Differentiating Approaches and Delivering Value in Opportunity Zones, with Jon White

Jon White

Why are shovel-ready projects so crucial to a multi-asset Qualified Opportunity Fund strategy? And how can a fund be structured in order to allow investment from self-directed QOFs at the project level?

Jon White is president and managing director at Larson Capital, a real estate-focused private equity firm headquartered in St. Louis.

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

Episode Highlights

  • The types of high net worth clients that Larson Capital Management typically serves, and the Opportunity Zone property types they like best.
  • How acquiring shovel-ready projects and providing the developer with a buyout after the property is stabilized can quickly create value for Qualified Opportunity Fund investors.
  • The importance of refinancing in 2026, in order to provide a liquidity event for investors.
  • The potential for early exits, and the long-term exit strategy for creating a capital gain for limited partner investors after a 10-year hold.
  • Why fund structuring to allow for a self-directed Qualified Opportunity Fund to make a direct investment at the project level can be beneficial for both the asset manager and the investor.
  • Some of the biggest challenges in finding the right Opportunity Zone deals, and what Larson Capital specifically looks for when filling their project pipeline.

Featured on This Episode

Industry Spotlight: Larson Capital Management

Larson Capital Management

Founded in 2012, Larson Capital Management is a private equity firm offering targeted investment in institutional-grade, income-producing commercial real estate with a focus on commercial office and industrial properties.

Learn more about Larson 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.

Show Transcript

Jimmy: Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. Joining me on the podcast today is Jon White, president of Larson Capital. And Jon joins us today from St. Louis, Missouri. Jon, welcome to the show.

Advertisement

Jon: Hi. I appreciate you having me.

Jimmy: Good to have you on, Jon. So you are at Larson Capital. Maybe just to start us off, can you give us a little bit of background on your firm and the qualified opportunity fund that you’re offering?

Jon: Absolutely. So Larson Capital Management was created back in 2012. It’s a wholly owned subsidiary of a financial services firm called Larson Financial Holdings. By trade, those guys are our wealth advisors, primarily focusing on doctors, everything A to Z from doctors, from insurance products, all the way up through wealth advisory or wealth management services. That’s kinda where they cut their teeth. But our private equity firm was started back in 2012, really to provide an alternate investment platform for our doctors and our clients.

So last year, about a year and a half ago, we kind of got involved in opportunity zone deals. We’ve created our first opportunity zone project. I’m not gonna tell you that we were the first in the country to do it, but we were one of the first in the country to do it. We spent hundreds of thousands of dollars getting it structured, finding out how to do it, the correct way to do it. And, you know, from there, we’ve done four or five projects. And we have two ongoing projects. So we’ve been fortunate and we continue to kinda push forward.

Jimmy: Sounds good. And let’s dive into your fund a little bit more. What’s your overall strategy or investment thesis? And I’m curious, what types of asset classes you’re investing in and where? Also, which opportunities zones around the country do you like?

Jon: Yeah. Great question. So, you know, I would love to tell you we have something super sophisticated, but the kind of the first gate that we look at is any project that we identify or that we wanna move forward with, you know, has to be a good real estate deal. In other words, a lot of the opportunity zone deals that I find or I see, they’re not good projects. So if they weren’t in an opportunity zone, they would not be enticing or people wouldn’t be tasting it.

So the first gate for us is, would we buy it if it wasn’t or would we invest in it if it was not in an opportunity zone? Once we get through that gate… You know, we really focused on two avenues. One is office. The first opportunity zone deal we did, we built an office tower, ground-up development in an opportunity zone. The current project is about 94% occupied, we had preleasing, and everything was…leases were signed, everything was identified early on and buttoned up. So primarily office, and then we also do multifamily developments. So right now, we’ve got two multifamily developments ongoing, one here in St. Louis and one down in Huntsville, Alabama. So those are primarily what we focus on, office, multifamily. We do look at some industrial deals that happen to be in opportunity zones, but right now, that’s our primary focus.

