OZ Investing In Tertiary Markets, With Hannah Kirby

Are tertiary markets in the Southeast U.S. a prime opportunity for real estate investors?

Hannah Kirby is managing partner at Carolina Opportunity Funds, a consultancy for self-directed Qualified Opportunity Funds that concentrates primarily in the Southeast U.S.

Click the play button above to listen to my conversation with Hannah.

Episode Highlights

  • The evolution of Carolina Opportunity Funds since the inception of the Opportunity Zone program.
  • Opportunities for investors in “tertiary markets” in the Southeastern United States.
  • How merchant developers are acting as catalysts in tertiary markets by attracting additional tenants and developments.
  • The process for establishing self-directed Qualified Opportunity Funds.
  • The impact that elimination of depreciation recapture can have on bottom line returns for certain Opportunity Zone projects such as car washes.
  • Challenges in maintaining compliance with applicable regulations over the lifetime of an Opportunity Zone project.
  • Challenges in attracting capital for projects in smaller markets in the current environment.

Featured on This Episode

Industry Spotlight: Carolina Opportunity Funds

Carolina Opportunity Funds is a consultancy for self-directed Qualified Opportunity Funds that concentrates primarily in the Southeast U.S. To date, the company has directed over $25,000,000 in capital to communities in North Carolina that might not otherwise attract economic investment from investors located outside of the region.

Learn More About Carolina Opportunity Funds:

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 another exciting episode of the “Opportunity Zones” podcast, the weekly show where we interview opportunity zones professionals and experts from fund managers to tax advisors, from real estate developers to venture capitalists. If it impacts opportunity zones or the opportunity funds industry, we cover it here on the “Opportunity Zones” podcast. Welcome to the “Opportunity Zones” podcast. I’m your host, Jimmy Atkinson. Joining me on the show today is Hannah Kirby, managing partner at Carolina Opportunity Funds, a consultancy for self-directed qualified opportunity funds. They’re concentrated primarily in the Southeast United States. Hannah, thanks for joining, and welcome to the show.


Hannah: Thanks for inviting me.

Jimmy: Absolutely, Hannah. Happy to have you on. We’ve known each other in the OZ space for well over a year and a half, maybe two years or so now. And I’ve tried to get you on the podcast, I think, once or twice before, but happy to have on now. Better late than ever, as I say. But anyways, let’s dive in right now with what you’re doing. I’d like to hear from you. You’re managing partner at Carolina Opportunity Funds, as I mentioned at the top. Maybe you could talk to us about the evolution of Carolina Opportunity Funds. What was its original purpose, and what have you evolved into over the course of the last couple of years, and what are you up to these days?

Hannah: Well, we started out, quite frankly, just accidentally. When opportunity funds first became something that was being written about back in 2017, I pounced on the idea of creating Carolina Opportunity Funds as a way to attempt to direct capital towards tertiary markets within the Southeast, particularly in the Carolinas, recognizing the need and also that the Raleigh, Charlotte area, Greenville, South Carolina were really high growth areas. And so their surrounding tertiary cities were probably prime for development and prime for economic development, particularly, but possibly wouldn’t be noted in the larger area of private equity. So that was the impetus for creating Carolina Opportunity Fund.

Through the years, we’ve gone through a couple different iterations and now have become a consultancy for primarily economic development and people within counties and developers to direct their investors toward a self-directed fund. So I can give you a little bit of background on that if you’d like. We’re mostly looking at development that would happen anyway, whether or not it was inside an opportunity zone, or whether or not it was done through an opportunity fund. So a project such as we were working on a multifamily project in phase, which is adjacent to their ballpark. And the ballpark project was a public private part partnership that was about $125 million development in downtown Fayetteville. So this is basically a springboard off of that project and is now completing another 300-unit multifamily project.

Another project that we’re looking at is a student housing project with the University of North Carolina at Pembroke. What’s unique about this is that Pembroke was primarily HSBC college that was annexed into the UNC system. The area is dominated by the Lumberton Indian tribe. And it’s really now just starting to come into its own with the college. The college is growing, they didn’t have any student housing, so our OZ project there is basically student housing. So looking at more or less, like I mentioned, the tertiary markets, markets that probably wouldn’t make “The Wall Street Journal,” so to speak, but nevertheless, what we would consider a growth market here in North Carolina and South Carolina. So that’s about it, really.

