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Why might indoor vertical farming be ideally suited for Opportunity Zones?
Zale Tabakman is founder and president of Baltimore-based Local Grown Salads, an indoor vertical farming company that has its own Opportunity Zone fund.
Click the play button below to listen to my conversation with Zale.
- The benefits of locally grown indoor vertical farming versus traditional farming.
- Why Local Grown Salads believes Baltimore is a perfect starting place for their business.
- How indoor vertical farming is ideally suited for Opportunity Zone investment.
- What a typical indoor vertical farming operation looks like.
- Capital costs and expected returns for an indoor vertical farm business.
- Job creation and environmental and social impact of the farms in Local Grown Salads’ portfolio.
- The exit strategy for the Local Grown Salads OZ fund.
Featured on This Episode
- Zale Tabakman on LinkedIn
- Local Grown Salads
- Opportunity Zone Fund Database
- Safe Quality Food (SQF)
- Local Grown Salads Opportunity Zone Fund Overview
- LGS OZ Fund structure diagram
- Circle Partners
Industry Spotlight: Local Grown Salads
Founded in 2013, Local Grown Salads is a grower and packager of leafy green salads. The LGS Baltimore Opportunity Zone Fund seeks to own indoor vertical farms and real estate in Opportunity Zones in the Greater Baltimore area.
Learn More About Local Grown Salads
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. Joining me on the show today is Zale Tabakman. Zale is president of Local Grown Salads, an indoor vertical farming company that is general partner in The Local Grown Salads Baltimore Opportunity Zone Fund. Zale joins us today from his office in Toronto. Zale, thank you for taking the time to chat with me today and welcome to the show.
Zale: All right, Jimmy. Thank you. I’m very excited to be chatting with you.
Jimmy: Excited to be chatting with you as well. I’ve kind of been following what you’ve been doing with your Local Grown Salads Baltimore Opportunity Zone Fund for, I think, the better part of a year now. I remember you were one of the first Opportunity Zone funds, maybe you don’t even know this, but you were one of the first Opportunity Zone funds that I hand included in my Opportunity Zone Fund Database at opportunitydb.com, way back when we were first starting out. So I’ve had my eye on you for a little while now and I was very pleased to meet you at the Opportunity Zone Expo in Miami back in November. It was a pleasure to talk with you then and now as well. So let’s dive into vertical farming, Zale. Why vertical farming? Can you tell us some of the benefits to vertical farming versus traditional farming?
Zale: Okay, so one of the more exciting things about indoor vertical farms is that you’re actually producing the food right where the people are. Depending on the day, there’s lots of different exciting things but this is the one I’m thinking about today. So, traditionally, California is the breadbasket of United States. Most of the food and vegetables are produced in California and Arizona, and kind of goes along that a little bit in Texas but that’s where it happens. So as we see, you know, a couple weeks ago, we had the problem with the romaine lettuce and the failure of romaine lettuce and all the [inaudible 00:01:52] things don’t have it. And it was in California that you didn’t have the romaine lettuce so which means the people in New York City, in BosWash, Washington, Boston, that whole area, and Chicago, Detroit, don’t have food. So what you really see is the food is being transported from California, on trucks, all the way to New York. So that takes two to three, four days, depending on the solution. And then if you go to the service centers, it can be five days from the time something is harvested until it shows up in the retailers or at the restaurants, your McDonald’s, your Walmart, your Target, wherever you buy your food, you have Whole Foods. So it takes it four or five days.
So what happens with the vegetables the second they are cut or harvested, they start to degrade. And the quality degrades and you lose the nutrients and everything else. It’s a big problem. So the first thing that indoor vertical farms means that we’re producing them in the New York, Washington, Philadelphia. Wherever we have the farm, it’s right there. So in an indoor vertical farm, you harvest at 6:00 in the morning and it’s dropped by the truck at the retailer by 9:00 and you’re eating it for dinner at 5:00, 6:00, 7:00, whatever time you get home. Essentially, it’s one day. The nutrients, the taste, everything is phenomenal from fresh foods. That’s the first really cool thing. The second thing is that when we do indoor vertical farms, we entirely control the environment. In California, they have to use pesticides, you have to use herbicides, fungicides. And indoor vertical farms, it’s almost like a pill factory or a pharmaceutical facility in that we just have a clean environment.
