Multifamily Investor Expo - Feb 15th
The Sacramento Kings ownership group successfully spearheaded downtown Sacramento’s revitalization, which by the end of 2018 had resulted in a hugely positive community impact and a downtown job increase of 38 percent. Now, can they leverage the Opportunity Zone incentive to replicate this success in similar markets across the country?
Alex Bhathal and his family are principal co-owners of the Sacramento Kings NBA franchise and managing partner of RevOZ Capital, an Opportunity Zone fund that focuses on urban core development.
Click the play button below to listen to my conversation with Alex.
- Why despite initial skepticism Alex eventually turned onto the Opportunity Zone initiative.
- RevOZ Capital’s mission, where they are investing, and why.
- Why public awareness, investor education, and community education are paramount to the Opportunity Zone initiative’s success.
- Practical advice for Opportunity Zone participants.
- Benefits of the long-term holding period required of Opportunity Zone capital.
- How the Opportunity Zone initiative presents incentives to bring all stakeholders to the same side of the table, equally aligned.
- The pros and cons of doing Opportunity Zone deals in California, and speculation on whether California may ever conform with the Opportunity Zone tax incentive.
- The impact of the coronavirus pandemic and economic crisis on the Opportunity Zone marketplace.
- IRS COVID-19 relief timing extensions available to Opportunity Zone participants at the individual investor level and the fund level.
- Did the stock market sell-off of February and March provide a surge of capital gains recognition that may result in increased interest in Opportunity Zone investing later this year?
Featured on This Episode
- Alex Bhathal on LinkedIn
- RAJ Capital
- RevOZ Capital
- Ryan Parkin on LinkedIn
- Tom Parnell on LinkedIn
- Golden 1 Center
- Kunal Merchant on LinkedIn
- California nonconformity (Bisnow article)
Industry Spotlight: RevOZ Capital
Founded in 2018 by Alex Bhathal, RevOZ Capital is focused on urban core development in Opportunity Zones in select markets across the United States. The Bhathal family acquired the Sacramento Kings as principal co-owners and successfully developed much of the sports and entertainment district of downtown Sacramento, including the Golden 1 Center.
Learn more about RevOZ Capital
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. The Bhathal family are principal co-owners of the Sacramento Kings NBA franchise and have developed much of the sports and entertainment district in Downtown, Sacramento. Today, I’m pleased to be joined by Alex Bhathal, managing partner and founder of RAJ Capital, the asset management platform of the Bhathal family. He is also managing partner of RevOZ Capital, an Opportunity Zone fund that focuses on urban core development. Alex comes to us today from his office in Newport Beach, California. Alex, thanks for joining us today. Welcome to the podcast.
Alex: Hi, Jimmy, thanks for having me.
Jimmy: Absolutely, Alex. It’s great to be speaking with you. You have a lot of experience deploying capital in a lot of these opportunity zone areas specifically in Sacramento. And I know you’ve got a lot of projects. You’re slating to start all around the country. And we’ll get to that in a moment here. But first, I want to go back to the beginning of when you first heard about this. So when did you first hear about opportunity zones? And what were some of your initial thoughts?
Alex: Great question. We were very early in our knowledge of the opportunity zone space. I actually have the email from my business partner and cofounder, Ryan Parkin. He sent me a memo on the opportunity zones back in February of 2018. So just a couple months after the law was passed as part of the 2017 Tax Reform Act. And my initial reactions were, I would say, fairly dismissive. Oftentimes, we’ll see different blurbs about tax schemes or strategies, and don’t pay too much attention to them. After having a conversation with Ryan, however, I saw that this program was something much more substantive and was a policy that I felt really could be impactful for our country. And that’s what really prompted a deeper investment of time and energy into this space.
Jimmy: Well, that’s great. That’s interesting to know that you were skeptical at first. And now, you’re a huge champion of the program. And you’re helping other people become more aware of it as well. And we’ll get to that in a minute what you’re doing to raise public awareness of it after some of that initial skepticism. I want to talk now though with you about RevOZ Capital. Maybe you can give me a little bit of background on that group. Tell me a little bit about the team and the mission.
