are there any other examples of bad deals you’ve come across or what else might make a bad deal?

Gabriel: You know, what I would caution just along this topic in general and just to sort of be wary if you’re, you know, sourcing a deal is that you wanna really protect your reputation, you know, when you approach developer…sponsors. And you don’t wanna bring deals to market that are half-baked because you can do that probably just once. And the investors are busy people and they may not take your call or look at your deal a second time around. So I would be just very careful about how to approach folks and do it right the first time.

Jimmy: Yeah. Fool me once, shame on you, fool me twice, shame on me. Right? So you’re not gonna even take us a second glance if the guy came to you with a bum deal the first time around, I would say, right? All right. So those are some examples of some things to steer clear of. Let’s talk about good deals now. What constitutes a good opportunity zone deal or investment? Maybe some examples you’ve seen.

Gabriel: So these are not, you know, trade secrets. It’s just what you want are, you know, deals where there is a clear runway for value creation and where the risks are understood and answered and/or mitigated. And these include construction risks, permitting and delivery risk, lease up risk, asset management risk, etc. And just to sort of step back that for the most part in the OZ space, as you know, we’re talking about ground up development deals and/or deals that require a substantial amount of work, but what has been overlooked as part of this program is what happens during the asset management phase, which is actually the largest part of the holding period. And what is the asset management phase? It’s basically it’s what’s involved when you protect and enhance the value of the property during the holding period. Real estate requires active management and you need a knowledgeable real estate team to stay on top of your asset and the market it’s in in order to make the most of the investors’ investment. And I’ve had investors say to me they don’t wanna pay an asset management fee. Well, value protection and enhancement post-completion is why you pay an asset management fee. And it is why an asset management fee is baked into a fund’s fee structure.

So if you’re an investor, what you want is you want to work with a team that has the experience and depth not only on the development side but also on the asset management side. You want the confidence to know that the team is gonna keep the train on the tracks during the holding period and that includes not only protecting and enhancing the real estate, but also satisfying all of the compliance and reporting requirements that are associated with the OZ program. So that means, in addition, having good legal and tax support to satisfy all of the OZ program’s requirements.

Jimmy: Yeah. Gotcha. So that’s a concept that comes up over and over again on a lot of these podcast episodes I do. You’re not the first guest to harp on how important it is to make sure you’re partnering with somebody with a lot of experience. I think we’ve talked about a lot on the developer side of things in a lot of my past podcast episodes with a lot of my past guests. You’re the first one to specifically draw attention to, well, you need experience in the asset management arena, also on that side during that holding period which is gonna be a long time if you’re gonna write out, you know, at least 10 years to take full advantage of the tax benefit, you know, maybe 10, 11, 12 years or more.

Gabriel: And if I could add, if you think of it this way, that when you embark on a development project, you have a vision for the project day one and you have to deliver this project and that process can take three, maybe four years. And the world can be a very different place in year four compared to when you started in year one. And so when your project is completed and you’re in the lease sub stage or in the operating stage, the market around you, for example, may have changed. There may be more competition and so you might have to adjust your pro forma, your rent expectations or whatnot to remain competitive. Or there might be new advances in building technology that you want to incorporate into your project which were not foreseen originally. There’s all kinds of innovation taking place right now in the IT space with regards to how to improve the operations of a building. And the market, the users, are expecting these services from the landlords.

And so you need a team, a real estate asset management team that’s knowledgeable and plugged into these things to keep your asset relevant to protect it and also to enhance its value. And I’m talking about from year four up until finally the point that you decide to dispose of the asset.

Jimmy: Right. So this is not just a set it and forget it type of thing.

Gabriel: That’s exactly right.

Jimmy: So correct me if I’m wrong, but I think we’re kind of tackling this conversation through the lens of large multifamily buildings, but… Is that correct, first of all? And does this also apply to other types of real estate as well?

Gabriel: You know, this applies to multifamily and all types of the commercial real estate, which is really where my experience has been, but I would, you know, venture to say that the lion’s share of the property types that I’ve seen in the opportunity zone space have been in the multifamily area. I think it’s very well suited for the development sites that are located in opportunity zones. And it’s a product that is in great demand at this point. Certainly, you know, everybody is aware of this sort of the housing crisis, housing shortages, certainly in major cities, affordable housing shortages, etc. And multifamily is a great asset class to be in.

Jimmy: Yeah. Why is that, do you think, that opportunity zones may be better suited for multifamily than for single family or hotel or retail or any other type of real estate? Why do you say that multifamily might be, not to put words in your mouth, but I think you’re kind of intimating that it might be the best use case, at least on the real estate side of things, that might be the best type of property to use opportunity zones for? Why is that?

