How has the Opportunity Zone marketplace matured over the past 12 months? What has the investor response been? And is the current pandemic-instigated economic downturn threatening to change everything?
Jill Homan is founder and president of Javelin 19 Investments, a Washington DC-based commercial real estate investor, developer, and Opportunity Zones advisor.
Click the play button below to listen to my conversation with Jill.
- How the Opportunity Zone marketplace has matured over the last year as the IRS has issued additional guidance and final regulations.
- Investor response — in particular family office response — to Opportunity Zone investing, both pre-COVID and post-COVID.
- The difference between this downturn and the previous downturn in 2008.
- How many investors are currently waiting on the sidelines, undergoing a price discovery process during these uncertain times.
- How banks being overwhelmed by PPP are not originating the normal volume of construction financing, putting a lot of pressure on funds that need debt financing, and the risks associated with this. In this environment, how will deals get done?
- Some real-world examples of the good being done in Opportunity Zones, and the importance of highlighting them.
- Examples of COVID-19 business response strategies, and some opportunities that may exist for business owners.
Featured on This Episode
- Jill Homan on LinkedIn
- Javelin 19 Investments
- Jill Homan on Podcast Episode #20
- IRS Final Regulations on Opportunity Zones
- IRS Hearing on Opportunity Zones (February 14, 2019)
- IRS Hearing on Opportunity Zones (July 9, 2019)
- IRS Correcting Amendments on Opportunity Zones
- Charlie Munger: ‘The Phone Is Not Ringing Off the Hook’ (WSJ)
- Opportunity Zone Outlook newsletter
Industry Spotlight: Javelin 19 Investments
Founded by Jill Homan in 2011, Javelin 19 Investments is a commercial real estate investment and development firm. Since January 2018, the firm has focused full-time on Opportunity Zones and also advises family offices. Javelin 19 is currently working on a single-asset student housing project in an Opportunity Zone in Baltimore.
Learn more about Javelin 19 Investments
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. Jill Homan is president of Washington D.C.-based real estate development investment and advisory firm, Javelin 19. And today she joins us from her home office in Washington D.C. Jill, thanks for joining me. And welcome back to the podcast.
Jill: Jimmy, thanks for having me. I’m excited to be with you today. And I’m sure many of your viewers are also at their home offices. So they may hear a few noises in the background but we’re all trying to make do during this time and, you know, really hope all your listeners are well and managing during these times.
Jimmy: Well, thank you, Jill, I wish you well. I wish my listeners well, too. And yeah, I heard your kids screaming in the background a few minutes ago and I know my kids are screaming in the background over here as well. So we’ve got our hands full. Everybody’s…not everybody’s working from home but there are plenty of us who are under stay at home orders and we’re working from home doing the best we can. We’re recording this in late April of 2020. So yeah, definitely the world has changed a lot in the last few weeks.
But let’s back up a little bit, to before the pandemic. Jill, when you first joined me on this podcast a little more than a year ago and we were discussing the first tranche of proposed IRS regulations on qualified opportunity funds that had just come out. And, you know, now here we are in spring of 2020, and well, we’ve really come a long way since then. We’ve had the second tranche come out, we’ve had final regs come out several months ago now. And so really a lot more clarity on opportunity zone investing. Put the coronavirus concerns aside for a moment, what trends have you noticed in the opportunity zone marketplace since we last spoke a year ago, and especially in the last couple of months since final regs were published?
Jill: Yeah, and I appreciate your question because really, so much has changed with opportunity zones since we first spoke, and I would say it’s really a maturation of the industry. So you go from 6 pages of legislation to what is now 544 pages of final regulations. And the IRS has done really a tremendous job to process all of this feedback, the two hearings that, you know, I know you…I think you went to some of them or both of them. I remember seeing you and we testified at both…I testified at both of them and they’ve taken all of that information in and process it into what I think are a solitude of final regulations that were released around the holidays.