Jimmy: Well, that’s great. Yeah, it’s obviously a lot of advantages. Are there any drawbacks to the locally grown indoor vertical farms?
Zale: Disadvantages, just the cost, which is the capital cost of setting up a farm. Our farms produce about 1.5 million pounds and it takes about $2 million of capital cost to do that. And, of course, you need a building and all those other kinds of things. There are very little disadvantages. Oh, the other disadvantage is you need power, which in American Northeast, it’s fine because you have good power supply there. But, for example, we are looking at putting farms in Puerto Rico, the giant Opportunity Zone. Power there becomes a little bit more interesting and you have to look at alternative sources of power which includes solar and other kind of stuff. The power in those kinds of places is a problem, but in northwest, the primary disadvantage of course is the capital cost of setting up the farm.
Jimmy: Got you. So mainly the money is the main drawback or disadvantage, but all of the other advantages may outweigh that if you can find a source of capital. And I wanna dive into how the fund is structured and how the farms work, exactly, a little bit later in the podcast. But first I wanna back up for just a minute here and get a little bit of background on you, Zale. Could you tell us, briefly, how you got to where you are today and maybe you can also include when you first learned about Opportunity Zones and how you brought this fund together?
Zale: Okay, so I have grandchildren. You know, so that puts…it gives you a kind of context of my age. I’ve been working in R&D for the last 10, 15 years, working with companies that are high-edge R&D companies. I was working with companies in the food space and restaurant companies. And we discovered that the need for food and consistent food became a problem. And I was riding my bike around one day and I was looking at these roofs of buildings. I was saying, “Hey, wouldn’t it be great if we could grow food there?” And when we started doing the actual financial map of it, it just didn’t make sense if you did it horizontally. You can imagine a farm on a roof. It just doesn’t make sense. You couldn’t even pay, you know, $10 of square foot for the roof. But if you went out vertically and you used every square foot and you put more volume per square foot, that’s where we started from. So that’s where we started from. And it actually started in 2013, developing the technology. Our technology, we have a patent pending. Okay, so that’s kind of where we’re going.
It’s leading-edge technology. In the United States right now, there are some big competitors. One is AeroFarms up in Newark, plenty in California. But there’s no real, solid industry that’s developed. It’s all like brand new industry just rolling out slowly. We started looking at, okay, “Well, let’s…” I think up in Canada, Canadians are so conservative. It’s unbelievable. People are still using rotary phones here. Cell phones are just too advanced for most Canadians. Anyway, so we decided, okay, United States is where the leading edge is. That’s where people are doing. And then we started looking at doing these buildings and retrofitting these buildings. So we developed our technology for older buildings.
We could just go into an existing building. And then we were approached by somebody that said, “Hey, you know, have you heard about Opportunity Zones?” And then we said, “Wow, this is perfect for us. We get to buy buildings that are cheap, right, because they are just basically old buildings from early 1900s. Maybe some as early as 1900s, some 1950s, 1970s, buildings that really have no other use as factories. They are in the worst place. So we have a great story to tell about how we’re helping the community, working with the community.” And we just jumped on it. And, you know, as the rules have been rolled out, we’ve been modifying and creating our fund. You know, we structure…we said we’d talk about our fund but we had to structure our fund and we had to put together partners. So, you know, we’re working with BKD as our auditor, Circle Partners as our fund administrator, and putting all the pieces together. And then realizing, you know, I’m an innovator, so realizing that Opportunity Zones are a new innovation and they’re gonna make a lot of people a lot of money and I should…my personality and what I like to do.
Jimmy: Excellent. Yeah, I wanna talk, in some detail, about the structure of your fund and get into some of the technical details there a little bit later in the podcast. But first, let’s talk about the farms now. I wanna talk about the farms in some detail. What does one of these actually look like? If I walk into one of your buildings and see this vertical indoor farm, can you paint a picture of what I would be looking at exactly?
Zale: Okay, okay. So first things. When you walk in, we are gonna gown you up and we’re gonna put you in, you know, it will look like a biohazard-type suit. And we’re doing that, not because you’re gonna get sick but we wanna make sure that if you’ve got a cough or a cold or in any way are sick, that you don’t spread your germs onto our food. And, of course, in case you have a little insect on top of you or something on it, we need to make sure that you’re perfectly clean. So you’re gonna walk in. You’re gonna be gowned. You’re gonna walk through a little bit of an air curtain. You know when you walk into one of those stores and you see air blowing down on you and it keeps things like hot and cool separate, it’s another separation. And you’re gonna walk in. What you’re essentially gonna see is five grow rooms. Each grow room is a microenvironment because kale likes a cooler temperature than lettuce, lettuce likes a cooler temperature than tomatoes, and tomatoes likes a cooler temperature than herbs.