Gabriel: So it’s fascinating. And, you know, I teach a real estate class at Baruch and this is what I tell my students, all multifamily development is speculative development. And when people talk about multifamily, they also link it with low risk. So that’s very interesting, isn’t it? It’s speculative development, but it’s also relatively low risk. Now, why is that? It’s really because what you wanna do is develop multifamily in markets where the supply-demand balance is ripe for new development, where the vacancy rate is low, where there’s employment growth, where there’s population growth. So I’m thinking of the major cities, for example, the gateway cities, New York, Boston, Washington, on the West Coast, Los Angeles, San Francisco, Seattle. And also in these cities, there are barriers to entry to new development. Development is highly regulated so that it’s very hard for these markets to experience rapid oversupply.

So when you have those attributes in your favor from an underwriting point of view, it gives you the green light for investing in this space, in the multifamily space. I don’t want to, for example, you know, with regards to retail, and I don’t want to say paint the entire sector negatively with a bad brush, but unfortunately it is the sector that is receiving an inordinate amount of negative press. And it’s because of the shifting consumer preferences from bricks and mortar to online. And the bricks and mortar retailers are really transitioning and evolving now. And with that uncertainty, it increases the risk and thus investors are, you know, less friendly to that product type now. You know, the other product type that is really the darling with investors happens to be in industrial and specifically its distribution and logistics.

And that’s the flip side of the story of, you know, the challenges that the retail sector is facing. The problem is that with industrial and certainly in urban areas, it’s hard to find large enough development sites to accommodate logistic footprints that are viable for distribution. So there are real barriers to entry. The other product type that I would say, you know, with respect to hotels, in general, I would say that opportunity zones are not places where there are demand drivers for hotels. And hotels tend to be the riskier segment or major food group in the real estate space simply because to a fair degree, the spending associated with hotels is discretionary. So that will suffer in a downturn. And also because the leases in hotels are for one day and so you have to re-lease the entire hotel every night.

And so that just leads to a riskier equation when you’re trying to achieve stable cashflow producing investments. You know, remember, at the end of the day, these are investors with capital gains and they’re looking for…they’ve made their money. They don’t want to put their money… They don’t wanna lose their money. They have a limited appetite for new risks. And so the asset classes in the industrial space today that offer the greatest certainty tend to be multifamily and industrial.

Jimmy: And I know that that’s what you’re hearing from some of the clients you work with. I know you have relationships with wealth advisors and family offices in the area, in the greater New York City area, and correct me if I’m wrong, but I believe they tell you that by and large they’re looking for multifamily properties to invest in, is that correct?

Gabriel: That is exactly right. And I wish they say to me, I’d love to see for example a last mile distribution deal. The problem is there are very few of them. And certainly in New York City there is just a dearth of development sites to accommodate this new last mile, sort of last touch distribution format, which is why it’s led developers now to do multi-story development. And there are several projects underway here in the New York City area that are multi-story distribution, which is fascinating because they are more expensive to build and if they’re more expensive to build, you’ve got to achieve higher rents to get the same return or higher vis-a-vis developing a distribution center on just a single story building on…you know, in the suburbs somewhere. So the big question is will these multi-story facilities find tenants willing to pay a multiple of the rents that they pay, for example, for distribution in a peripheral location.

But that’s the supply-demand reality. That’s where it has led. But just to circle back, yes, the investors that I have been talking to and the investment managers that I know just through my relationships here in New York, the bias in the property type is largely for multifamily.

Jimmy: And I suppose that makes sense for those type of clients. Like you said, they’ve already made their money. They have capital gains, and now they’re looking to preserve their wealth and not necessarily looking, at least in the case of your clients, are not necessarily to, you know, invest in a startup business or anything, any other type of risky real estate asset. And I think you gave a very good explanation of why multifamily is speculative yet also low risk. That’s one of the best if not the best breakdown of that concept that I’ve heard. So thank you for sharing that with us.

So Gabriel let’s say I’m an opportunity zone fund sponsor, or I’m a real estate developer in an opportunity zone, or maybe I’m a QOZB owner and I’m looking to raise some opportunities on capital. I know this is the case of a lot of our listeners out there. I know this was one of the biggest challenges that a lot of people conveyed to me in a survey I ran recently. I kept hearing over and over again that they can’t find capital, that that’s their biggest challenge. They’re looking for capital or they can’t find enough of it. What’s your advice for those people who are looking for opportunity zone capital? What are some best practices for packaging a deal and shopping it around to potential investors?

