Lessons Learned from Seven Successful OZ Deal Closings, with Ryan Tobias

Ryan Tobias

Jackson Dearborn Partners is on their eighth Opportunity Zone deal in less than three years. What were some of the biggest challenges that they’ve faced and biggest lessons learned during their first seven OZ deals?

Ryan Tobias is partner and co-founder of JDP and has worked on over $1 billion of real estate transactions.

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

Episode Highlights

  • Background on Jackson Dearborn Partners and how the Opportunity Zones program fit in with their preexisting investment thesis.
  • Lessons learned and best practices formed after successfully closing seven single-asset Opportunity Zone funds.
  • Product types and locations that Jackson Dearborn favors for their Opportunity Zone projects.
  • Capital channels and deal structures that have proven most successful for JDP’s Opportunity Zone projects.
  • Biggest Opportunity Zone challenges that JDP has faced along the way, since coming to market with their first Qualified Opportunity Fund in 2018.
  • Macroeconomic and Opportunity Zone-specific trends to keep an eye on in the near future, and how the OZ policy may be improved.

Featured on This Episode

Industry Spotlight: Jackson Dearborn Partners

Jackson Dearborn Partners

Founded in Chicago in 2014, Jackson Dearborn Partners is a vertically integrated real estate investor and developer focused on multifamily and student housing. In 2018, their student housing projects in Champaign, Illinois were some of the first Qualified Opportunity Funds to hit the OZ marketplace.

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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 today is Ryan Tobias. Ryan is co-founder and partner at Jackson Dearborn Partners. And he comes to us today from Ann Arbor, Michigan. Ryan, welcome to the show. Thanks for coming on.

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Ryan: Thanks for having me on, Jimmy.

Jimmy: Absolutely. Great to have you here. To start us off, why don’t you tell us a little bit about Jackson Dearborn Partners? When did you guys get started? What’s your main investment thesis, and a little bit more about some of your past projects, maybe give us a little brief history of your firm.

Ryan: Happy to. Certainly, we have gotten this pitch down pitching opportunity zone deals for the last few years. So easy, breezy. So I started Jackson Dearborn Partners with two other partners Sean Lyons and Shaun Buss in 2014. We’ve been in the business together, mainly on the brokerage side, going back to the early 2000s, and started JDP to really focus on multifamily, and student housing, both acquisitions and development. Through that we kind of circuitously got into the opportunity zone program, and that we were planning a couple of student housing developments near the University of Illinois in Champaign. And when the opportunity zone program was announced, lo and behold, a couple of qualified tracks were right there next to campus where we had a couple of projects planned. We’re typically long-term holders. And so the opportunity zone program sort of fit with our general business plan and thesis already. So we decided to capitalize those first couple of projects with QOZ money. We raised a small fund to do that. It was $10 million in early 2018. Final regulations were still forthcoming at that point. And that was very successful. And we just kind of took it from there. So it’s been a guiding principle of our growth pattern. We do both opportunity zone and conventional, multifamily development, and a little bit of student housing. And we’ve now done, I think we’re on our eighth opportunity zone project in four states. We started here in the Midwest, and we’re now largely focused in Colorado and Arizona.

Jimmy: That’s great. So quite a lot of experience. You’ve done seven successful opportunity zone funds in the past, I guess, two, two and a half years or so now. But with all that experience under your belt, I’d be curious, what are some of the best practices that you’ve picked up on? What are some of the lessons that you’ve learned?

Ryan: You know, it’s been a wide variety of best practices. And that’s changed a little bit. I mean, you know, when we first got started, obviously, the final regulations weren’t even out yet, we had to evolve all of our agreements as we went along. But each successive deal and fund, I think we’ve gotten a little tighter, a little crisper in our documentation, in our process, in our message to investors. But honestly, it’s still a work in progress, because we’re just now getting to that point and we have our first deals. We’ve just gotten to the point where they’re cash flowing, and there are potential distributions to be made that just happened in the last few months, and we’ve got to be among the first to do that for true ground-up type deals here in the last few quarters. So we’re still learning. But I mean, it’s just like any other project or any other program, I suppose. I mean, you got to have the right team in place, and an opportunity zone program that really means your tax council, and your attorney, and your CPA, and those folks who are gonna be very key in preparing the right documentation and making sure you’re compliant and the message to investors is accurate at least as of the most recent writing of the rules.