And with that, I think the final regulations I would say got us, you know, probably 90% there in terms of the information we needed to know, in terms of really moving and enabling investors to have a level of comfort and also project sponsors to really try to…It’s hard to simplify things because with more information, you’re also providing…you’re putting more really rules on the road if you will. And so that means that you know, now project sponsors or fund sponsors have to navigate more rules, but that’s really what is needed in order to figure out how current partnership tax law or current tax law can map with opportunities zones. And I would say the remaining 10% are really facts and circumstances phase. So just by way of example, if you own land and you are wanting to sell, say, to a developer, sell your property and you want to take that gain and invest that gain into the project, that is gonna be problematic.
And so that, you know, some of the remaining challenges that folks in working groups and the accounting and legal side are really wrestling with. But to go from where we were in early 2018 with just six pages of legislation to where we are now, you really have a significant amount of capital that has moved into this industry, use this tax incentive and, you know, it’s really well established. And so now a lot of the focus is on finding the right investment opportunities, hitting the right impact goals. And also, you know, just dealing with particular facts and circumstances that sometimes can be very, very complicated when you’re dealing with different, you know, real estate deals or different operating business companies.
Jimmy: Right, there’s a lot fewer questions now than we had a year ago when we last spoke, that’s for sure. And certainly a lot of momentum moving forward in the right direction.
Jill: People still have questions, but it’s many things. Like when you write…when you make that charitable tax deduction, the IRS does not affirmatively say, “Yes, Jimmy, you’re gonna get a tax deduction.” You adhere to the guidance, and you write the check and, you know, your belief is that you’re gonna get it. At some point, that’s really where we are. And you’re gonna have, you know, maybe some sub-regulatory guidance, some additional information, like there was a clarification that was a correction of about 20 pages that provided several more examples. I think you’ll see some revenue rulings that at certain points, the IRS is not gonna weigh in on every single particular question and people really need to make sure that they’re meeting the spirit of this tax incentive and just move forward.
Jimmy: That’s very fair of you to point out. Those are some fair points. Maybe I should have worded it, we still have questions, but at least the answers are more readily available or forthcoming. And in certain cases, yes, there is no perfect answer, it will be a facts and circumstances test as you point out, but certainly, there’s a lot more clarity moving forward than there was a year ago, I think you would agree. Jill, many of your consulting clients and investors are family offices, which are pretty much the perfect type of investor for this program in many ways. They’re subject to accruing huge capital gains, they can be very patient with their capital. Obviously they’re not the only type of investor that can take advantage of this program but there are a substantial portion of the capital base for many opportunity zone funds. What have you seen in terms of their response to opportunity zone investing over the course of the last year or two?
Jill: I think this really is a question that has to be looked at as both like pre-COVID and post-COVID. Because really where we are, and I know we’re gonna talk about this a little bit more, is that in some ways, obviously, the world has changed in, you know, what was a previous strategy in even the February-March timeframe, is now a different strategy. And so, what I’d say just generally speaking about opportunity zones is that investors are extremely interested in utilizing this tax incentive and at the same time, they’re looking for appropriate risk-adjusted returns. And so we’ve talked in the past, what are those occurrences? So pre-COVID it was, we were looking for around 15 levered deal IRRs about a 3X equity multiple. Looking at investing in what I’d consider liquid markets to markets where you can point out where similar assets have traded, that you have a comfort level over the next 10 years. That, you know, okay, I’m building this workforce housing product, and my basis is $30 million and I can point to other workforce housing projects that have traded and it’s an institutional market.
And so it was really looking at those elements and investors were just really trying to focus in on, you know, which projects deliver the right risk-adjusted return. Some of the investors were very interested in the impact. And I would characterize the impact, you know, for example, there’s an investor that I’ve worked with who really wanted to put money into a particular community where he grew up, and he would have taken a lower return to find deals in that community. And then other investors are wanting to use the tax incentives. They’re very significant philanthropists and donors, and so they’re not attaching a specific impact strategy to it. They just wanna use the tax incentive and feel that they’re gonna get an appropriate return. So that was really the pre-COVID strategy and, you know, pre-COVID how investors look at in we can talk more about kind of what I’m hearing on, you know, the time, the post-COVID time.
