OZ Pitch Day - March 23rd
State Of The OZ Marketplace, An OZ Pitch Day Panel
In this panel from OZ Pitch Day Spring 2022, a trio of OZ experts give an update on the current state of the OZ marketplace and make some predictions about what comes next.
- Estimates of the current size of the OZ market from Novogradac.
- The relationship between investor motivations and impact-related tracking elements.
- Contradictions between some negative narratives and the actual data surrounding the Opportunity Zone program.
- What survey data reveals about the types of investors who are allocating capital through the Opportunity Zones program.
- The opportunities that various stakeholders see for continued improvement and prioritization in the OZ program.
- Predictions about the future of the OZ industry.
- Live Q&A with webinar attendees.
Featured On This Webinar
Industry Spotlight: JTC Americas
JTC Americas, formerly NES Financial, is the North American division of JTC Group. JTC is a publicly listed, global professional services business with deep expertise in fund, corporate and private client services.
Visit JTCAmericas.com to learn more.
Industry Spotlight: EIG
Founded by Sean Parker, John Lettieri, and Steve Glickman, EIG is a bipartisan public policy organization that combines innovative research and data-driven advocacy to address America’s most pressing economic challenges.
Visit EIG.org to learn more.
Industry Spotlight: Novogradac
Based in San Francisco, Novogradac is a top 50 national accounting firm with an emphasis in the real estate sector, specializing in tax credits. In recent years, the firm has become one of the foremost thought leaders in the Opportunity Zone industry and are one of the leading providers of education and live events in the space.
Visit Novoco.com to learn more.
Jimmy: …the Opportunity Zone Marketplace in 2022. So I have all four of our panelists here today including me. I’m more the moderator, really. I’m gonna turn it over to the real industry leaders to do the bulk of the heavy listing today. We’re a little short on time. We’ve got only 20 minutes today. So I wanna kind of kick things off really quickly here, everybody. So I’m gonna go around the horn real quick and introduce everyone. Catherine Lyons is joining us from Washington, DC this morning. She is director of policy at the Economic Innovation Group, EIG. If you’re unaware is a bipartisan research and advocacy organization that basically architected the OZ concept several years ago. And today, they’re focused on the successful implementation of the OZ policy across the country. Thank you, Catherine, for joining us this morning.
John Sciarretti joins us from Dover, Ohio. He is partner at Novogradac, a national professional services organization. And John is also the leader of the Novogradac Opportunity Zone working group. And finally, we also have Reid Thomas here today joining us from San Jose, California. Reid is chief revenue officer and managing director of JTC. America’s formerly known as NES Financial. JTC is the leading fund administration provider in the OZ industries. So to start us off today, actually, John, I’m gonna turn to you first in order to get our conversation rolling on the state of the OZ Marketplace in 2022. Probably helpful to characterize how large the marketplace currently is. And I know your firm, Novogradac, does an incredible job surveying the qualified opportunity fund industry. What’s the total size of the marketplace to date, how much capital has been raised so far by QOFs through the end of last year according to the Novogradac’s survey?
John: Thanks for inviting me, Jimmy, glad to be here. We actually do do a survey. I’d say it’s a subset of marketplace where we’re surveying. As of the end of last year, we kind of release our reports before we 1,300 funds, and 978 of those funds actually provided fundraising data to us. And so it gives us anecdotally, you know, a good subset of the market. Our survey, as of the end of 2021, we show over 24 billion invested in opportunity funds. We think it’s three to four times greater than that, which, you know, would be $75 to $100 billion, which is by the way consistent with what Treasury predicted, you know, on the onset of this program to be about $100 million above it. So looks like we’re gonna smash that by the end of the 2026 deadline to invest. But when you look at the growth in that $24 billion number, in 2021 alone $9 billion was invested. And so, you know, 45% of the total dollars of we surveyed came in 2021. In the last quarter, $4 billion of that $9 billion happen. And so, you know, that’s 74% of that number. So it looks like it’s increasing, you know, or the momentum is increasing at an increasing rate. And so we expect you know, good things.
Jimmy: That’s great, John. I was gonna make that point as well that Steven Mnuchin, former treasury secretary, predicted at the outset of the program, that this would be a $100 billion program a $100 billion of private capital would be invested in Opportunity Zones was more or less what he said. And I think it’s possible we’ve already hit that number according to your survey and some other surveys floating around out there. Maybe if you factor in debt, there might already be $500 billion worth of projects out there, is that potentially the case?