Because we can grow all those, we can grow some 60 different vegetables, you know, growing strawberries, peas, beans. So you can imagine, you know, the entire environment of all the climates of the world in this kind of one single place. So each of the rooms are separated out. Each room, of course, has a positive air pressure very similar to a thermal room. So we need to make…because we don’t use any pesticides, fungicides, herbicides. We need to make sure that we get no insects, we get no bugs, we get no dandelion, you know, things coming into the system.
So everything in the room is filtered and cleaned to make sure we have a pristine environment for each of the rooms. And you go into each of the rooms and you’ll see these long grow units. They are about 8 feet long, 3 feet wide, and 8 feet high. On our website, you can see pictures and videos of them and they are just basically dense walls of vegetables. And whatever…each grow unit will be, of course, one will be kale and another will be tomatoes, another will be strawberries. And each one, of course, is separately managed. And to ensure that they get their exact nutrients, it needs to maximize the taste, quality, nutritional value, etc., etc., etc. And you have all these different rooms and you can go into one room and another. And if it was a tour and you were, you know, a very, very, very important person, we would take a snip of each of them you could eat as a fresh salad as you’re walking along. But because we’re very focused on food safety, you would see people harvesting. They would be snipping them into baskets. They would take, you know, hi-tech baskets. They would take the baskets into the central area.
In the central area, you will find a cleaning space where we have to actually wash them once again. So we follow the standard called SQF, safe quality food, which is the same standard used to manage courier and anything else in the food industry. And we wash them. And then we take our different components and we mix them together. So there will be a little mixing space there where we’ll take up to eight components into our salad. And then salads will flow into a machine and you’ll see them bagged and sealed and then they’ll go through a couple other safety checks, and then they’ll be flip cards and be ready to ship out.
So you’ll be walking into a complete…it’s more to imagine it is a farm and it’s a factory at the same time. And that’s what you’re kind of gonna see. It’s 15,000 square feet, not particularly big. Each room is around 2500 square feet. Not, again, very large but small enough that we can control it, which is very critical to our technology, and everything is very clean. And then you’ll see a factory. You’ll see people working and, you know, making food, and shipping things out and dollars coming into the till.
Jimmy: Yeah, and you mentioned that, you know, each one of these farms has grown or has the capacity to grow, you know, roughly 60 crops. You mentioned kale, lettuce, I think strawberries came up. What are some of the biggest crops that you’re growing in there?
Zale: Well, mostly the things that you would find in packaged salads. So they would be…but our packaged salads are kind of the more exclusive ones. So typically when you walk into a nice restaurant, you have a lettuce, you have a kale, and you have a few other items, and then you have a bunch of herbs in there. When you walk into a store, you currently buy a retail salad, you get three or four items. There will be a lettuce, maybe a chopped up carrot, something like that. Our salads will be more like the exclusive salads you walk into when you get in a restaurant.
So we’ll have any of the different types of herb that’s bought that you could imagine. You have basil. You’re gonna have a little bit of basil in there and you might have a little arugula. You’ll have a couple cherry tomatoes, maybe a fresh pea or two in your salad. So that’s kind of what we grow because we’re really actually focusing on the finished salad product rather than just selling raw products. And that’s because price of a finished salad is like a Starbucks versus buying coffee beans. And for our investors, and since this is really about the investors for the fund, the investors would rather get returns on a Starbucks coffee than they would get the returns on selling raw coffee bean.
Jimmy: Got you. So you’re not just shipping out just the crops to the grocery stores or other distributors or restaurants, you’re actually…so you must have some sort of kitchen, at some point, in the facility as well where you’re actually putting these salads together and packaging them?
Zale: Yeah, so that whole conversation where I was mentioning the mixing, that’s actually where we’re mixing, or putting the eight products into a bag, and then sealing the bag, sort of manufacturing. You know, when you walk into a store, you see a Dole salad or you see a organicgirl salad or an Earthbound salad?
Jimmy: Right, right.