Alex: Sure. So RevOZ Capital is an investment platform focused on opportunity investing in real estate projects nationwide. It began from that email actually that I referred to back in February of 2018 as an idea. I had already been doing business with Ryan Parkin and his group in real estate investments and Ryan and his other principal partner became another cofounder of RevOZ, Tom Parnell. Ryan and Tom both came from institutional backgrounds having worked in private equity and as operators in commercial real estate. And you mentioned my background, our family has been in the real estate business for generations really since the 1940s, and recently came off of the Sacramento development project in which the Kings were able to build a new arena in Downtown, Sacramento. And then on the adjacent land, there was a whole lifestyle commercial district built around sports and entertainment.
So given my background in real estate, and on the development side, and Ryan and Tom’s background as capital allocators, we began developing our business plan for focusing on opportunity zone investing and created our firm called RevOZ. Since that time, we got engaged on the policy side trying to understand what this five pages of law meant and how do you turn five pages of law into a executable investment program that can deliver financial results, and impact to communities, and then pivoted towards investing. We’ve closed our first transaction in March of 2019. And then last year between June and December, we invested in, raised, and closed our first multi-asset fund. So, now that pool of capital is allowing us to make investments in Opportunity Zone projects. And also, we’re focused on building out and growing our team. We have a team of about 10 dedicated individuals focused on this strategy and I’d like to think that we’re doing a lot of good work in Opportunity Zones and on the path to grow some scale, you know, as an investment firm.
Jimmy: That’s great to hear that you’ve already closed out your first opportunity zone fund. Could you talk to me about your main investment thesis? You have a lot of experience developing sports and entertainment districts, well, specifically the one in Downtown Sacramento that you did for the Sacramento Kings, which happens to be in an opportunity zone although, correct me if I’m wrong, I believe that that development was already completed before the legislation was passed, so you were not able to take advantage of the tax benefits for that particular development. But, yeah, tell me a little bit about your investment thesis, what you’re looking to do all over the country?
Alex: Sure. So we saw with our own eyes how sports and events, and entertainment can really help to drive change in urban environments. And it’s been really a joy to see what the Kings has been able to do as a group up in Sacramento with the new arena, and the adjacent development, and really create a district that is a community asset that can drive economic growth, and be a joy to the community. And we saw the power of that. And we wanted to be able to draft off of those experiences in other places in the country. Obviously, we at RevOZ, we’re not gonna be building arenas or do anything at such a grand scale, but to the extent there are urban districts where there are sports and entertainment districts that are driving economic activity, especially as they’re going through changes, or upgrades, or new builds that we want to be able to facilitate that change in communities and that growth in communities by investing opportunity zone capital to help supercharge the growth.
Jimmy: Are there any specific locations you’re at liberty to speak about which types of deals you’re getting involved with?
Alex: Sure. So in terms of markets, we are investing nationally. We focus on primary and secondary markets. So typically, major league cities, they have sports teams but they’re not necessarily the New Yorks or the LAs of the world. We like markets, like, obviously Sacramento, Austin, Texas, Charleston, Indianapolis, Denver, Phoenix. Markets like that are examples of where we are investing and where we would invest. We generally like urban core. And then with respect to asset types, we’re primarily multifamily or mixed-use and office. We have seen some hospitality. We did one hospitality project. We’re probably not gonna go too aggressive in that category unless and until we get through this kind of market dislocation and find some great opportunities in that area.
Jimmy: Right. And I want to speak more about that market dislocation toward the end of our discussion today. But for me here, I want to shift gears and talk about public awareness of opportunity zones. And it’s a topic that I bring up on this podcast pretty frequently. And it’s actually one of the reasons why this podcast and my website, Opportunity Zones Database exists is to create additional public awareness, more education of this great policy initiative, this opportunity zones initiative. Can you tell me a little bit about what you are doing, Alex, and what RevOZ Capital is doing in terms of educating the public more about this program?
Alex: Sure. So like you said, the Opportunity Zone program is still very new. Although you’ve been in it a long time since the beginning and we’ve been in it since the beginning. For the general public, it’s still a brand new program. Last year, 2019, was essentially the first year that you can invest because of the amount of time it took to get the regulations issued. Last year was the first year that you could actually invest in an opportunity zone. 2020 is now here with us, and at the same time, many people are not extremely familiar with the nuances of the program, how it works, and what the benefits are both from an investor perspective and from a community perspective.