Jimmy: Okay, Hannah, that sounds good. That makes a lot of sense. You’re in a lot of tertiary markets, concentrated particularly in North and South Carolina and surrounding states in the Southeast United States. Why do you like those tertiary markets other than avoiding headline risk, I guess? Is there anything that’s attracting you to them, or maybe there’s something that’s attracting these types of projects to you?

Hannah: Well, more or less that they were the areas within our state and with our region that were designated as opportunity zone. So, for instance, downtown Raleigh, there are not opportunity zones there specifically because those areas are not 80% of the poverty level. So I think that what happened was that there’s a lot of markets that are adjacent to these larger MFAs, but that we’re looking at as well. But in terms of when we started looking for project, we were looking for projects specifically within opportunity zones.

Jimmy: And how many projects, roughly, are you working with right now? And what’s in your pipeline?


Hannah: We’ve got four active projects and probably three projects in the pipeline. And we’re moving into a newer area with regard to the pipeline. And we’re starting to work with what are called merchant developers. I’m not sure if you’re familiar with that term.

Jimmy: No, I’m not.

Hannah: Okay. So these are developers that are contracted by franchise organizations, primarily, and build to suit developers. And it’s quite a coveted title in certain regional areas to actually be the build to suit developer, for instance, a Family Dollar or Dollar Tree. So there’s a chain here that’s a local chain, and they’re growing quite rapidly, called Bojangles. That’s a chicken franchise. That also is another area that we were working with the developers for these Bojangles chains as well as a carwash that’s going into rapid expansion. Tunnel car washes, now, I’m not sure whether or not you heard that they’re becoming like a Wall Street darling.

I think one of these tunnel carwashes was just valued at $4 billion and went public. So we’re looking also as an expansion of this carwash. And the areas that we’re moving into, just giving you the kind of a generalized area, like I said, they’re adjacent to some of the major Metro areas, but they’re less suburban areas. So these are the areas where you’re starting to see some retail expansion. We call it community retail, especially if it’s in an opportunity zone, that will create jobs, will create some economic multipliers in terms of the types of…so, for instance, if you put a Bojangles in, chances are you’re gonna get some other retail next to Bojangles because it’s quite a popular spot. Same thing with Family Dollar Tree. You’re usually gonna see some retail expansion go in next to these areas.

And since we’re talking about opportunities zones, I mean, we’re obviously talking about areas that did not have this type of capitalization with regard to economic development. So it’s quite exciting, actually, to see some of these little places like Leicester, North Carolina, and Pembroke, North Carolina, and places that, by and large, were left behind. And now seeing things like new retail development, new multifamily development, things like that. So we’re pretty excited to be kind of in there with the merchant developers that have the build to suits for this, because we can then leverage that into providing their investors with a self-directed fund that gives them the benefits of a managed fund without having to manage it.

Jimmy: So the merchant developers, essentially, in some of these areas that have traditionally lacked capital are serving as catalysts, in many ways, in some of these communities. They’re attracting other retail investments and other types of investments in the community. That’s what I mean by catalyst. I kind of view opportunity zones in many of these areas as catalytic type investments that can help spur follow-on investments and get the snowball rolling, essentially.

Hannah: It’s a great terminology to use as well. Yeah.

Jimmy: Well, thank you. So let’s talk about how you are working with some of these self-directed funds. And I’m curious what partners you’re using and what value you’re adding, Hannah, at Carolina Opportunity Funds. Can you go into some of the logistics of how you set up these self-directed funds?

Hannah: Sure. Well, the first thing is, and I’m sure you’ve run into this as well, is that it’s basically a lot of the OZ dialogue, if you will, is more or less educating the player. So you’re sort of providing the benefits of the initiative, but the benefits of the initiative relative to the project in question. And what we do then is we take like a financial modeling approach and say, “This is what this investment looks like within an opportunity zone, and if it’s held for 10 years.” So we provide then the financial modeling, more or less a presentation, if you will, that shows some of the demographics of the area as well as the actual pro forma numbers for the project itself, but relative to what that project looks like when you put it in a post-hack context. Because most of the time when you’re looking at an investment, you’re looking at that then in pretax dollars. And with OZs, you really need to look at what are the current tax benefits and what are the biggest benefits. Especially in real estate, it’s appreciation.

Jimmy: Absolutely. And the all else being equal, if you’re looking at two different projects, one’s in an OZ and one’s not. The OZ project’s IRR numbers don’t need to be as good as the non-OZ pretax IRR numbers, because that tax benefit helps juice those returns more than the pretax numbers might show on a typical pro forma projection.