Zale: That’s what we’re producing under this farm. We may sell the other items but there’s no…the margins there are very, very low versus the margins on the packaged salad. This is all about great returns. And 85% of Americans buy packaged salads, you know. Every one of your listeners probably has one sitting in their refrigerator right now.
Jimmy: I know I do, yeah. We’ve got a few of them, probably, in our refrigerator right now at home, yeah.
Zale: Yeah, that’s exactly it. Now, it turns out that the foodservice guys, the McDonald’s and all these other guys are also buying those packaged salads but they don’t buy them in 5-ounce bag. They’re buying them in 5-pound bags and they wanna custom-blend. So they want, you know, a certain percentage of kales, a certain percentage of arugula, you know, any of the other kind of lettuces that are out there in the hills, 20, 30 different types of lettuces that you could put in there. Just even basil. You know, we had purple basil, we have the regular green basil, people are familiar with, and some of the other basils, so holy basil. We can pluck in there and then they say, “You know, I want a certain number of green peas.” You know, the snap peas where you just bite them and eat them, you know, bowl of peas and they’re part of a salad. That’s all…we can customize for any one of our customers. And, of course, we’re chasing after the chains, the small chains, the big chains. We’ve talked to some of the big boys.
Jimmy: Okay. Got you. That’s very interesting, that very interesting. So you mentioned, in the beginning of the show, that, you know, the main disadvantage to vertical indoor farming is the capital cost. What is the capital requirement exactly? How much capital does it take to get one of these up and running?
Zale: We do everything in 15,000 square-foot increments because we want every farm to look exactly the same. So that’s why I use this kind of numbers. I realize that people don’t always understand when I say this. So say, for example, we buy a building that’s 6 floors and every floor has 15,000 square feet. We will put six unique farms in there. Each floor will be a separate farm. There will be some savings in terms of people but not in terms of technology. It’s a very, very important point when you get into the details of what we do. Anyways, the technology for the farm is $2 million and using Baltimore as our kind of starting place, we’re finding the buildings are about $1 million.
Each farm is without using any leverage, meaning we’re not taking mortgages or any other kind of loans, each farm will be about a $3 million piece and we’re planning to…our fund is based on setting up three farms in Baltimore. So it’s three times three, three, three, three. And we’re raising $10 million so that we have the 90% cost. So we have a little extra million dollars in there just in case. So some farms are 700…the properties we’re looking at are anywhere from $750,000 to $1.25 million. So we have a little bit of play and a little extra in there if we need it. But so a long explanation, the physical 15,000, the equipment set up, $2 million, then you price your property which we’re in Baltimore estimating at a million dollars. Detroit would be higher. Washington would be higher. Philadelphia would be somewhere in the middle.
Jimmy: Okay, I got you, I got you. Are you always taking over an existing structure and then substantially improving it with these projects or are you ever doing new construction?
Zale: We only do new construction and I don’t have a lot of patience. Why should I build up something new when I can go buy something that’s already existing? When we walk into an existing building, all we need are walls and floors. We’ll just blow out everything else. We bring in our own HVAC. We don’t need anything other than walls and floors. So if I go walk into a building that’s already there, why would I put all those floors?
Jimmy: Right. No, I got you, I got you. And, you know, you mentioned earlier the returns that you’re seeking for investors. What types of returns are you looking at, typically, for one of these projects?
Zale: Okay, so based on our…well, we’re really doing it on the fund level. So the fund we’re looking at about a 19.5 IRR, the IRR over the period of the 10 years. And that’s assuming very basic assumptions meaning that, you know, the property goes up 2% per year, the building…you know, we sell the businesses at the exit at, you know, roughly what the EBITDA of the farm is, nothing fancy that way. But we’re projecting at least 19.5 over the 10 years.
Jimmy: Good, good. That’s pretty strong. And you mentioned earlier also, you know, some of the jobs that your fund is creating. Can you talk a little bit more about that, the number of jobs that each farm creates? And maybe you can go into more of the social and environmental impact returns that you’re seeing with these projects as well.
Zale: Okay, terrific. So, this to me…just so we’re clear, you know, these are the things that happen just by doing good business. So each farm itself is about 25 jobs. These are, you know, $15-an-hour factory-type jobs but they are solid jobs and we are working with the bank to provide education, financial literacy to our employees. And the banks are gonna help make sure that the people with the paychecks don’t have still cash. Their paycheck and pay-offs [inaudible 00:19:43] rate. So we’re gonna look after our employees because we’re working in a community that we know is a challenged community. That’s number one.