So we think that doing our job to educate about the program, and what the goals are, and also the advantages for investors is paramount to the overall program success in ensuring that investors are comfortable, making the investments in this space, and also that developers are comfortable utilizing opportunity zone capital as they bring the best projects to the capital markets. So what we’ve been doing specifically is hosting and/or participating in a series of events that are designed just to educate and expose the program to interested parties and stakeholders, whether they be developers, potential investors, money managers, and community groups.
Jimmy: And you’re hosting some quarterly lunch and learns too. Is that correct? And what type of participants are usually showing up at those?
Alex: We do quarterly lunch and learns. Prior to COVID, we were doing that on the road and starting to do those in markets outside of home. We’ve done it primarily in California, but also in Denver, in Colorado, two events in Colorado, and some other places. The participants in the events, in the lunch and learns that we do depends upon the market. But typically, the interest level in this program is across the board. Like I mentioned, you have investors, money managers, service providers such as lawyers and CPAs, as well as developers, community groups, policymakers, all of those, and just other interested parties. I think what we’ve been able to do just to get the word out there has been helpful to us and also helpful to the opportunity zone industry overall.
Jimmy: Right. As I mentioned and as you mentioned as well, your family has decades of history investing in real estate. And you’re an early participant in the opportunity zones program. You’ve closed your first opportunity zone fund. You’re actively deploying capital to real opportunity zone projects. What advice do you give to investors and developers who, you know, may not have the level of expertise that you have who are coming to you at these lunch and learns or these other events? What are some specific advice that you have for these folks many of whom may be listening to this podcast right now?
Alex: Sure. Good question. Just to quote Kevin who works with us, he’s one of our regional team members, he likes to use the term, “Measure five times and cut once.” This is a complicated space. Real estate in general, and real estate finance, real estate investing has a level of complexity. And then when you layer in a tax component and an opportunity zone compliance perspective, it is complicated. It’s not too complicated, but it’s complicated enough where you don’t want to take shortcuts. So what I would recommend is partnering with people that you know, like, and trust, and getting sound advice from professional service providers who can educate on the pros and the cons and really making sure that it’s the right program for you as an investor. It is a long-term capital commitment. And there’s nuances involved. So it’s not for everybody.
Jimmy: Yeah, you got that right. I tell people all the time, you know, “This might not work for you. You really have to dive in to the program and figure out if you’ve got the capital, if your capital can be that patient, if you want to work in these locations. You know, it’s definitely not for everyone. But if you are eligible for it and you feel like you can stomach some of the hurdles you have to get over, it’s an absolutely incredible tax incentive, really once in a generation or possibly even once in a lifetime.”
Alex: And on that note, I can add. One of the reasons why we’re passionate about this space is like you mentioned, we’ve been investing in real estate for a long time. And our view on capital is long-term by nature anyways. So 10 years for us is typical. And to the extent that this aligns the stakeholders in real estate projects, whether they be developers, investors, all the various people that come together to make a real estate project work, the longer the time horizon, the more aligned the incentives. So having a long-term capital view on real estate projects, we think is beneficial. It’s a good policy. It’s good for the communities. It’s good for the capital stack of a project. And it also mitigates some of the crazy ups and downs that can happen in real estate. When you’re in something for the long haul, you care less about the stock price at 3:00 on a Friday.
Jimmy: The noise doesn’t bother you as much if you have a long-term view. I couldn’t agree more. I want to talk to you about CalOZ now, the nonprofit group that advocates for stakeholders in California. You were one of the founding members of that group, which helps to advocate for opportunity zone policy in the state of California. Could you give a little bit of background firstly on why you decided to form the group or back the group? And secondarily, what is the purpose of the group? What does it do exactly?
Alex: Sure. So CalOZ was founded by Kunal Merchant who is a longtime friend, super sharp guy, Harvard undergrad, Harvard MBA, worked at a…has a particular focus in public-private partnerships and worked with a lot of sports groups, including the Kings in creating these urban core sports and entertainment districts, anchored by arenas or stadiums. And he has a very sharp policy mind. And early on as this program was being created and as the regulations were coming into focus, we saw in California that there was not a group advocating for all the stakeholders. And one of the things that we found really interesting about this program is how it does bring, sometimes competing interest to the same side of the table.