Jimmy: So let’s turn to Reid now. And Catherine, I’m gonna bring you in really quick, just sit tight. But Reid, you are the leading fund administration platform, JTC Americas is, I believe, there’s over 150 qualified opportunity funds on your platform to date. Opportunity DB and JTC are two organizations just collaborate on a survey. What can you tell us about that survey and some opportunities on trends you can glean?
Reid: Yeah, thanks, Jimmy. And appreciate your support on the survey. The intent of the survey was really to try to figure out the relationship between investor motivations into Opportunity Zones and the impact and impact-related tracking elements associated with that. You know, we’re really passionate about this kind of investment opportunities that come along that are really intended to do good, and we want to help make sure that ultimately, you know, the Opportunity Zone initiative gets re-upped and is recognized for all the good it’s trying to do. You know, it’s amazing John pointed out, you know, we’ll almost smash the $100 billion mark, but there’s all these negative media and the narrative around it. So the purpose of the survey was really to try to narrow that down. And we found some very, very interesting things that I think bode well for the future of the program particularly, you know, a couple of things.
The investment amounts typically by investors are relatively small. And that’s interesting because you know, this narrative that it’s only the Uber wealthy, that are playing in this space, isn’t really true. You know, folks as we heard on the last panel, $50,000 is a minimum, not that that’s an insignificant amount of money, but that certainly opens it up to a wider range of investors. We also found that investors are quite interested in the impact that funds can make, and at least those that claim, it’s the second most important factor next to what the return on investment is in terms of investors who’ve already invested. But it’s the most important factor for aspirational investors we found Jimmy was that, you know, those who are interested investing actually are very focused on the impact benefits of their investment. And according to what they said would be willing to take a cut and yield. Not that that’s necessary, I think it’s very possible to have sort of a double win here, but investors are open to looking at that. So I think the key takeaway on that front is if the fund managers would be more upfront about the impact benefits of the projects that they’re doing, like job creation or what have you, it would appeal to a wider audience and maybe attract more investors, I think.
Jimmy: Yeah, I found that really interesting takeaway from the survey that we did as well, Reid, the ability to do well by doing good by making the opportunities on investment, that concept’s very much alive. Catherine, I wanna turn to you now and maybe shift gears just a little bit, EIG is at the forefront of a lot of knowledge of the policy changes that may be forthcoming with Opportunity Zones, what might change with OZ’s in the future, and what is your coalition, in particular, working on what are some of the biggest priorities?
Catherine: Sure. So we, you know, as a coalition, you know, we have put together and put a lot of thought into you know, what kinda legislative improvements would make the policy even more effective in producing better outcomes for these high need communities. And we, you know, have worked with the congressional champions in the House and the Senate really since the policy’s passage on thinking through some of what those priorities should be and should potentially look like. And so, you know, I think actually everyone on this panel, I believe signed onto a letter we submitted to the Biden Administration early last year outlining a lot of this. And a lot of them are also consistent with, you know, what we’ve seen the members of Congress who have led this work say publicly as well.
So you know, in terms of where the, especially the senators kind of stated priorities are on this. I mean, Senator Scott has always been a strong advocate for extending the policy by two years. So, extending that end of 2026 state and the deadline to invest to the end of 2028, you know, essentially making up for a lost time that it took for the regulations to be promulgated that took about two years from the policies passage. And so essentially this is a perishable incentive, so giving those two years back, and so more investors and, you know, funds that were potentially on the sideline while waiting for those roles could get back into the market and still receive the full suite of benefits. So, you know, that’s I think a priority one we think makes a lot of sense, especially in this post COVID, you know…well, we’re maybe not quite there yet, but as aspirationally, you know, a near post COVID potentially, you know, economic recovery that will be, I think, really important.
You know, the other, I think the most probably important is reporting requirements. I mean, I think the surveys that we have and some of the earliest reports that we have from Treasury and GAO that look at, you know, the first full year of the policy is really great. But I think, you know, we need to be able to see the full picture of what is happening across the country. And we don’t have that yet because reporting requirements that were part of the original legislation we’re taken out through the legislative process, you know, the nature by which it was passed. And so you know, establishing those reporting requirements will be imperative for understanding the effectiveness of this policy, how it can be even further improved, you know, in hopefully its next iteration.