Jimmy: Yeah, please, you know, that was a great rundown of the pre-COVID situation. So what is transpired? What are you seeing among family office investors over the past, I guess, what? Six to eight weeks or so since COVID-19 started becoming a serious problem here stateside.
Jill: So there’s really I would just say, feedback is just…first of all, the difference in my experience so far with this downturn as compared to the last downturn is investors, I’ve found in the last downturn, really just took themselves out of the market. They were so heads-down, didn’t want to talk about deals. On this downturn, I found that investors don’t wanna talk about deals, but a lot of capital, their capital is really sitting on the sidelines. And I think I’m comfortable and think it should sit on the sidelines because we’re all looking for some sort of visibility into the other side. What does it look like? And nobody can predict because we’ve never been here before. And just to make that point, there was an article in “The Wall Street Journal” on the other day, and it was maybe a third of a page interview with Charlie Munger at Berkshire. And the whole article was about his phone stopped ringing and he has no idea what’s gonna happen.
Jimmy: I saw that. Yeah. Because this is so unpredictable, and we’re kind of waiting to see where coronavirus takes us.
Jill: Yeah. And so my view is like, look, if Charlie Munger doesn’t know where this is going, you know, I don’t know where this is going. And I think others who are speculating that it’ll be an L, a V, a U, that’s fine. But it’s really, you know, we should all really just take it as that. And so the investors, I’m suggesting and, you know, they’re of the same mind, it’s really, you know, I need to see what the other side looks like, I need to see businesses opening up. And is what happens is it that, you know, this is a continued deterioration of jobs? You know, we’ve lost 22 million jobs and that’s about the same number of jobs we created over the last 10 years. And does this continue to decline? Because now you’re looking at, for example, governments are having issues making their budgets work because there’s no revenue coming into these states. Or on the other hand, is it there’s gonna be a significant amount of pent-up demand once businesses start open for social beings that we wanna go out, we wanna support the businesses. We wanna know, you know, we’re gonna be here for the community, we’re gonna be here and help each other. And, you know, you take kind of the opposite side and say, “Look, I think it’s gonna come back much more quickly than the last upturn.”
And so it’s really hard to say until when you’re looking at “Well, what should I do?” I would describe it as investors are really trying to find price discovery, which is, you know, should my deal post-COVID that I was looking at, should I get a 5%, a 10% discount? What does that look like? And then I find a lot of investors and capital were really trying to figure that out right now. And it also goes to, we’re talking about the opportunities and tax incentives, which is an equity tax incentive. And we really need to look at that in a combination of how our developers and our project sponsors are really gonna capitalize on these fields when, for example, you know, there’s issues with other banks that are so focused on the PCP program that they’re not really originating the volume of construction financing or even just real estate financing that they had previous, and a lot of debt funds, essentially number the debt funds are out of the market. And so when you think about your equity investing, I think you really need to also consider, you know, how is this deal gonna get done? It could be a great equity return, but it really is dependent on the deal getting capitalized. And so that’s what investors are really focused on is how are these deals going to be done?
Jimmy: Yeah, some great points in that discussion there, a couple of things to unpack. I mean, I think you’re right, you know, whether it’s an L-shaped curve or a V-shaped curve or a U-shaped curve, I think you can really make a pretty rational argument for any of those scenarios. But the fact is, you know, at this point, as of at least, you know, when we’re conducting this interview here on April 21st, no one really knows. I think, yeah, I read that Charlie Munger article as well and that was my takeaway is, you know, the phones aren’t ringing for him because everyone’s just kind of frozen. And no one really knows what to do, everyone’s just waiting to see not even really a policy response or another government response in many cases, but just to see what the virus actually ends up doing. There’s so much we still don’t know about it. And so it’s a bit of a waiting game for everybody at this point, I think. I wanna talk a little bit more about COVID-19 and some response strategies that you’re seeing in a minute here.