Jimmy: Good. That’s pretty common throughout qualified opportunity funds, multifamily being one of the biggest asset classes that are typically invested in by a qualified opportunity fund. A lotta office on your end too, it sounds like. Tell me, Jon, how are you differentiating yourself to deliver value to your shareholders in this OZ market? What makes your fund or your approach different?

Jon: Great question. So what we do, which I think is unique, is a couple of pieces. Number one, the projects that we invest in on the development side are 100% shovel-ready. We looked at deals when we first identified opportunity zones as something we wanted to do. You know, we looked at deals East Coast, West Coast, Midwest, all over, and the primary theme that I kept seeing was, people were raising dollars to go into an opportunity zone, but the actual shovel time, the actual build time was a year, two years, three years out. They still had to go get entitlements, they wanted to raise the capital. The deal wasn’t ready.

So what really differentiates us is we partner up with developers that we trust, that we know, that we have relationships with, that have projects that are 100% ready to go. So by the time that we negotiate and sign the contract, and get the deal inked, we literally start construction the very next day. And so that’s key because as you know, as my dollars sit, as our investor dollars sit on the sidelines, they’re not earning interest, they’re not building value, it’s sitting there, you know, basically collecting dust. So shovel-ready jobs is…projects is key to what we’re doing.

The second piece that we do is by partnering up with developers, we’re partnering up with somebody who has an expertise on what they’re doing. We have a very strategic partnership where they do the development on the project, we provide the capital for the project that we own for our investor zone, and then when the project is finished and when the project is stabilized, that’s when the exit happens. But we provide the developer with an earn-out buyout. So basically, we predetermine what the buyout looks like.

So for example, our multifamily project in St. Louis, we’ve determined about a 7% cap rate on the exit. So the developer gets paid basically on a stabilized asset, once it is stabilized at a 7% cap, but we’ve also determined that the market rates for that or the market cap rate or market value for that is closer to a 6% cap or perhaps under. And so what we work into our deals which creates immediate value for our investors is that arbitrage between what we’re actually paying for it versus what it’s worth. And that is very unique in the market from what I’ve seen. Again, it’s creating value quickly for our investors and getting their money to work and providing a return for them very quickly throughout that process.

Jimmy: And you mentioned the exit strategy in terms of getting your developer out. But, you know, more and more, I’m receiving questions and comments from my listeners, and my readers, and my audience in general about, you know, what are the different exit strategies of these funds at the LP level or the GP level, you know, when the 10-year holding period is up? Do you have any thoughts on that? What is your long-term exit strategy to exit these assets and to create a capital gain for your LPs at the end of the day after 10 plus years?

Jon: Yeah. So obviously, with opportunity zone projects, I mean, you have a minimum hold period of 10 years. We look at a couple of different specific exit strategies, one being…well, three to be exact. One being is we recognize that all of our investors have a liquidity event come March or when their capital gains comes due in 2026. And so one of the things that we look at is how can we, as the general partner, provide a liquidity event so that they can pay their taxes.

We look at whether it’s through refinancing of the assets, in other words, we build an asset that has a $40 million value, you know, with 70% debt on it, we look at an opportunity to raise the value or see what that value may look like to refinance, to be able to provide cashback to our investors to make those tax payments. So that kinda goes into the thinking. But the second piece really comes into, you know, we don’t necessarily have to hold the asset for 10 years. In other words, we can trade out of the asset and go into another opportunity zone project provided it makes sense to sell.

I always, when I talk to colleagues and peers, illustrate that if we have a good offer, if we’re hitting our pro forma, or we’re above where we think we should be in exit, in the early exit to be able to go do another project, it might make sense. And so we do look at, you know, potentially early exit, potentially what that looks like, keep the pipeline of other potential opportunity zone deals that we’re looking at that may make sense. And then, of course, the third one is, you know, at the end of 10 years, then you look at just a normal exit of the asset through a disposition process.