By that, I mean, when you’re looking at a real estate project, sometimes you have community groups fighting developers and capital fighting government process, but in the opportunity zone space, you really have the opportunity to put everybody on the same side of the table. And community groups who want capital and want impact in their community, of developers who want to get the projects done in a manner that is consistent with a long-term hold viewpoint, you have investors who are motivated to bring capital in, and you have government agencies, which are equally aligned in getting projects green-lighted in an appropriate fashion. So really, that’s what CalOZ about, is bringing everybody together to the same side of the table to see how we can utilize the Opportunity Zone program to make positive impact in the state of California.
Jimmy: No, I think it’s great. I think it’s a great organization from what I’ve heard about it. I know California is a big state with a lot of stakeholders. So if you can wrangle all of them, getting them rowing that boat all in the same direction, that would be very helpful for the state. At the same time though, there are a lot of headwinds that investors and developers face in terms of doing deals, doing opportunity zone deals, specifically in California, a lot of opportunities as well. Maybe you can speak a little bit now to the pros and the cons of doing opportunity zone deals in California.
Alex: Sure. Well, I’ll start with the pros. There’s I believe over 800 opportunity zones out of the 8,700 that are in California. So approximately 10% of the opportunity zones in the whole country are in California. And there’s some really great areas of potential investment whether they be inner core like we’re talking about or even some suburban markets have some good zones that are highly investable, as well as in the, for example, Central Valley, which we hear a lot about the investment opportunities in Silicon Valley, in San Francisco, in LA. But the Central Valley of California has been overlooked in many ways over the last economic cycle. And investment into those areas, if they can be incentivized through a program like opportunity zones, it could be really attractive. And that being said, there’s also are some big headwinds in California that make, at least from our perspective, investing here a bit harder. The California state tax code does not conform with the federal code. So while investors would earn the federal tax benefits here in California, they would not be eligible for similar state tax benefits. So that makes a higher hurdle rate. And it makes investing harder in projects if you look at projects on a net after tax basis.
Jimmy: Yeah, I think that’s a pretty big headwind. That’s actually come up on this podcast in a few previous episodes. Are there any efforts underway to have the state legislature produce some state law that would allow conformity with the federal benefit?
Alex: Governor Newsom is on record as being supportive of the opportunity zone program. Last year in his budget proposal, there was a limited conformity, which he supported. It did not make it through the legislature. We’ll see this year. In this year’s budget proposal, there also is a call for conformity in a limited manner. We will see what happens. I’m not super optimistic. But to the extent that groups like CalOZ can get involved in the process and educate policymakers around the benefits of the program, and how it can positively impact communities, we’re certainly supportive of that effort.
Jimmy: Yeah. That would be a step in the right direction, at least, if even a limited conformity could go through. Limited, how is it? I believe it’s by asset type. Only specific types of assets would qualify, affordable housing or green projects potentially. Is that right?
Alex: That was the original proposal from last year. And we’ll see how it evolves.
Jimmy: Okay. I’ll have to badger you about that as the months pass here. And maybe you can provide some updates for me. I’d love to see California get on board even if it’s in a limited form. You know, you mentioned earlier some dislocation in the marketplace. And, you know, right now, we’re recording this podcast episode in late April, much of the country still under stay-at-home orders due to the ongoing coronavirus pandemic, although we are beginning to see some reopening or at least plans for reopening some areas of the country over the next few weeks here, as we’re looking out into May. But Alex, what has been the impact of the pandemic on the opportunity zone marketplace? I know there’s obviously a lot of challenges that the pandemic has posed but do you see any opportunities or any light at the end of the tunnel as a result of this?
Alex: Boy. Well, what a month it’s been. We’re really hopeful that we can get to the end of the crisis here and back to a new normal whatever that looks like. In terms of how that impacts the opportunity zone space, well, I guess, first of all, I’ll just kind of start with how it impacts us. At RevOZ, we’re very fortunate. As I mentioned, we raised and closed our first multi-asset fund at the end of last year. So we’re fortunate to be mostly sitting on cash. And fortunate in that none of our investments that we have made are in a distressed situation. So at least from our perspective, we think the dislocation that’s in the chaos of the real estate market today and not to spend too much time on kind of all the implications of that, but what we believe it will lead to is better entry points into projects and investments.