So each farm has 25 jobs. Three farms, 75 jobs. Those are majority of the jobs. There will be one or two more senior jobs, a plant manager, food safety, kind of trained people. Again, we’ll look to the community for those people first and foremost and then we’ll go from there. We’re looking to hire people that can want to work because that’s where we wanna be. In other words, places that are the most interesting to me. So that’s kind of the community level. We’re gonna work with the community to help us find the employees and everything else. So that’s number one.
Number two, of course, is we’re located in the worst, again, the worst parts in the city where there’s a concept that’s called food desert. Unless you’re sort of socially aware of what’s going on, many of these locations, people have to drive or take a bus half an hour just to go to a place to buy food. So that’s called a food desert. There’s no available food for people to eat. So that’s another thing that we’re doing. We’ll, obviously, be able to sell locally at the prices we would sell to let’s say Walmart, we’ll make it available to the people in the community, you know, somehow through the door and then, of course, employees will be able to buy even at a greater discount. So we’ll make sure that we’re providing healthy and safe food. All our food is organic because no pesticides, herbicides, fungicides. It’s easy for us to become organic. We buy only organic feeds. We only use organic-type deal. So we’re catching into that organic thing and healthy.
Traditional farms have a thing called run-off. Farmers need to make sure that the plants get enough nutrition, get enough of whatever. And they always over-compensate and all that stuff goes into the run-off. That goes into the water. It goes through the soil and ends up in the rivers, and lakes, and everything nearby. And that’s why you have things called algae bloom and all the other kinds of terrible things that happen by putting extra stuff into the environment. We don’t have any of that because we just use…we only give our plants what they exactly need because we can physically control that.
There is a significant reduction in the carbon because, typically, let’s talk Washington, Baltimore, stuff is shipped from California. So that truck that’s shipping everything from California is, you know, spewing out all those gases and doing all that carbon stuff that it does. We don’t have any of that. We are talking to solar people, working with a solar company. Our projects now are so leading edge we don’t even wanna bring in solar at this point but eventually, solar will be just a natural part of what we’re doing because we do use electricity. We generate some heat. We’re planning on recycling the heat, reusing the heat, giving the heat to other people, turning the heat back to electricity. We’ve a bunch of plans along that way because there’s leading-edge…people aren’t doing it very well yet. So we kind of…that will happen but it’s just not part of our intricate story right now. Those are the big highlights of what’s happening with what we’re doing.
So just to resummarize, we’ve 75 jobs, you know, $15-an-hour jobs, good jobs. We’re working with their bank to make sure there’s financial literacy for our employees, whatever else we can do to help make our employees solid, happy. You know, I firmly believe it’s better to train a person, make them happy, than to keep recycling employees, bring in new employees. We’re working with the community for those kinds of things. Food deserts, addressing, you know, the food problem in the area or the places where we’re located and, of course, there’s the impact thing. We actually did an analysis of the 17 UN SDGs, the sustainable development goals, and we’re actually help on 16 of the 17 sustainable goals. But that’s very esoteric and I think only 17 people in the world care about that. It is…
Jimmy: And you’re one of them.
Zale: Well, I care about it because I like the story, I tell the story. The other big thing that we do is we use existing buildings, buildings that, you know, were built as factories and we can now raise them because we only need to be 14 feet to the choice. And typical warehouses need 30, 40 feet height clearance. We only need 14 feet which means that we can reuse existing buildings. So we’re considering partnering with people who…you know, in our fund, we have the ability to partner with people who have a building and it’s not being used and they are looking for tenants and they wanna find a way of working with us. And we’re open to that. We’ve structured our fund to enable us to do that as well.
Jimmy: Well, that’s great and I do wanna shift gears now and talk about how your fund is structured. So this might get a little bit technical but please do get as technical as you want because I think our listeners wanna hear exactly what you’ve done here. How is your fund structured, exactly?