Jimmy: And tell me a little more about your investment thesis. Which product types are you investing in? And which locations do you like specifically for your opportunity zone projects?

Ryan: Sure. So we’ve always done a mixture of multifamily and student housing, although we’re predominantly focused on multifamily right now. We have done around one, two, three, four, five student housing projects in the opportunity zone, but again, largely focused on multifamily right now. And our thesis is essentially I mean, we’re looking for areas and locations that we would wanna do projects in regardless of the opportunity zone designation. And those are areas where maybe they’re adjacent to a more qualified opportunity zone, but maybe they have really made a lot of progress. Certain neighborhoods have already kind of turned the corner perhaps over the last 10 years, 11 years. We’re looking for locations that really make a lot of sense today and these deals to us really need to stand on their own. The tax benefits are wonderful. But they’re meaningless if it’s not a good project. If the property doesn’t succeed in hitting its returns and projections, just getting reduced basis, taxes and deferral etcetera, etcetera, that’s only a small piece of the equation. We’re doing projects in locations and types that we would be doing, regardless of the QOZ.

Jimmy: Right, and your current project that you’re looking to develop that you’re raising capital for now currently, is based in Colorado Springs. And I wanna talk to you about that in a few minutes. But first I wanna look at your first seven deals that you’ve done. Which locations have you been in for those first seven? I know Champaign was your first one, but any other locations that you’ve been in that are interesting?

Ryan: Well, we’ve done a number in Champaign, actually. And the reason for that is just the QOZ track went down right next to campus. And that’s been one of those, I’d say early recipients of a lot of QOZ capital is that from a 10,000-foot view, the area adjacent to a university campus looks to be somewhat of a low-income type area, it’s filled with college students. College students either have no income or very little income. And so a lot of those areas were QOZ when in fact, they are fairly active student housing development areas. So I think you saw an outsize level of investment around the country in either student or just kind of university adjacent type neighborhoods. So we actually did five different student housing projects in the opportunity zone in the University of Illinois. We did a multifamily project in Lafayette, Indiana. It’s actually near Purdue, although this project was not student housing and not near campus necessarily. And then those are kind of legacy projects here in the Midwest. And we’ve just begun a real expansion out westward in Colorado and Arizona. So between Colorado and Arizona, we have four opportunity zone projects, one of which is under construction right now in suburban Phoenix 211 unit project called Solace at Ballpark Village in Goodyear, Arizona. We have another project in Scottsdale, that’s working its way through entitlements right now. And then we have two projects in Colorado Springs and the first of which is one that is open for investment right now that’s Solace at Cimarron Hills. Phase One is 234 units multifamily.

Jimmy: Good. And it looks like typically you’re looking to raise somewhere in the neighborhood of $5 million, or $10 million, or $20 million of equity, free to these deals. How have you raised capital so far? Which channels have proven most successful for you?

Ryan: Yeah, so we’ve kind of early on, I guess, decided that we were gonna take the approach of going deal by deal, project by project in the way that we’re gonna capitalize these. And I’d say that more commonly, at least at the beginning was more of a larger commingled fund vehicle. We found and just both in practice and just at least theoretically, that that was gonna be a little bit more challenging just due to the timelines of when folks had realized the gain had the capital, had to put that money out the door, and then our fund manager would then have to deploy that capital kind of meet all those timelines and deadlines for investors to make it all work. It can be done, obviously, and there are some very successful funds out there doing it. I think that the number that were initially announced, you know, who’s still out there and who’s had success. I mean, there’s a pretty wide disparity. There were a lot of funds out there at the outset. And now just a few have emerged that are really, really successful in aggregating a significant amount of capital and getting it deployed into good projects.

