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Oregon has been scrutinized for some of the state’s Opportunity Zone selections, particularly those in downtown Portland.
Vanessa Sturgeon, founder of Sturgeon Development Partners, joins the show to discuss how the Opportunity Zone nominating process unfolded in Oregon, why it was so controversial, and where her firm is developing in the state.
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- The uniqueness of the Opportunity Zone nominating process in Oregon and Portland in particular.
- How the census tracts in Portland may be in danger of losing their Opportunity Zone status, should the OZ reform legislation get passed with the early disqualification provision for high-income tracts.
- Why such early disqualification may provide an opportunity for the state of Oregon to nominate new tracts as Opportunity Zones.
- Updates on Sturgeon Development’s two Opportunity Zone projects, including a Hilton Hotel in Salem and a multifamily building in inner southeast Portland.
- How Sturgeon Development Partners sources most of its Opportunity Zone investors.
- How the Opportunity Zone incentive provides a unique opportunity for over-concentrated stock market investors to take some low basis chips off the table and diversify into real estate.
- A high-level overview of some of the key differences between 1031s and Opportunity Zones.
Featured On This Episode
Today’s Guest: Vanessa Sturgeon, Sturgeon Development Partners
- Vanessa Sturgeon on LinkedIn
- Sturgeon Development Partners
- New Legislation Would Extend and Improve Opportunity Zones (OpportunityDb)
- Hilton hotel coming to downtown Salem (Salem Reporter)
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, and joining the podcast today is Vanessa Sturgeon, founder of Sturgeon Development Partners. She joins us today from Portland, Oregon. Vanessa, great to meet you here today. I don’t believe we’ve met on video or in person before, but it’s great to have you on the show today.
How are you doing?
Vanessa: Great, thanks so much for having me.
Jimmy: Absolutely. So, Vanessa’s firms, for our listeners and viewers out there, own and manage 6.5 million square feet of real estate across multiple sectors, and her opportunity zone developments are primarily focused in hotel and multifamily. And I want to talk with you, Vanessa, about your two projects there in Oregon a little bit later in the episode today.
But first I want to talk about the opportunity zone nomination process. You’re based in Oregon, and Oregon had, kind of, an interesting nominating process from what I understand, but just, kind of, back up for a second. So, first of all, every state in the country when the Opportunity Zone initiative was passed at the end of 2017, they got a few months to nominate low-income census tracks within their state.
Each state’s governor’s office plus the mayor of Washington D.C. got to nominate up to 25% of their low-income census tracks as opportunity zones. But how did the process in Oregon unfold? And what was unique about the way that it unfolded, Vanessa?
Vanessa: Well, this has been the subject of a lot of news coverage over the years, actually. So, Oregon’s census data is really old. So, it looks different than many other states because it only gets updated every decade. So, it can really lag behind.
And in the life cycle of the census data, when the opportunity zone tracks were set, it was really truly at the end of that 10-year census. So, a lot of tracks got included that were very controversial, areas like all of downtown, inner Southeast Portland, the Pearl District. Some of the most high-income areas now in Portland, in particular, were slotted as opportunity zone tracks, and it became controversial to some degree.
And actually, “Bloomberg Businessweek” wrote an article about it entitled, “Welcome to Tax Breaklandia,” and we were interviewed for that article. I worked with a journalist on that, and there was a lot of complaining, frankly, from some of the institutional capital that was planning to put out opportunity zone funds just because of the fundamental lack of fairness that Oregon got such better opportunity zones than most other states.
Jimmy: That’s really interesting. So, you know, what’s interesting about that also is that I think that’s one of the knocks on opportunity zones, or at least it was initially when the policy first became, I guess, well-known nationally.
It got a few bad PR pieces in “The New York Times,” and “Huffington Post,” and elsewhere. And some of the attacks on opportunity zones dealt with just that very point that some communities that got designated as opportunity zones weren’t really low-income, and it, kind of, made you think, “Well, how the heck is downtown Portland or some of these other areas that are really gentrifying and up and coming, why are they designated as opportunity zones?”