Zale: Okay, so our fund is…if you were to look at our structure chart and we’ve actually published it and it’s widely available, our fund looks a lot like the traditional private equity fund or it looks like a real estate fund or a VC fund. All the same structures. So in the center of the fund, of course, is the fund itself where traditionally, you know, industrialists can put their money in capital gains and that’s your Opportunity Zone fund. Well, what happens is Opportunity Zones have a particular rule that you’re not allowed to invest in other funds. So we created a sub-entity, which is owned by the fund, which allows other funds to invest their fund money. So let’s say you’ve taken money from people and you’ve created a fund and now you need a place to deploy it. So you could partner with our fund, use the traditional word, co-invest with our fund in that thing which we call just the Baltimore LLC. That entity now owns two type other entities. It owns the property, right, as a separate entity and then it owns the farm as an Opportunity Zone business which has a tenant agreement with the property.
So okay. So that middle thing called Baltimore owns both…will own three properties and it will own three businesses that are in those three properties that are tenants in each of those buildings. So now we got six entities at that bottom level. Then we created the structure…and then moving above it is there’s a general partner, which is we’ve created a general partner for Baltimore and then that’s owned by Local Grown Salads U.S., which will own all our general partners. And then Local Grown Salads Canada owns that higher-level entity. But that’s more our problem, our structure, but we like to be very transparent who’s involved and what’s happening.
So back to the three…so at the very bottom of the structure, there’s three business entities and three property entities. And the reason we created this is we were thinking a lot about the exit strategy. Like, it’s very nice that we’re creating this thing but how do our investors get out of it and how do we maximize the returns to our investors at the very end? So we’ve created the three properties so that we can either spin out the properties and sell the property to somebody else already intending to buy our farms, or we can take all the three properties and sell them to a REIT, or gather all our properties from all our different Local Grown Salads’ funds and put them together into a REIT as a separate entity and the businesses themselves can all be gathered together and done as an exit on say an IPO if we want to.
You know, this is dreaming but that’s what could happen. This allows the…let’s say the building property shoots up in value and it’s got more value then as a commercial installation and people wanna turn into lofts. The area gets so hot, lofts are worth a lot more money than the rent from a Local Grown Salads farm. We’ll just take out all our equipment from the farm. We’ll move it to another location and the business continue operating.
As the business operates, it generates income all the way along because our investors do have a tax problem in five years or seven years depending on how they want it to work and they need to have income from the farm to pay their tax bill along the way. And just to sort of finish the reason for the end of the structure, the end of the structure, when we wanna sell everything off and we wanna return everybody’s capital and close down the fund and we wanna make sure these people don’t have any capital gain. And we wanna make sure that their returns will be massive. So that’s kind of how we structured everything along that way.
And, of course, we can also partner with people at the level of the property because our fund allows us to put a farm into a leased property if it’s owned by somebody. So, you know, Suzie property owner, has a property says, “Yeah, I’m looking to invest in your fund. But, you know, one of the side deals is that you gotta set up a farm in my property.” That’s fine as long as, you know, we can get a proper lease arrangement that doesn’t affect anybody else. But it’s to the advantage of everybody, all the owners and all the investors in the fund.
Jimmy: Got you. Okay, so it’s a rather complex fund structure.
Zale: I mean, our structure is very interesting and exciting but if you talk to any other fund managers, they are [inaudible 00:29:15]. That’s what they call a two-tier and the three-tier structure. Ours is what is called a three-tier structure.
Jimmy: So for our listeners out there, if you’re having a hard time kind of holding the picture in your head, you can head over to opportunitydb.com/podcast and I’ll have a link to the flowchart of the structure as Zale just described it. It’s very helpful. It helped me follow along while you were talking just now, Zale.
Yeah, so let’s talk a little bit more about the exit strategy. I think you had kind of talked about how, you know, each one of these QOZBs could be sold off into a REIT? Is that correct? Can you go into a little more detail there?
Zale: Okay. So there’s six entities. Three of them are QOZBs and three of them are properties which are QOZBs but they are a physically-owned property.
Jimmy: And sorry to interrupt but just in case there is a listener out there who is not sure what a QOZB is, that stands for qualified Opportunity Zone business. So I’m sorry. Continue.
Zale: So there’s a business and there’s a property. And the property, especially with the Opportunity Zones, if you imagine…this is how I’m sort of seeing one possibility is Opportunity Zone businesses and the kind of stuff that we’re doing generates income and creates wealth in the community. You know, I got 25 jobs. Well, somebody next door is gonna say, “Well, this guy has 25 guys working there. Let me set up a little restaurant.” Another guy may say, “You know what? I’m gonna buy their raw materials and I wanna set up a catering company.” And income and business starts generating and the value of the property goes up significantly like really significantly. And somebody says, “You know what? We wanna create nice condos or lofts out of these buildings.”