But first, I wanna talk about your email newsletter, Jill. You recently started the “Opportunity Zone Outlook,” which is an email newsletter that you author. And each week, you’re highlighting real-world examples of some of the real good that’s being done in opportunity zones. And I think that’s so important today because I feel like opportunity zones, in many ways, are under attack in some ways from some of the mainstream media. And overall I think there’s a real public perception problem among the public and I think that’s why it’s so important that we highlight some of these good stories that may not see the light of day otherwise. Can you speak to that a little bit and maybe there’s one or two examples of some good opportunity zone work that you’re seeing that you’d like to highlight?
Jill: Yeah, and I really appreciate it. And if any of your listeners would like to sign up for our weekly newsletter, you can always shoot me an email [email protected] Or you can visit our website, javelin19.com. And I would really suggest that what we’re trying to do is paint a more robust picture of what’s happening in the marketplace. Because I think it could be fun for some, you know, “The New York Times” or other…you know, there’s another blog that has published some articles. And I’m sure it’s a good kind of eyeballs and clickbait to write about different articles and sensationalized that, you know, the rich are getting richer, but it’s really not the story of the opportunities and tax incentives and it starts with, this is a true bipartisan tax incentive. And it was done both in a bipartisan fashion in the Senate, bipartisan in Congress, and it passed. And you see within the industry, folks in the impact space, affordable housing, workforce housing, Class A, market-rate, retail, people on operating business ventures, and CDFIs, just a whole ecosystem within it. And so, when you see folks on the impact side really push back to a “New York Times” article, it just really, to me, it tells that the true story of opportunity zones is not being represented.
And so, you know, there’s stories about, you know, there’s Class A multifamily buildings that are being built in areas that haven’t seen multifamily investment before. We featured an article about a hospital building in Old Twin Falls, Idaho that was purchased and transformed into a charter school and two apartment buildings. And then there’s a small apartment building that’s being built also in rural Colorado. Just the level of innovation…I know, Jimmy, you see this as well that people are coming up with in terms of their different ideas for opportunity zone businesses. There’s an innovative real estate project in Chicago that’s being done by the Habitat companies and they’re including an outpatient facility, affordable housing, and a film training studio. And, you know, Duluth, Minnesota has six opportunity projects that’s bringing housing and access to healthy food. And it’s just, you’re seeing these projects that are everywhere from Maine to Florida, in California, and everywhere in between.
And I think that’s what we’re really focused on with the newsletter is telling the true story of opportunities zones, and letting folks know what people on the ground are really doing. And it’s, you see also in the local reporting on so when you exclude the sensational national reporting on opportunity zones, and you just read, you know, what’s the Pittsburgh paper saying about opportunity zones? What’s the paper in Duluth, Minnesota saying about opportunity zones? Really overwhelming, just fact reporting, this is what it is it’s bringing in jobs, and people are just really excited about it.
Jimmy: Yeah, those are several great examples you cited there, and thank you for doing what you’re doing with that weekly newsletter. I think that’s great. I read it every week and happy to hear about all the good projects out there. You highlighted but a few of them and I’m sure there are or will be hundreds, if not thousands, more examples like that all over the country over the coming years as this program continues to unfold. Another thing that your newsletter is doing recently here is it’s soliciting your readers for their COVID-19 business response strategies. Could you provide one or two examples there as well and maybe speak to the opportunity that exists for opportunity zones in the wake of the current economic crisis and pandemic?