Gabriel: Sure. So, you know, in terms of advice, I mean, just basic do your homework and also to be forthright with investors because you do wanna build trust and also because bad deal attributes will come out. So it’s better to, you know, deal with them up front. But I would like to make a comment, you know, on this topic, which is perhaps outside of the literature and, you know, with respect to some of the deal sponsors and that is don’t be put off by the extensively long holding period in an OZ investment. And what do I mean by that? But before I go into that, I just wanna take a step back and, you know, just talk about how the capital stack for a deal is formed. You know, most deals are funded using a blend of equity and debt. And in most deals, the sponsor will contribute a small amount of equity. The majority of equity comes from an investor. And they could be a family office or an investment manager. And the balance of the capital and the stack comes from a bank or a fund. Most projects are structured so that the equity achieves a baseline return. And then the sponsor has incentive compensation above a baseline return. The investor should be willing to give the sponsor an incentive comp because the investor wants the sponsor to outperform the baseline return. If this happens, in theory, both the sponsor and the investor win.

Jimmy: And that’s what is referred to as carried interest or carry.

Gabriel: Yeah, the carried interest is… So there’s a preferred return to equity, both the deal sponsor’s equity, which will be a minority, it could be 5% or 10% of the total equity will be treated the same as the larger equity investors. And there might be a pref. It could be an 8% hurdle or whatnot. And what you wanna do is you wanna set that pref. Basically, you’ve got to work some…you’ve got to achieve it. The investor is not gonna let you, you know, with a deal that’s gonna pro forma at a 6%, for example, stabilized yield, they’re not gonna let you set the pref at a 5% and then start the sharing arrangement above that. The pref really, has to be at a reasonable level of at or above the baseline return. And then what you want is for there to be a sharing arrangement above the preferred return where the deal sponsor gets a larger share of the return above that preferred return.

So what happens is that, and I’m seeing this just, you know, all the time and I’m seeing this now in the OZ space, I saw this, you know, when I was, you know, working for the Clarion Fund or at AIG is that, you know, basically, the deal sponsor is thinly capitalized in general. But, you know, they’re the entrepreneur. They’re the ones that have the vision and they also want liquidity and they want liquidity in part because they wanna continue to do new deals.

The investor by contrast is well capitalized and they wanna allocate capital to good deals, but they also wanna stay in for a minimum of 10 years to capture the capital gains benefits that the OZ program offers. So the investor and the sponsor are often not aligned in terms of the holding period. The solution to this is that a sponsor can utilize a deal structure that allows him or her to crystallize their incentive compensation prior to the 10-year mark. And the crystallization involves using a synthetic waterfall. Now, before, you know, folks kind of glaze over, a synthetic waterfall is just a fancy way to say that the project can simulate a sale prior to year 10 by using an appraisal. And the appraised value is used to flow through the deal waterfall so that the sponsor can compute the value of its interest at the appraisal date. And presumably because the project has stabilized at that point, let’s say this is year six, the owner should be able to refinance and use the proceeds from the refinancing to pay off the sponsor’s carried interest or promote.

The investor should allow the sponsor to exit once the project is completed and on a stabilized track. As for the investors, well, what I tell family offices is that with the OZ program, they have the option but not the obligation to sell at year 10. And perhaps the biggest benefit of the OZ program is that an investor can hold an asset for decades and be subject to favorable capital gains treatment. For assets located in markets that have favorable long-term tailwinds like favorable employment and population growth trends, going long is a good way to go. And there are many New York families that have made their fortunes just this way with multigenerational holds of residential real estate assets in New York City. And these long-term trends do not turn on a dime. The OZ program sunsets in 2047, meaning that you have a window from your deal year 10 up until 2047 to sell and not pay capital gains tax.

Even if you decide to sell beyond 2047, say you decide to sell in 2050, you would only pay capital gains tax on the imputed gain for the 3 years from a basis of 2047 up until 2050. So if you do a deal in 2020 you’re basically holding it for 30 years and only paying capital gains tax on 3 years of that last 3-year period. So in some, if you’re a deal sponsor and you have an investment in an opportunity zone and you have less than a 10-year horizon, looking for an OZ capital can be a viable option for you. And for family offices, real estate can be a great store of wealth for long-term holds. The OZ program is a great way for investors to invest in real estate.

Jimmy: Well, that’s great. By the way, I don’t know what the opposite of glaze over is, but that’s how I’m feeling right now. When I heard you say synthetic waterfall, I definitely was not glazing over. That’s a term that was new to me. Admittedly, I’m a little bit new to this real estate game. But yeah, that’s an interesting option for deal sponsors or developers who they don’t want that 10-year hold. They don’t wanna even hold it… They definitely don’t wanna hold it until 2047 or 2050. That’s a very interesting option for them to look into. I had not heard of that rule, imputing the capital gain between 2047 and a year beyond that, in 2050. I had not heard of that one before.

Gabriel: Yeah, I mean, look, I would, you know, certainly check with, you know, a tax counsel. But I did go to one event, you know, here in New York put on by one of the leading tax advisers. And I did ask just this question and got that answer. So I’m reasonably confident that that’s the situation.