Jimmy: Yeah, that’s right. That makes sense. I like that you provide that liquidity around 2026 when that tax liability is due. And that tax liability could be pretty sizable for some investors, especially depending on where tax rates go from here, recording this episode in early 2021. Who knows what the tax rates on cap gains will be in 2026. But I think the consensus is that it’s likely to be higher if not much higher than it is today. I wanna talk about, Jon, how you’re growing your business? What are you doing to grow the business further and to raise capital for your funds? What types of investors do you typically partner with?

Jon: Yeah, great question. So primarily, most of our investors are high-net-worth individuals, family offices, that we have relationships with. You know, this year alone, we took two of the largest single investment that we’ve had in firm history. One was at $20 million, and one I believe was at $25 million. Those are just individual checks. So that’s primarily probably about 80% of what we raise comes from that kinda sub market, if you will. The other 20% comes from our internal network. Again, Larson Financial Group, which is our RIA and wealth advisory service, they’ve got, you know, about $1.5 billion, maybe $2 billion of assets under management. Inside of that, there are, you know, obviously accredited investors that look at our alternative investment platform, like what they see, and end up investing with us.

Jimmy: That’s great, Jon. And if I understand correctly, also your fund is somewhat unique, in that you do allow for investors’ own QOFs, if they have their own captive qualified opportunity fund, they can come in and, not invest in your QOF because that would be a violation of the OZ regulations, but they can come in directly at the project level. Is that right? Can you explain how that works and why that’s of benefit to certain investors?

Jon: Absolutely. So we have a lot of our higher-net-worth individuals that have their own QOF fund. And so what they like to do a lot of times, they don’t like investing into a “blind pool,” they wanna go into a deal-specific. So in any number of our projects where they like the deal, but don’t necessarily wanna go into a blind fund, they can co-invest with us. So what happens on a technical term is our fund, the Larson Capital QOF fund, invest down into a partnership. And then our other side co-investment, our other investor that has their own fund, invests into that partnership as well. And then that partnership drops down and buys the real estate or the project.

So it’s a pretty seamless transaction. And again, it’s something that further differentiates us from other people because we’re indifferent to whether you go into our fund or if you want to invest directly into a project. That, we don’t care.

Jimmy: Yeah. At the end of the day, the project’s getting capitalized. Yeah, I guess that’s a way for an investor with his or her own QOF to come in directly at that qualified opportunity zone business, or QOZB level to invest in just one asset at a time. If they only liked one of your assets and maybe they like two of your assets, they can invest in one or two of them without having to invest in the broader fund, which is a larger multi-asset fund. And you referred to it as a blind pool fund, but some of the assets have been identified, I suppose, that it allows you or that you have a…or that your fund has a mandate to go after other projects that are similar to the projects you have previously invested in, but may not have been identified yet. Is that right?

Jon: Yeah, that is correct. I mean, we have a very, very precise directive within our fund. Like, we’ve identified what the asset classes are we’re gonna go after. In many cases, those are somewhat known prior to investors putting dollars in. But at the end of the day, I mean, what I like as the GP about allowing co-investment and allowing these other groups to bring in their own fund is that it adds the diversity to my fund. In other words, if we have a fund that has $50 million in it and I have co-investment going along, I can buy more projects, I can invest in more projects, I can spread the risk out amongst more projects. And again, it’s a win-win. It’s a win for my fund investors, as well as a win for those other clients that are bringing their funds into these deal-specific.

Jimmy: Good. No, that makes sense. A little while back, you were talking about your pipeline. I wanted to dive into that a little bit more. For our listeners out there who may be real estate developers, maybe they have a project that’s ready to go, what’s your advice to them? How can they get in front of you? And what types of deals are you looking for in particular? I know they have to be shovel-ready, but can you give us some more details there?

Jon: Yeah. So we as a firm do not focus on the big markets. Like, we don’t wanna be in New York, Chicago, Los Angeles. Candidly the pricing to…the entrance pricing to get into some of those markets, you know, our required returns are a little bit higher than what we can get in those markets. But primarily, I mean, we look at deals in the Southeastern United States, we look at deals in the Midwest, we’ve done through our other funds. We’re in Minnesota, Texas, Indiana, Illinois, and Missouri, Florida, South Carolina. So we’re pretty diverse as it relates to where we can go.