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So we’ve always taken a project by project, deal by deal approach, and then we raise an individual fund for that project. Nomenclature is a little confusing in opportunity zone funds because everything is a fund. So even if it’s just one project, it’s still a fund. But those are all individual and you’re right. There are anywhere from $5 million to $20 million typically is the equity slug into various projects. And we’ve been syndicating those, and we’ve been syndicating them sort of internally through a network of investors, which has grown pretty significantly over the last few years as we’ve kind of emerged as one of the more active developers of the QOZ projects. So we tend to pull a few more folks into our gravity kind of overtime. And then the other kind of backstop to that and other channel that we’ve had a lot of success with is a company called CrowdStreet. CrowdStreet, they have a crowdfunding online marketplace. And we’ve had some great success putting a couple of our projects up on that platform and raising a lot of capital pretty quickly. I mean, the QOZ program has really attracted a lot of non real estate type investors, because it can be a capital gain from anything. There’s a lot of folks, and we’ve had a lot of folks that made a lot of money on Tesla stock. I’ve had a handful of investors more than a handful now that, you know, have realized a lot of their gains through Bitcoin. I mean, just different vehicles altogether. And a group like CrowdStreet is a good place to be able to deploy smaller amounts, $25,000, $50,000, put it into two, three, four, five, projects, pick and choose, versus just putting it into a larger commingled fund. And we found that they’ve got a great access to small to medium-size investors.

Jimmy: Right. So what you guys are doing over at Jackson Dearborn Partners, instead of doing a large $100 million, let’s say, multi-asset fund, you’re doing one fund at a time, which makes it a little easier in many ways, both on you as the GP and then also on your LP investors as well. You have a series of single asset, qualified opportunity funds, which you close regularly, as opposed to just one large open multi-asset fund. I think that makes it a little bit more palatable for many investors and may make a lot of the administrative work on you easier in some ways too. You were talking about CrowdStreet a little bit. I know you’ve got a fun story to share with us on how quickly you were able to raise capital on that platform. I’m curious to hear your memories of that success you’ve had on CrowdStreet.

Ryan: Yeah, CrowdStreet has been a great partner. We’ve done two projects with them both opportunity zone, one with student housing, one a multifamily project. The way it works there it’s a webinar time model in which you put the property out on the marketplace, you do a webinar, and then they open up for investment. And I think the first project it was full before the webinar was over. And the second project, which was Solace at Ballpark Village, I believe was filled out before I even finished the introduction. I think three minutes was the amount of time we took to fill out that equity slug on that which was really just tremendous demand for that project. Granted, that’s suburban Phoenix was near the end of 2020. A lot of folks had year-end 2020 deadlines. And so maybe the timing and the location and everything else was really paramount. But it was a fun ride to do that so quickly. I believe it was a CrowdStreet record, and they’ve raised a lot of capital. So I think that’s saying something.

Jimmy: Yeah, that’s pretty impressive anytime you’re able to raise a few million dollars within a two or three-minute period, that’s incredible. Well, tell us about your current project right now. You’re working on the Solace at Cimarron Hills, which is in Colorado Springs. Tell us a little bit about what you’re doing there, what type of project it is. And I’m also curious why Colorado Springs? Why are you bullish on that area of the country?

Ryan: We love the Colorado Springs market. We’ve actually got three projects in the pipeline in that particular market. Denver gets a lot of the press and a lot of the attention and for good reason. I mean, it’s one of the best markets in the whole country for growth and underlying fundamentals. What we’ve always loved about Colorado Springs is similarly even higher quality of life, a little bit lower cost of living, very similar, underlying fundamentals for demographic population growth, job growth, and just sort of a recipient of continued emigration that has only accelerated with COVID. Folks being able to work anywhere. Leave the West Coast perhaps, and live more affordably be skiing every couple of days and just have a really high quality of life.