And one thing that the proposed opportunity zone reform legislation is proposing to do would be to disqualify early some of those census tracks, and it’d be a small number. I’ve heard estimates of a few dozen to, you know, about a hundred or so. I’m not exactly sure how many there would be.
I don’t think the data’s been crunched on that to be able to determine that. But what’s your sense of what might happen in Oregon there, Vanessa? Do you think Portland and some other areas may be in danger of losing their opportunity zone status?
Vanessa: Most definitely. I think that Portland is going to have a big wave of opportunity zones that are disqualified. Now, that doesn’t necessarily mean as much for existing projects. In fact, it really means nothing for existing projects, because the reality is that the tracks that are here existing, the projects that are in those tracks are already grandfathered.
So, if you’ve invested already or if you’re going to invest in a project that’s already underway and under planning, you don’t have to worry. You’re grandfathered.
Jimmy: And that’s really good news for investors who have already invested in funds. And I like to start with that as, well, hang on a second. Yeah, we’re going to… By the way, the legislation hasn’t gotten passed yet. I’m hopeful that it will, because I think it’ll do a lot of good for the opportunity zone industry, but if it does get passed, there is that grandfathering provision in there. And I do like to lead with that so people don’t get nervous. If you’ve already made…
I just want to make it super clear. If you already made an investment in a fund that deploys capital into some of these spots that might get sunset or disqualified early, you’re going to be fine, assuming that they don’t remove that grandfathering provision. I don’t see why they would, because I think that’d be a very bad precedent for Congress to set with regards to tax policy.
The other interesting thing there, Vanessa, is that, if the current legislation… I’m sorry. If the proposed legislation gets passed as it’s currently drafted, there’s another provision in there that would allow for the governor of Oregon and the governor of all the other states that have some early disqualified tracks to nominate new tracks.
So, potentially some other areas would get designated as opportunity zones, which I think will be very valuable for investors for one but also for those new communities that get designated as opportunity zones. So, with that said, I wanted to, kind of, drill into what you’re doing in opportunity zones. Vanessa, I understand you have two different single-asset projects, single-asset deals, one, a hotel, one, a multifamily development.
Tell us about your opportunity zone developments and what makes them unique and where they’re located exactly.
Vanessa: Yeah, so we do have two projects and we have our own fund. So, we have some investors who’ve invested just in one project or another, but the lion’s share have invested directly into the fund. So, we’ve raised all of our funds to date directly. And so, so far we have started on our project in Salem. It’s a Hilton Hotel directly across the street from the convention center.
Right in Central Salem. So, that project is actually almost complete, and we will start welcoming guests in December of this year. So, we topped off about two months ago on that project, and the crane is coming down, so that’s very exciting. We’re in the final throes of planning there.
And then our project in inner Southeast Portland was actually envisioned as an office project. It’s a really great site right in the middle of the center of southeast Portland. Great views back into downtown. And the office market obviously thinks have changed with COVID, so we’ve decided to pivot that project to multifamily.
And so we’ve redone the drawings and now that is with the city.
Jimmy: Yeah, lots changed with office over the last couple years since the COVID pandemic. I’m sure it probably penciled out pretty nicely maybe a couple years ago but probably smart play to pivot that into multifamily for sure. I want to talk about your capital base and the capital base coming from high-tax states in particular, kind of, tying back in with Oregon since that’s your area of expertise and where you’re located, Vanessa.
How is the tax impact of opportunity zones different in Oregon than in other states? And then I’ll ask you about your capital base, in particular, in my next question.
Vanessa: Yeah, so Oregon is it’s interesting because it’s been proposed a couple of times that Oregon would disconnect from the federal structure because the way that it works in Oregon, you’re automatically connected to the federal policy. And so there’s been a couple of rounds of proposals that suggest that it should be disconnected. That has never been successful.