But the reality is, is what we’re looking for is we’re looking to partner up with people that are experts in what they do, developers that have projects, that are ready to go, and are simply in need of a partnership because we view it as a partnership to bring in the equity to partner with, to get the project finished. So I mean, I like to say we look at any and all deals, but we’re selective as it relates to who we partner up because, you know, it’s very important we get it right, and we get it right the first time.

But as far as getting in front of us, please feel free to go to our website, larsoncapitalmanagement.com. Get on the website, you can email us, you can send us projects. And again, we get back to anybody, whether we like the project, don’t like the project, you know, we love building relationships. So, you know, while we might go forward, it might not go forward, we still love to talk to you. You can also, if you’re an investor, reach out to Kevin Maloney. He is the head of our capital markets in our investment team, investor relations team. And he can point you in the right direction. He can be a huge benefit and a huge advocate for what you’re trying to get accomplished.

Jimmy: Good. Jon, winding down here, but I wanted to ask you just a couple more questions. You know, one question I’d like to know, you’ve been doing OZs now for a year and a half, as you mentioned, toward the beginning of today’s episode. What have been some of the biggest opportunity zone challenges that you and your firm has faced in that short time span?

Jon: Yeah. So the biggest challenges that I see and that we face is finding the right deal. There are hundreds and hundreds of deals out there, whether it’s…everything from hotel development to, you know, fill in the blank development, but it’s really honing in and finding the right deal. Again, my advice to anybody that’s looking into doing an opportunity zone deal is make sure that the deal that you’re looking at…make sure the deal that you’re looking at actually makes sense as a real estate play, irrespective of the opportunity zone deal, because a lot of these deals that I’m seeing just are fundamentally not solid real estate investments. And again, one of the major reasons you’re doing an opportunity zone project is not just the tax deferral, but it’s also the tax deferral on the gains and the future gains that you get, and so you need to make sure that you, in fact, are gonna have those gains in the future.

Jimmy: Yeah, that’s a very good point. But I like to point out from time to time is that, you know, without an appreciation in the assets that you’re investing in, the tax benefit doesn’t really exist at the end of the day. So always make sure you’re investing in deals that make sense, of course. Jon, it’s been great speaking with you today. Before we go, can you tell our listeners where they can go to learn more about Larson Capital and if they’re interested in getting more information about the OZ fund that you’re offering?

Jon: Absolutely. So you can always go to our website, larsoncapitalmanagement.com, to read more about who we are and what projects we have going on. And then specifically, if you’d like more information, again, I highly recommend reaching out to Kevin Maloney. Use him as a resource. He’s very knowledgeable, very good about what he does. Kevin can be reached at [email protected] And again, Kevin is very knowledgeable, can certainly point you in the right direction as it relates to opportunity zones.

Jimmy: Very good. Thanks, Jon. And special, thank you, shout out to Kevin Maloney for helping facilitate this interview today. Thanks, Kevin, for doing what you do to connect me with some great qualified opportunity fund issuers around the country. For our listeners today, as always, I’ll have show notes available on the Opportunity Zones Database website. You can find those show notes for today’s episode at opportunitydb.com/podcast. And there, you’ll find links to all of the resources that Jon and I discussed on today’s show. And I’ll be sure to link to Kevin Maloney’s email address. And I may even put his phone number up there as well. So head on over there if you wanna give Kevin a shout. Jon, thanks for joining me today. It’s been a pleasure.

Jon: Thank you for having me. I appreciate it.

Jimmy Atkinson

Jimmy Atkinson

Hi, I'm Jimmy Atkinson... I founded OpportunityDb in August 2018. I'm a veteran Internet entrepreneur with a background in economics and Web marketing. I previously founded ETFdb.com. These days, I am passionate about impact investing and tax-advantaged investment opportunities. At the crossroads of these two ideals is the opportunity zones program, a place-based tax policy intended to economically transform some of the poorest areas of the United States with new real estate and business development.

Leave a Reply