Hannah: Exactly that, although they have to kind of almost be comparable, I mean, they have to be within the…you can’t really get too many percentage points off that, where people start to think, “Well, this really isn’t a good investment. Who cares if I hold onto it for 10 years.” Again, which is why one of the biggest things that we do with the developer in a consultancy kind of arena is provide them with those numbers so that they understand fully who their competition is in terms of capital dollars and go there. But when you get right down to it, even when you look at the tax benefits from capital gains, one of the biggest benefits at the end of the day is depreciation.

Jimmy: Right, and I cut you off right before you were about to get into that, but talk us through that a little bit more. You’re talking about there’s no depreciation recapture, right?

Hannah: Right, exactly that. And if you look at depreciation recapture, specifically when you look at it in certain retail environment, so there’s depreciation accelerators that are out there for certain types of businesses and certain types of franchise businesses and certain types of buildings that accelerates the depreciation. So, for instance, if you look at, like, traditional multifamily, maybe that’s a 30-year depreciation. And if you look at a carwash, so you get 10-year depreciation, which you’ve got a fully depreciated asset at the end of 10 years with no recap. And, yeah, that gets to be quite enticing, especially, you know…but again, you’re not looking at a $40 million project, you’re looking at a $3 million project.

Jimmy: But that’s still very compelling, and that’s interesting.

Hannah: It becomes more compelling.

Jimmy: I have to study my depreciation tables a little bit more. I wasn’t aware of that.

Hannah: Well, you know what? It’s funny because I really wasn’t up on this until I started working with a franchise developer, you know, who basically was like, “Well, what about the depreciation recapture?” So that became something that, you know, I learned about as well, just from working more or less with them, because I think they used that as a big part of their pitch.

Jimmy: Right. No, I think that’s huge. I oftentimes refer to that depreciation recapture elimination as the fourth hidden benefit of opportunity zone investing. The first three being obvious, the deferral period, the reduction, and the elimination of capital gains on the back end from appreciation of the OZ investment itself. But that fourth hidden benefit is you can really juice the numbers quite a bit. You don’t hear about it a lot, but yeah, the depreciation recapture elimination, gosh, especially with a carwash, now that I’m learning something new every day here, you can fully depreciate that within that 10-year hold, coincidentally enough. So that’s interesting. Very interesting.

Hannah: Yeah. I mean, basically, again, that makes an investment in this really quite compelling. So some of these things are exciting within their own rite, even though, you know, they’re smaller investments than some that we’ve seen within the OZ space. So it more or less worked along that we, you know, we work with the developers, the developer may have their own investors. They may have people that they know. A lot of times locally, especially in some of these really smaller markets, these are community leaders that, yeah, may have capital gain to spend, but fully understand what the development itself is gonna mean for their community. And then, yeah, if they get an extra tax benefit by investing in that, you know, they’re all for it.

Having said that, the other part of this is the opportunity fund itself and the transactional data that is required to keep an opportunity fund compliant. That can change when you think about a 10-year investment, right? We’re gonna go through numerous legislative changes over that 10-year period as well as, I mean, administration changes. So we’re already seeing now that the luster of this initiative is not quite as bright with the current administration. So one of the benefits that we add, that we provide, is we’re giving investors that security of compliance through our involvement with our suppliers that they might not otherwise have if they create their own fund, because anybody can create their fund, right? You know, you can still create your own fund to just declare that you’re a fund. However, you do wanna make sure that you keep abreast of all the legislation that’s coming forward, all the compliance issues, the reporting issues, especially on jobs reporting, and that type of thing that are going to basically certainly come out of some of the stuff that’s encountered right now.

So that’s, you know, one of the areas. We’ve created kind of like a little secondary self-directed product that gives investors this level of compliance that they would otherwise receive in a much larger fund, but without the much larger fund. So sort of, yeah, it comes out like software as a service. You’re getting the backend benefit of JTC, who used to be NES Financial. You’re also able to tap into the auditing, the tax auditing capacity of Novogradac, but you are not paying management fees in excess of three or four basis points.

Jimmy: Oh, that’s tremendous. So that’s a pretty good product you’ve put together. And you’ve partnered with some pretty strong partners in the space. JTC America’s formally known NES Financial, as you rightly point out, and Novogradac, another leader in the professional services space, excellent accounting team they have over there. And they keep abreast of all of the changes with opportunity zones on a regular basis. They’re very good at that, of course. And one other thing that you mentioned that I think you’re absolutely right on about is anybody can create a fund. It’s easy, right? You can just grab IRS Form 8996, print out that PDF from your web browser, fill it out, send it in. You got yourself a QOF. But the devil’s in the details, and staying in compliance and making sure that your deal fits the bill and then keeping up with all of the statutory changes that may come down in the future and any regulatory changes that come down from treasury in the future, very important.