So, Oregon remains connected to the federal policy so that the benefit flows through directly to your state return. That is different in states like California and in Washington. So, we do have investors from other communities that are interested specifically because they want to capture all of the tax benefit.
Most of our fund investors come on as referrals through their CPA. So, essentially they come to their CPA with a problem, and the CPA needs to help them solve it. So, yeah, that’s usually the referral path generally through that CPA.
Jimmy: And the problem is what usually for those investors? It’s a good problem, I think, but what is the problem typically?
Vanessa: It is a good problem. The problem is essentially that somebody has a big capital gains event. They sell a business, they want to sell stock they’ve been sitting on the sideline with for a very long time, and, you know, they want to realize their capital gain in it. They want to realize the profit.
But they’ve hesitated because of the tax consequences. So, this opportunity with opportunity zones really is unlike anything that I’ve seen in my career in terms of incentivizing people to go ahead and sell that business or sell that bit of stock, and realize the gains, and go ahead and make a new investment that makes more sense for them with their life plans.
Jimmy: For sure. I’ve been, kind of, driving home this one particular point a lot over the last several months, we’re recording this episode in late May of 2022 against the backdrop of the stock market, kind of, tanking a little bit over the last several weeks, but that said, a lot of investment in the stock market still have fairly low basis if they invested, you know, maybe in the early 2000s or 2010 range somewhere or maybe even longer than that.
I mean, the stock market is still way, way up since where it bottomed out in ’08, ’09. It’s still way up from where it bottomed out from the dotcom crash of what ’99 or 2000. So, there’s a lot of investors, a lot of stock market investors who have huge unrealized capital gains, and what I like to say is, you know, you look at stocks right now, I don’t know how much of a return you’re getting.
I think over the very long period, I still like stocks quite a lot. I’m still bullish on stocks in the long run, right? But you might want to take a look at your overall portfolio asset allocation because what you thought was maybe a 60/40 split might look more like 70/30 now if you haven’t paid attention to that in a while. I always think that that provides investors with an opportunity to take some chips off the table, maybe reallocate your portfolio a little bit, draw down your stock waiting a little bit if you’re overweight in stocks, particularly if you believe like I do, that stocks may be overvalued and maybe are due for a correction.
We might be in the midst of that correction right now. But the huge problem there is you’re going to get hit with a huge capital gain tax liability, right? So, I think that’s where opportunity zones fill in so brilliantly. They actually incentivize an investor who’s been in the stock market a while and say, “Okay, I can take some chips off the table and I can defer taxes on that drawing the chips off the table, that capital gain triggering event, and I can diversify my portfolio by maybe getting invested in some real estate where I wasn’t really incentivized in this particular way to do so before. And I have this huge backend tax elimination. If I hold the OZ investment for 10-plus years, I get to escape it tax-free.”
I just think it’s an incredible benefit. Sorry for getting on my soapbox there for a minute, but I like to drive that point home. How many of those types of investors do you see coming to your projects, coming to your fund, Vanessa? Are there a lot of folks like that who have those low-basis highly-appreciated stock gains or is it more folks who sell private business or, I don’t know, maybe you’ve got some Bitcoin investors who struck it rich by investing in Bitcoin several years back?
Where do you see your investors triggering capital gains from typically or is it all over the place?
Vanessa: It’s a little bit of both. We don’t have any Bitcoin investors, you know, in our fund. However, we do have some folks who are really over-concentrated in the stock, and that happens oftentimes when people are employed by the same company for a long period of time, they had a ton of stock options, and now it’s time for them to diversify their portfolios, but they are stuck.
They don’t know what to do and how they can turn this investment that they made into a living for them maybe in a period of their retirement or just in terms of diversifying their portfolio. So, we have had a fair number of Intel employees who have been interested and who have converted their stock into investments in an opportunity zone fund.