And so it’s a market that we love before that has only I think, gotten stronger over the last year. You know, we saw some good data recently. I mean, their employment rates are already back higher and better than they were prior to March of 2020. The rent growth has been maintained and been really, really strong, I think I saw this at number four market in the country for rent growth in 2020. It’s tracking toward a million-person NSA. And just got a Southwest airline hub in the market, and is one of those cities that’s just in the top 10 list for various magazines and websites all the time for a variety of reasons. So we love that market. And this is a site that we’ve been working on for over two years now. It’s 234 units in the first phase of a 342 unit total project. Eastside of Colorado Springs, the Powers Road Corridor, which is the major commercial corridor in Colorado Springs. Every retailer under the sun is kind of up and down that particular corridor. Also just north Peterson Air Force Base and where Amazon is building their largest facility in the whole country, I think the whole world actually. It’s like 4.3 million square feet.

And so great location, powers and galley road 234 units. I think Jimmy you’d asked me kind of before we even started the podcast kind of what really sets a project like this apart. And my answer is kind of like, it’s the simplicity of this particular project. This is multifamily. It’s garden-style, three-story walk-up multifamily. It’s the third in our solace branded theme. We’ve built this exact product type in other markets, just like this. It’s obviously different for Colorado Springs. We’re using rent levels of a project across the street that they’re getting right now. It’s just a very kind of down the middle multifamily project in an excellent growth market that also happens to be opportunity zone. And we’re really excited about it. And we’ve got a couple of others in the pipeline, including one more that’s also opportunity zone that we can maybe talk more about on a future podcast.

Jimmy: That’d be great. I’d love to. Well, you guys have been doing this for a while, like we were talking about in the beginning of the episode today. You guys were one of the first funds that came to market in 2018 while the regs were still not finalized yet even and you’ve done…this is your eighth one of these you’ve done so far. So I’m curious to know, we already kind of picked up from you some best practices or lessons that you’ve learned along the way. But what have been your biggest opportunity zone challenges thus far, anything that has been particularly challenging for you?

Ryan: Well, every deal has its own challenges. I mean, that’s just real estate and development. It’s obviously the last year in COVID, no matter which market or product type you’re in, and we’re fortunate in that we’re largely in multifamily, our student housing has fared well. We’re not in retail, office, hospitality. We don’t have exposure in those markets. And we’re also mainly focused in Colorado and Arizona areas of the country that has fared very well during the pandemic, mostly certain parts of the country. California, San Francisco, New York, I mean, there’s obviously a lot of more damage in those areas from a rent standpoint, etc., etc, and not to mention just a public health standpoint. But so we’re fortunate, but it’s been really challenging. Just hard to get construction financing has been more challenging, lumber costs and just kind of weird type construction costs have gone through the roof on certain things. Little supply chain shortages along the way. I remember last August when we had several projects opening all at once and just we couldn’t get appliances. We just could not. We were renting trucks to drive to other markets to go buy appliances at retail just to fill out because it was so challenging. So I mean, COVID is sort of a…that’s not really opportunity zone related challenge. But that’s certainly been the biggest one over the last year.

Other challenges, just, I think, you know, the program is still so new that we’re consistently making sure we’re up to date on our paperwork and our understanding of the program. And as we get to different phases of the kind of real estate cycle or spectrum of a deal, you know, how that’s going to affect it, because it’s somewhat unchartered waters. We get the first project to a refinance point and to distribution points and things like that, that just…not many have gotten there yet, or they have it’s just been the last six months, nine months, 12 months. So having the resources that we have, law firms and CPAs and other OZ funds, which again, there are a handful out there, they’re really good and we talk to and share our best practices and trials and tribulations. And I recommend anybody that’s gonna get into this business or that is already in this business to do as much of that as possible because we’ve learned things and misunderstood things along the way that we could have probably have missed so.