Clearly values are different today than they were even just six weeks ago. And the tumult in the real estate market will continue, we believe for the balance of the year. And that will allow us to make investments at more reasonable valuations and have better entry points into projects. I think it goes to kind of the bigger picture of kind of a venture capital philosophy advantage here. It’s probably better to be investing at the bottom of a market cycle than at the very tip-top of a market cycle. So just from a basic economic and investment perspective, people who make investments now will have a higher likelihood of being better off versus investing in peak times. And in terms of what it means for the opportunity zone program specifically, I think there’s some interesting policy changes that are happening at the DC level that will provide once the education is out there that will provide opportunities for investors such as some of the changes to the investment periods.
For investors who have gains, there’s been some changes that have been favorable. Most investors who have gains call it from the fourth quarter of last year until now have windows to invest and have been extended until basically middle of July. Corporations or entities that received K-1 gains have potentially up until the end of September. So there’s a longer investment period. Also at the fund level, the funds now have an extension to their significant improvement tests, which basically means if projects take a little longer, then there won’t be penalties back to the funds for the dollars not being put to work quick enough. And hopefully, this will lead to some sort of legislative improvements to the program and maybe some extensions of some dates on the taxes. One area that is a particular interest to us is, is trying to understand how the CARES Act, which was recently passed, and some of the tax law changes that occurred as part of that program, when combined with the opportunity zone program, potentially could be meaningful for some people.
Jimmy: Yeah, a lot to think about there. Definitely some advantageous changes for folks looking to do some opportunity zone investing. Do you anticipate that there may also be an increased demand for opportunity zone investing here over the next several months? My theory is two things are gonna happen. One, there will be more public awareness of this program just as time goes on. Just organically, this program will just seep into the minds of different investors and their advisors. But also two, a lot of investors may have participated in the stock market sell-off toward the end of February, beginning of March. And suddenly, they find themselves with massive capital gains in some cases. And opportunity zones offers an interesting strategy for capital gains deferral and mitigation. What are your thoughts on that? Does my theory hold any water there that there may be increased demand for opportunity zones in the third quarter of this year potentially?
Alex: I think you’re right. And we’ve heard that from our network, talking to investors who did sell during the sell-off in March. In some cases, they were doing tax loss harvesting, buying some things, and selling some things. But to the extent that they generated gains, because there were participants of the long market run up. Up until March, they will have capital gains that, if not redeployed into opportunity zone funds would ordinarily be taxable. So we think that will be motivating for some people. And also, I’ve been reading quite a bit about how in situations like this, one of the best things we can do from a policy perspective as a country is build. If you build especially in areas that historically haven’t seen a lot of capital investment, that need capital more than others, that have been hurt harder due to this COVID crisis than other places, you’ll create construction jobs, you’ll create more economic activity, and it has the potential to be…one of the bright spots coming out of the crisis of what we can do as a country is get back to building things. And opportunity zones could be a very powerful program to help facilitate the creation of a building mindset back in this country.
Jimmy: Yeah, I think you’re absolutely right, opportunity zones seems like it falls right in line with that very concept of building in…especially in areas that have traditionally lacked capital. I think you’re right there. Well, Alex, this has been great. Thank you for offering your perspective on the show today. I appreciate the expertise and the experience that you’ve brought today. Before we go, where can our listeners go to learn more about you and RevOZ?
Alex: Sure. Thanks, Jimmy. Thanks for having me today. RevOZ, we can be found on our website, revozcapital.com. We’re also on social media. I believe we have LinkedIn and Instagram. So you can find us there as well.
Jimmy: Good. Well, perfect, Alex. And for our listeners out there, I will have show notes on the Opportunity Zones Database website for today’s episode. You can find those show notes at opportunitydb.com/podcast. And on that show notes page, you’ll find links to all of the resources that Alex and I discussed on today’s show. And I’ll be sure to link to RevOZ and CalOZ, and their associated social media accounts as well. Alex, again, thanks for joining me today. This has been great.
Alex: Thanks so much, Jimmy.