So good to hear that you are keeping your projects in compliance with the team and the partners that you have in place there, Hannah. I wanted to ask about your capital base a little bit more, revisit that, because you touched upon it briefly in one of your last responses. But who are your investors, typically, or who are you finding or investing in the projects that you’re working with, and what are their motivations? Why are they investing in OZ deals?

Hannah: Well, I think it’s less…for us, at least. We are finding that the people who are coming forward obviously have capital gain that they would like to invest. Whether those capital gains come from, like, maybe cashing in a 1031 exchange, where they were…by and large, the investors that we’re looking at are real estate investors. They are people that would otherwise be in 1031, or people that understand, for instance, commercial retail, or commercial multifamily, or commercial student housing, things like that. And more or less, the people that have come forward in our groups have been local to the communities that these projects are in. Like I said, some community leaders, maybe people who have made money in real estate within the community and wanna see something else get developed.

The developers themselves are bringing in some capital through either family and friends, or other contacts that they have where they have new investors with them on other projects that maybe weren’t OZ projects, but they were successful at that so they can tap into those investors again. We have had difficulty, I will say, in bringing in outside capital from North and South Carolina. We solicit some of the larger funds sometimes to see whether or not they basically have capital to deploy and not projects that they can deploy into. And that’s worked. You know, that’s worked in a couple of cases. Early on, I would say in 2018, 2019 that worked. But just lately, I think we’re more or less looking at local investors. We have a lot of people moving to our area. We recently landed a billion dollar Apple complex. So we have a lot of people coming into the area. So we’re fortunate there as well in terms of, you know…what do I wanna say? The universe of potential investors.

Jimmy: Gotcha. Yeah, that makes sense. Why do you think it is that you’re having a hard time attracting capital from outside of that area to come into the projects where you’re focused on? Is it something to do with the projects themselves? Is it something to do with the OZ component? Is it unfamiliarity with the area? Is it a combination of the above, or what are your thoughts there?

Hannah: I think it’s the combination of the above. I think primarily because we’re small. It was funny early on in my commercial career. I moved from Southern California to North Carolina. So I still had some real estate people in California when I moved here and was trying to entice them to come and look at projects and buildings and things, you know, here. And they couldn’t wrap their head around how small it was, you know? And I had to keep saying, “You have to realize that North Carolina has less people than greater Los Angeles.” And so they just couldn’t seem to wrap their head throughout the fact that this is an area that is small by comparison to the, you know, New York, Chicago, Los Angeles, San Francisco. So a lot of it’s that, a lot of it’s that. I mean, it is growing, and I think there are very good opportunities here for investment, for growth, that could be very lucrative. But we haven’t been discovered yet. And I think it’s just a matter of time until we certainly unfold, but I do see that this area is expanding rapidly.

Jimmy: Very good. Well, I think we’ll leave it there, Hannah. Thanks for joining me today on the show. Appreciate your insights. Before we go, can you tell our listeners where they can go to learn more about you and the Carolina Opportunity Funds?

Hannah: Sure. Our website is carolinaopportunityfunds.com. I know that’s a mouthful, but it’s true. And also, I can be reached directly at [email protected]

Jimmy: [email protected] That’s easy.

Hannah: Yeah.

Jimmy: Excellent. Please do visit carolinaopportunityfunds.com to learn more. And for our listeners out there today, I will, as always, produce show notes on the “Opportunity Zones” database website. You can find the show notes for today’s episode at opportunitydb.com/podcast. And there, you’ll find links to all of the resources that Hannah and I discussed on today’s show. Hannah, again, thanks for joining me. I appreciate it.

Hannah: I really appreciate it as well. Thank you so much, Jimmy.

Jimmy: That’s it for our show today. A huge thank you to you, our listener. If you liked this episode, please rate and review us on iTunes. The “Opportunity Zones” podcast is produced by the Opportunity Database. Visit opportunitydb.com to learn more about “Opportunity Zones” and opportunity zone fund investing. You can learn how to subscribe to this podcast and read more about today’s guest in the show notes by visiting opportunitydb.com/podcast. And we’ll be back soon with another episode.

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