So that I think has deep and broad bipartisan support across both chambers in kind of making that a first-order priority. There’s a few others that we think would be certainly beneficial, especially for operating businesses and encouraging some of more investments in operating businesses. That’s a real priority of our group and our organization that’s really focused on entrepreneurship. But I think, you know, another area that also makes sense and one that our organization has certainly prioritized is the idea of early sunsetting a small percentage of tracks that exceed a certain threshold of national median family income, replacing those tracks with lower income, you know, high need places that are more aligned with the intent and the spirit of the policy. So I think those are kind of our priorities, some of the data priorities by the senators and where I think there could be some, you know, potential changes. Or, if there were to be a package coming together, you know, I think that’s where there could be some common ground.
Jimmy: Yeah, absolutely. I think that last point you brought up, in particular, would help get the backing of some current detractors of the program. I would hope if we can early sunset, some of the tracks that are maybe a little higher income than people would expect from an Opportunity Zone. So I think, you know, three areas of broad support for possible changes are, as you mentioned, transparency reporting obviously hugely important and expansion, you know, maybe opening it up for a couple more years and then that early sunsetting as well. Let’s talk about how the program has already started to sunset a little bit in some regard, right? We had the expiration of that 10% basis step-up at the end of last year. And for those unfamiliar, for those listening who are relatively new to Opportunity Zones, there was a benefit that allowed you to reduce the amount of your initial capital gain recognition by either 15% or 10% depending on when you first invested that benefit fully at the end of last year.
If I go around and ask everybody this question, actually we’ll start with John first, and then Reid, and Catherine, go in that same order again, how much of a role did that 10% basis step-up expiration play at the end of last year? I think we saw quite a bit of capital flowing in in Q4 because that expiration was expiring, that’s part one of the question. Part two would be, you know, if anyone’s making those investment this year, they’ve already missed out on that, is it really that big of a deal or at the end of the day is it a rounding error? How would you characterize that, John?
John: Well, I think it definitely accelerate investment, like you mentioned into the 4th quarter. So folks that could have invested in ’22 or ’21, why not invest in ’21 might get 10%. but when you look at the math, I mean, we’ve done the math around that benefit and, you know, it’s really tends to be less than 50 basis points of value on the investment. So if you look at, say a 10% after tax return, Opportunity Zones tend to have an increment of 3 to 500 basis points. So that 10% return starts looking like, you know, 13% or 15%, you know, just with the tax benefits. And that 50 basis points, so, you know, you’re gonna get 14% now you’re gonna get 1350, and it’s actually less than 50 weeks. So I don’t think it’s gonna affect folks’ decision on whether to invest or not. But I think it did accelerate the investment.
Jimmy: Thanks, John. And, Reid, what about you? What are you hearing from some of your QOF clients who are on your platform? Did they see a big inflows into their funds in Q4, possibly because of that big benefit expiring? And then part two, if someone missed out at the end of last year, we’ve got potential investors on the call today who are interested in those investing, was it a huge deal that they missed out? Should they just ignore the program completely now? Or is there still a lot that’s attractive about the OZ policy?
Reid: Well, it’s sort of what John said. I mean, we saw massive increase in Q4. I think 40% of the year was in Q4 and it was a banner year. We saw more than double the investments into QOZs, at least with our clients in 2021 versus 2020, which was also a good year. But that said, I think John’s correct on the math. We see continued and steady investment. Many of our clients are launching new funds as we speak. So that’s a good sign. You know, even the survey we did Jimmy, you know, we had 150, I think investors respond to that survey. There was gosh, more than 75% of the investors thought the amount of investment in Opportunity Zones would continue to grow over the next two or three years.
It was only less than 10% thought it would actually decline. So I think the spirit for this initiative is still out there, it still makes a heck of a lot of sense for people, and will continue to see it grow. I think, you know, it’s a shameless plug in a way, but I think that the things that are really gonna drive it now, as we’re seeing more institutional behavior are the fund managers. You know, are you using third parties to do kind of provide transparency and financial reporting? Are you gonna be reporting on impact as the legislation is likely to evolve, too? So those are gonna be important things in differentiating initiatives and now I think going forward.
Jimmy: Excellent. And, Catherine, I don’t know if John and Reid may have already hogged up all the talking points if there’s anything left to say, but curious to get your thoughts, if you have any insights into the 10% basis step-up expiring at the end of the year and, you know, moving forward, is it that big of a deal for investors who may be on the call today if they missed out on it?
Catherine: I think, you know, John and Reid kind of covered the main points but I’ll just actually repeat something that Mike Novogradac said on a recent webinar that we had on a similar topic that I think the increase in activity certainly propelled in part by the expiration of the step-up benefit, but also just the kind of more comfort with the understanding of the market. I think, you know, by last year, you know, again, we were coming or at least getting a little bit more comfortable with sort of this new state of affairs that we’re in. We, you know, everyone kind of has had a full chance to really understand the regulations, we’re starting to identify and develop market norms kind of in response to those regulations. And I think there’s just a real comfort with using the incentive now.