So the building itself says…you know, the cap rate on that building…this would be…real estate investors will understand what I’m saying, the cap rate on the building will be worth more as lofts than it would be on what we’re gonna sell as business as a tenant in this building. So some people will come along and say, “Listen, I really wanna buy your building from you.” They’ll say, “Great, but we have a business in there.” So what we’ll do is we’ll sell the building to the property guys and move our business someplace else into another empty building or whatever we have to do to do with the building.
The other thing that we could do is we have three buildings here. As I have mentioned multiple times, we’re going to reproduce our fund over and over and over again. So I have three buildings in Baltimore. Let’s say I have 6 buildings in Philadelphia, I have, you know, 20 buildings in New York, I have 5 buildings in Detroit, and I have 10 buildings in Los Angeles. All of a sudden, I could gather all my buildings together, I sell them to a REIT, you know, a public REIT, and I do an exit strategy, and I, instead of returning cash to my investors, I return shares in this REIT.
That’s an exit strategy that is much greater than I’m projecting the value of that property because we have all these properties and they are all over the country, and it’s an operating thing that’s getting cash. And the businesses themselves can be gathered up as a whole and just the way, you know, there are public companies that own franchises, we don’t like to use the F-word because our models are actually a license model and there’s a legal difference between franchises and licenses and we’re on the license side. But in any event, there are public companies that own…you know, they own 50 Burger Kings, they own 50 McDonald’s, they own 50 Popeyes. We can gather and these guys might be interested in buying the licenses, might be interested in buying these licensed companies.
The revenue we’re producing may meet the same kind of models that they want, and they might suck up all these companies as an exit strategy. And that’s how we try to position everything to head towards that because at the end of 10 years, you know, investors want their money back, right? They are gonna get income along the way but, of course, they want, you know, cash-in. They wanna move on to some other deal. So this gives them an exit strategy and it’s kind of planned up.
And because these are all existing models that we can tap into and we set ourselves up in our structures to make sure that we take advantage of them. And, of course, it may happen between now and the 10 years that we’ll do that internally. But we have to then reuse the money in some Opportunity Zone. So there’s a bunch of rules that we need to follow to ensure that that happens. And so this is where Circle Partners and BKD make sure that we follow all the rules and that the investors could be certain that there’s a third party watching us and ensuring that we don’t…well, I’m not gonna make a mistake purposely but accidentally make a mistake, and they are gonna ensure that that happens.
Jimmy: Right. No, that third-party verification to ensure that you’re in compliance with the regulations, that’s very important for any type of Opportunity Zone fund. Just to back up and kind of get your big picture view now, why do you think the vertical farms are ideally suited for Opportunity Zone investment, specifically? And maybe you can go into how you view the Opportunity Zones incentive in practical terms.
Zale: Okay, so Opportunity Zone funds are like…my advice to investors is if you’re gonna put money into an alternative investment, we’re in a class that’s called alternative investments. It’s alternative to the stock market. So people say, “You’re putting money in the stock market or you put them into something else.” So we’re in that class of alternative investments. It’s unbelievable. You know, essentially you can…let’s take Facebook, everybody likes Facebook as an example and Facebook is a great example and there’s a lot of them that just match the same way.
If Facebook was located in an Opportunity Zone and the business was operating physically in an Opportunity Zone, and then you put your $100,000 in when you met, you know, Mr. Zuckerberg when he was a Harvard grad and now he goes public and you decide, “You know what? I wanna cash in.” And your $100,000 is now worth, you know, probably $500 million. Right now, you’d have to pay 20% on that $500 million. So you’d just, basically, be giving the Federal government, $100 million. If that Facebook had been located in an Opportunity Zone fund, if they existed at the time and you put them in there, you would not be writing a check for $100 million. That $100 million would be sitting in your pocket to do whatever you want to do with it.