Jimmy: Yeah, there are some good lessons you’ve learned and some good challenges that you’ve had for sure. And, yeah, Ryan, you’re not joking about the increase in the lumber cost. I was just doing a small product in my backyard, I had to pick up some lumber from Home Depot a couple of weeks ago, and I couldn’t believe how much money it costs. I hadn’t bought lumber in a while and it was much more expensive than I had anticipated. It was kind of amusing. I wasn’t aware of that until it hit my own wallet.

Ryan: It’s crazy. It’s absurd honestly.

Jimmy: It definitely is. Hey, any trends you’re keeping an eye on this year or beyond in regards to maybe not just only lumber, but beyond lumber, any wider macroeconomic or microeconomic trends or OZ trends in particular that you’re keeping an eye on?

Ryan: Well, I guess, like all of us in our space, I mean, the big one is sort of the program itself. What’s it gonna look like in 2022 and beyond? You know, we expected the program to see some tweaks and some changes, regardless of the administration, obviously, the administration changed over here. And we expect those changes maybe to be a little bit more progressive than they might have otherwise. But still, we did expect some tweaks. So I think that’s the biggest one is what I think the additional reporting requirements and to a little more of a national sort of registration database component. Some of those would be relatively welcome, honestly, I think the program could be better and accomplish more of the goals that it set out to with some tweaks. There’s talk of more community benefits and partnerships with more local community-type organizations, more affordable housing, things of that nature. And all those, I believe, are probably on the table, and we’ll just have to kind of see what changes are coming down and adapt to them as necessary. Also, the census tracks themselves, you know, the qualified census tracts that are in place today are likely gonna change at least a little bit, and maybe a lot. And again, some of that’s probably accurate. I mean, it’s probably the right thing. There are some zones that probably shouldn’t be and some that aren’t that probably should. So I think that’s a big thing. And there are a lot of unknowns there. Hopefully, we’ll have some guidance here earlier in 2021 than later, but we’ll see. I imagine the administration has got a lot of priorities right now, I’m not sure where this one lies.

Jimmy: Yeah, some really good things to keep an eye on there. Two huge things to keep an eye on in regards to opportunity zones, specifically, like you just mentioned, just to recap, one, any changes to the program itself and how to qualify as a fund, whether you may have to go through some sort of national registration or something like that, more reporting may be required throughout the life of the fund. And then that second point you brought up, absolutely, the census tracts changing. When the 2020 census kind of gets reported and goes final, the geographic boundaries of the census tracts may change, one, and then two a lot of the demographic data behind them will change as well or get updated. So it’ll be interesting to see what happens on those two fronts. Absolutely. Ryan. I agree. Well, Ryan, it’s been a pleasure speaking with you today. Before we go, can you tell our listeners where they can go to learn more about you and Jackson Dearborn Partners?

Ryan: Yeah, absolutely. I really appreciate having me on, Jimmy. It’s always great to talk to you and share a few thoughts on the space. I’ve been a listener of the podcast and will continue to do so. Yeah, please find us at jacksondearborn.com, J-A-C-K-S-O-N-D-E-A-R-B-O-R-N dot com, jacksondearborn.com. That’s got all of our current investment opportunities, our portfolio, obviously, about us and whatnot. You can always reach out to me. My email is down there and also my cell. I’d be happy to talk to anyone that’s interested in our space. If it’s someone that’s looking to invest, wonderful, we have opportunities for that. If you just wanna shoot the ball or swap stories about opportunity zones, I’m always happy to do that too. So appreciate the time, Jimmy, and hopefully, some of the listeners will reach out.

Jimmy: Excellent. That’s jacksondearborn.com. And for our listeners out there today, I will, as always, have show notes for today’s episode on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Ryan and I discussed on today’s show. Ryan again, thanks for joining me today. I appreciate it.

Ryan: Thank you, Jimmy.

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