And so that, I think that was good to hear because there’s more sustainability there. You know, we don’t have to be relying on market activity because of the expiration of one of the benefits. You know, I think market activity will continue because, you know, if that observation is true, which I think it is just from anecdotally the conversations we’ve had too that, you know, this is just really, the increase in activity isn’t part because people get it, then that will only continue. So I think that that would be the only other thing to add to what Reid and John have already said.
Jimmy: Yeah, really good thoughts. Thank you, Catherine. Well, we’ve only got, I think three or four minutes here. If you have a question for us, use the use the Q&A tool in the Zoom toolbar. I don’t know if we’re gonna get to them or not. I’ve got one more question for everybody. I wanna kind of go around, we’ll start with Catherine this time. We’ll let you go first here, Catherine, so these two guys, don’t hog up all the talking points. What do you see for the future of OZs? Kind of just an open-ended question. Any insights you have on the rest of this year and the next several years before the program sunsets. What are you hoping to see? What do you think will unfold with Opportunity Zones?
Catherine: Yeah, well, I think, you know, we’re already starting to see, or really have already seen, you know, an incredible amount of incredible investments that have been made high impact investments as I think the survey that Reid and JTC did show. And I think, you know, one of the great inputs or outputs, I guess, of that survey was the aspirational investors and the fact that they are motivated by impact. I mean, I think that’s really great to hear. So what I think we’ll see is even more of the same that we’ve already been tracking thus far, which is, you know, high impact projects going into Opportunity Zones, which already knew, but now the GAO report kind of validated the fact that these are indeed well targeted, kind of high need places that are worthy and in need of the investment.
And so I think we’ll see, you know, a diverse range of investments, hopefully, more operating business investments. We’d love to see that market continue to expand. But I think we’ll start to see more of that in these places and people who are really motivated by impact in addition to the, you know, in return. I don’t think it’s an either-or and we’re certainly seeing that there are projects that can really meet a community need, but also, you know deliver on that rate of return as well. And you know, I think we’ve already started to see the policy really fulfill its promise. I think we’ll continue to see it do that. Hopefully, there will be kind of some legislative changes that are thoughtful in, you know, continuing to improve its effectiveness and for us to better understand what is actually happening in these places.
And I’m really hoping that that comes to fruition so we get a better sense of the full picture you know, of the market. But I’m very hopeful, very optimistic, you know, through our work, we get to track a lot of really exciting developments with this policy. And our OZ activity map is a great resource for some of that kind of those anecdotal, you know, evidence essentially for funds and projects all across the country that are using the incentive. And so, you know, I think we get the highlight reel, which is great. And I only expect that highlight reel to grow even longer.
Jimmy: Excellent. Well, thanks for your insights there, Catherine. Reid will turn to you next, future of OZ’s. What do you hope to unfold? What do you think we’ll see?
Reid: Well, what I certainly hope is that this connection between the good that the initiative is actually doing gets better recognized by policymakers. I think within the investor base, there’s work to do certainly as well, but it’s interesting to me that fast and foremost, this is an economic development incentive, but it gets characterized often as a tax incentive for wealthy folks. And I think, you know, when you have the kind of money that’s moving into these communities, and we have seen significant evolution in terms of the types of projects. Not that operating businesses are necessary to clean success in Opportunities Zone investing, but I do think it’s an important indicator and we are seeing increase in the number of opportunities to invest in operating businesses. So overall, I think the narrative will continue to evolve. There’ll be an enlightened sort of, oh my gosh, this really is an economic development program that’s working and it’ll ultimately be extended and made permanent, I think.
Jimmy: Well, that would be great. And, John, I’ll turn to you for some final thoughts here on where you think OZ’s are going and the future of the program. We only have about a minute left.
John: That fast. I was encouraged by Shay’s comments that there is those kind activity, you know, for an extension and also for reporting. I think those are the two things that I think will bring institution money in the program. I mean, if they have reporting and kinda look to the future of maybe a series of extensions or perpetual extensions every few years.
Jimmy: Fantastic. Well, I think we’re gonna wrap there. Thank you again to all of my panelists. John Sciarretti is from Novogradac in company, and Reid Thomas from JTC, America’s formerly NES Financial. Catherine Lyons from the economic innovation group. Thank you to the three of you for participating in the panel this morning. Really appreciate it.
Reid: Thanks, Jimmy.