So, essentially, you know, this is 15% taxing which is really nice, and it gives you a nice kicker, basically 3%. If you didn’t lose money and you didn’t make any money, you’re getting 3% because of your tax, right? But with the tax-free advantage of the not-paying taxes, not paying federal taxes, capital gains tax is like a 20% kicker. So your $100,000 becomes $500 million, and it’s $100 million that sits in your pocket that you can do whatever you want with. So why would any investor do any alternative investment that once will get it in an Opportunity Zone? That’s number one. So that’s kind of where like, “Oh, my god. This is great,” because we’re long-term hold. We’re generating income. We’re a core business. You know, we’re what they call an inflation-resistant business because people are always gonna eat every single day. So, you know, as long as you’re a good business in that space, you should be resistant to inflation. That’s number one.
Number two is, you know our vertical farms need real estate and we don’t…our particular technology doesn’t need fancy real estate. We need cheap real estate, but the closer we are to our customers, the better because while we don’t have to ship from California to Baltimore, we have to ship from, you know, part of Baltimore to Washington, which is 40 minutes, right? So if we’re…or, then closer we are to the company, the closer we are to our customer, the better off we are. So, therefore, Opportunity Zones are always in the core of a city. I mean, there are rural ones as well but they are generally in the core of a city. So a great place to be. And that’s where all the old factories are. You know, Detroit, some of Detroit…if you think Detroit, Baltimore, we are looking at a piece of property in Baltimore that was built in 1905.
You know, we’ll have to clean it up a bit at least for a bunch of things. You have to do an environmental test but if everything is clean and good, we’re using a building that was built in 1905. I got a great story. I’ll find out the history of the story. We’ll talk about the history of the story and then, you know, we go into the local Whole Foods, let’s say that was one of our customers and say, “You know, this is produced in Baltimore, down the street. Can it be any fresher?” And we’re using this building that has this Baltimore history, you know, that goes back when Baltimore was in its heyday as a manufacturing company.
And then on top of that, we’re giving jobs to people who have trouble having jobs, right, and went to work with the community. And so it’s like win-win-win-win. Like, everybody wins on this. Indoor vertical farming because it’s food, it’s great, but any other…I mean I hate to say it but any other product that was being produced locally that’s really value on local makes sense in an Opportunity Zone in the kind of quarter where you are, especially when you need to be close to your customers.
Jimmy: Right. Yeah, you could put these structures anywhere. You could put these indoor vertical farms anywhere, you might as well put it in an Opportunity Zone.
Zale: Might as well…yeah, yeah, yeah. Of course, our business model is, you know, we’ll do it outside an Opportunity Zone like, you know, we’re looking at expanding into Europe and every other place in the Opportunity Zones. But Opportunity Zones, if I’m doing it in the United States, why wouldn’t I do it in an Opportunity Zone? Like anybody who invested in me and I was outside an Opportunity Zone and they were an investor or on my board of directors, I’d have to answer to them. I’d have to say, like…you know, I have to explain that and I’d have to have a really good financial reason not to do it.
Jimmy: And there probably is no good financial reason not to do it.
Zale: Well, maybe like a cheap rent.
Jimmy: Well, there you go.
Zale: Or I’m placed in my client or, you know, Walmart comes and says, “I want you to put your farm inside my distribution center.”
Jimmy: All right. There has to be a compelling reason and in some outlying cases, there may be. I got you. Zale, thank you for joining us today. It’s been a fascinating discussion. Fascinating, speaking with you as always. Before we go, can you tell our listeners where they can go to learn more about you and Local Grown Salads?
Zale: Okay, so you can obviously go to our website, localgrownsalads.com with an S. You can search for me at LinkedIn. I’m posting all the time. There’s lots of links there. You can connect up to me there. You can send me an email, [email protected]. It’s probably the simplest and easiest places to find us. I like LinkedIn. LinkedIn, connect up with me. Send me an invite and we can connect up. I have some 30,000 connections on LinkedIn. So you can join a big environment and we can chat and discuss and connect up.
And, of course, if you’re interested in the fund, we’re very much interested and we’ll set up a Zoom call and go through our deck and go through our structure very carefully so you can understand like what we talk about. Well, one last thing is we’ve also created a virtual data room where we have our private placement memorandum and all our other documents available to qualified investors to see.
Jimmy: Perfect, perfect, Zale. Thank you. And for our listeners out there today, I will have show notes for today’s episode on the Opportunity Zones Database website and you can find those show notes at opportunitydb.com/podcast and there you’ll find links to all of the resources that Zale and I discussed on today’s show. Zale, again, it’s been a pleasure. Thank you for joining us today.
Zale: Thank you very much, Jimmy. It was great. It was very, very enjoyable.