Jill: Yeah, so I’ll give you two strategies and we can talk about what’s happening there. And so just two strategies that readers shared. One was how they were taking…one real estate sponsor was taking and rebranding their property and developing it into a facility to manufacture personal protective equipment, PPE. And it was really a way to both address this urgent need and then, you know, there’s tax incentive associated with it. Another reader who I know very well reached out and said, “You know, we’ve…” they had primarily invested…They’re a very successful real estate company, and primarily invested a lot of their own personal balance sheet. And their takeaway, what they’re thinking about is that they should really start and they’re thinking about raising a fund, whether it’s OZ or not OZ, they’re just thinking about, they need to take some of their own balance sheet and take some equity out of their own investments and bring in additional investors so it’s not all heavily focused on just their equity capital. And that’s how they’re thinking about it is, how can they think about structuring their deals in a way that’s more efficient and spreads the risk?
In terms of just other COVID strategies, I just think a lot about which asset types, which locations are not really impacted by COVID, but are being pulled down by just the overall downturn in the market. Because I think, you know, when you look at, for example, the easy one to talk about is, you know, Amazon logistics and just every day we’re all getting several Amazon packages, they’re hiring significant numbers of workers. And the fact that their stock isn’t on a tear and there’s some weight down of them as a company, but also in the overall industrial space, I think is something that is interesting. And so it’s just we’re thinking a lot about different strategies that are being burned by COVID and that really it’s operating outside of the direct impact of COVID if you will.
Jimmy: That’s great. And, again, there’s several good examples that you’ve highlighted in your newsletter over the last few weeks. So yeah, I would encourage my listeners to sign up for Jill’s email newsletter at javelin19.com and I’ll be sure to link to that in the show notes for today’s episode, as well. Jill, we just got a few more minutes here before we’ll call it quits for this episode. But you know, before we go, maybe you can tell us a little bit about Javelin 19 and what you’re working on specifically at the moment in the opportunity zone world.
Jill: Yeah, and again, I just wanna thank you, Jimmy, for lack of a better word, for the opportunity to be with you today. You know, I’ve really been thrilled to participate in one of your early interviews, and then here today is just seeing the growth of your company. So congratulations to you on your success. At Javelin 19, we’re focused, really fully focused on utilizing the opportunities and tax incentives. We both developed, co-develop in opportunity zones, we invest in opportunity zone projects, and then we advise opportunity funds. So it’s really, you know, we’re on the GP side, or the LP side, or we’re providing some strategic advice to those utilizing the tax incentive.
We have a student housing project that we’re partners on. We’re working on a project in rural opportunity zones, several hundred million dollars. We’re also working with several very successful fund managers who have raised operating business opportunities. In the long run, my comments have been focused on real estate that this is also a tax incentive for operating businesses as well. So we’re working with them. And you know, and it’s just been a pleasure to get out and meet so many people who are really being creative and utilizing this tax incentive and making such a positive impact in these low and moderate-income communities.
Jimmy: That’s great. And you know, again, thank you for the kind words, by the way, about my podcast and the website, I appreciate it. And thank you for all that you’re doing for the Opportunity Zone space. We appreciate your hard work and your newsletter and your consulting services, especially. Hit us up with that website URL one more time, where can our listeners go to learn more about you and Javelin 19 what’s the best way to reach out to you?
Jill: Great, thanks, Jimmy. The website is javelin19.com, that’s javelin19.com. Or you can always email me and my email is [email protected]com. So I welcome hearing from you guys. And again, you know, really wish everyone the best of health and hope folks are managing during these challenging times. And I’m so optimistic that, you know, we as a country are gonna get through this and get to the other side and retool and bring those 22 million jobs back.
Jimmy: Yeah, I share that optimism as well. I hope you’re right. And for our listeners out there today, I will have show notes on the Opportunity Zones Database website for this episode. You can find those show notes at opportunitydb.com/podcast. And there you can find links to all of the resources that Jill and I discussed on today’s show. Again, Jill, thank you so much.
Jill: Yeah, thanks so much, Jimmy. I appreciate it.