Jimmy: Oh, yeah. See, that’s very interesting. That’s very interesting. I would wonder who determines the property value in 2047 if there’s not a sale at that point. I mean, maybe I suppose you would just have to get it appraised, but then that seems like it would be subject to abuse there if somebody wants to game the system.

Gabriel: Well, you know, actually, on the flip side, you know, the advice I would give to an owner is if your strategy is to hold beyond 2047 is to indeed have your property appraised in 2047 because I do believe that that’s when the basis will be reset.
Jimmy: Okay. Interesting. Interesting. I’ll have to get another tax advisor or tax attorney on the show at some point, ask him or her that very question. I had not heard that, that point brought up before. So that’s an interesting possibility there too, if you are a family office or any other really long-term investor with very patient capital and you wanna have a multigenerational hold, that could be an option there that doesn’t rush you to the exit in 2047. You can hold beyond that potentially.

Gabriel: And it dovetails with this strategy of multifamily investing in markets that have favorable long-term tailwinds.

Jimmy: Right, right. Because as you said, those long-term trends don’t turn on a dime. Those are multigenerational trends in stable, mostly primary markets, right?

Gabriel: That’s correct. And, you know, another thing I tell my students, with respect to capital allocation, there’ll always be an allocation for real estate. You know, you’re looking at family offices…it could be a family office or a pension fund and, you know, their capital allocation strategies, they look like a pie chart. And depending on the biases of the investor, you know, that’ll determine the size of the pizza slices within that pie chart, how much you allocate to real estate, vis-a-vis bonds, etc. But in this environment, we’re in a low yield environment and there’s a consensus view that we’re in a low for long environment with interest rates, you have negative interest rates in a number of major advanced economies. And the yield on the U.S. Treasury on the 10-year has been at mid-1.5% and perhaps maybe even lower. And so real estate is a very attractive alternative for long-term stable income. You know, we’re looking at development projects with 6% unleveraged yields and so vis-a-vis a bond that will, you know, deliver 2% or 3% or 4%, these are very attractive cash flows.

Jimmy: Yeah, absolutely. I mean, I think Japan is the classic example there, right? How long have their interest rates been at or below 0% even, I think for more than a generation, essentially, for the last few decades here if I’m not mistaken. So that’s an example there. And possibly, we’re heading in that direction in this country. It’s hard to predict the future, obviously, but it’s certainly a possibility.

Gabriel: You know, there’s another factor which is relevant to this, which just has to do with the increasing life expectancy. And so it’s, you know, and I tell this to my students and it’s wonderful, all of these advances in medical technologies and whatnot are extending the life expectancies, you know, for people we love, and this is a great thing, but it also means that if people are living longer, the amount of years that they live when they are not active members of the workforce increases, which means that their requirements for income is only getting longer and longer. And these will continue to put pressure on demand for income producing assets in the long term. And we’re talking about income producing real estate and fixed income investments like bonds, etc.

Jimmy: Oh, absolutely. I think that’s a good point. What a time to be alive! Right?

Gabriel: Yeah.

Jimmy: Well, before we go, Gabriel, I just wanted to ask a couple more questions here. Maybe you can just kinda cap our conversation today by answering what have been some of your biggest opportunity zone challenges or hurdles so far that you’ve come across?

Gabriel: Well, you know, it’s not so easy to, you know, pair up capital with deals and, you know, you have to kiss a lot of frogs to find a prince. But at the same time, you know, and I should say, and I’ve looked at several dozen deals and I have two active deals, one that is, you know, very far along that I’m very optimistic about, but it’s a numbers game. But, you know, with respect to sponsors, what I would say is to be flexible and that it’s not realistic to think that the deal shoe was gonna fit at the first fitting. And so, you know, I used to have a boss that, you know, used to say to me, you know, “Look, anyone can kill a deal. I’m paying you to get to yes.”

And I think this is a good attitude to have in the investment business, that when you hit a roadblock you have to ask, “Okay, what do I need to do to make this work?” And you find out what the problems are and if there’s a way to solve them.

Jimmy: Well, I think that’s excellent advice. Excellent advice. I hope our listeners have taken away a lot of good value from today’s episode. Gabriel, thank you for joining us today. The breadth and depth of knowledge that you lent into our discussion today is second to none. So I appreciate you coming on the show. Before we go, where can our listeners go to learn more about you? How can they get in touch?

Gabriel: Sure. Well, I have a website. I’m at www.gabrielfrancisfernandez.com and I’m also on LinkedIn at Gabriel Francis Fernandez.

Jimmy: All right, excellent. Well, for our listeners out there, just know that I’ll have show notes for today’s episode on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast and there you’ll find links to all of the resources that Gabriel and I discussed on today’s show, and I’ll be sure to link to Gabriel’s website and his LinkedIn account as well. Gabriel, thanks again for joining us today. This has been great.

Gabriel: It’s been my pleasure.