It’s an interesting strategy and it makes a lot of sense for a lot of those folks. And what’s fascinating about it is that you only really ever had opportunities like this via 1031s. And everything had to be like-kind. In an opportunity zone, that’s just not the case. So, there are opportunities for folks who are really heavily weighted in stock or heavily weighted in one business to diversify their portfolio and hedge against market risk across lots of different sectors.
So, those are, kind of, the tried and true core base of our clientele. They’re folks that have either sold a business or have sold a large block of stock in one particular business.
Jimmy: Yeah. No, that makes sense too. I think for real estate property holders, maybe 1031 exchanges or DST investing might still make sense for them, but if you don’t have real estate property or if your gain is not from real estate, this finally unlocks that type of 1031 exchange-like benefit that really wasn’t ever available to stock investors or small business investors.
There’s some other differences between the two programs. I mean, 1031s and DSTs, you’re really looking at cash-flowing stabilized entities, whereas opportunity zone’s a little bit more speculative. It’s typically ground-up development and you’re really looking at capital appreciation more than cash flow. Especially since the first several years, you’re typically not going to be receiving any cash flow, right, while the property gets stabilized.
So, there’s some differences there, and we’ve done other episodes on the differences between 1031s and opportunity zones. So, I don’t want to go down that rabbit hole too far but just wanted to point that out. Vanessa, you know, we talked about the legislation a little bit and some of what it is proposing to do in terms of early sun setting of opportunity zones and how that might impact Oregon and Portland in particular.
Do you have any other thoughts on the proposed opportunity zone legislation? Anything that you feel like maybe it went too far, maybe it didn’t go far enough, maybe it’s just right? What are your takes on it?
Vanessa: You know, I haven’t spent a lot of time trying to understand it in depth. I’ve talked to my attorney about it, but because there’s just no finality on it and things have changed and ebbed and flowed so much over the last few years, and we really try to stay on top of the regulations once they have actually come into law because things get tweaked up until the very last minute.
That said, I understand the point of trying to maybe edit some of the opportunity zones because things have changed over time, and there are some areas which are now depressed that weren’t depressed a few years ago and vice versa. So, I do think it makes sense for legislation like this that unfolds over a period of years to really take a look at it and, you know, make those necessary tweaks to make it accessible.
My attorney also has let us know that they’re thinking about even extending the opportunity zone legislation because of the COVID-19 pandemic and what it’s done to the economy. So, you know, the thought of continuing this opportunity for others now that we really know how it works.
You know, people feel confident with the law that’s on the books, and they feel comfortable making that investment. And then of course we have some seasoning with projects. So, you might not necessarily have to wait that long before you’re going to get a return because, for example, we’re still taking investors in our Salem project, and that opens in December. So, you’ve eliminated a lot of your construction risk and investment risk now by getting in late in the game.
And, you know, we will take institutional investment for whatever gaps we have in equity on the inner Southeast Portland project in particular. And, you know, in that scenario, I think it’s good to back in and backflow with that equity.
But at the same time, I know that those investors that come in through that fund are going to be getting a smaller return than ones who invest directly into our fund because we’ve eliminated one full layer of fees. And most of the institutions are taking a carry on their fund, and we’re not. We’re just charging traditional real estate fund fees, which are less generally than most other fees.
So, I do like that benefit for the investors. It produces a higher return for the folks that invest directly with us.
Jimmy: Yeah, that makes perfect sense. Cuts out the middleman, right?
Vanessa: That’s exactly right.
Jimmy: Exactly, and then they get to take advantage of not only, you know, a more straightforward investment return but of course the after-tax return is phenomenal as well due to all of the tax advantages that come with opportunity zone investing.
Vanessa: That’s right.
Jimmy: Well, Vanessa, I think we’re running short on time. It’s been a pleasure speaking to you today though. And for any listeners or viewers out there who want to get in touch with you or learn more about Sturgeon Development Partners and the opportunity zone projects that you have underway in Salem and in Portland, where can they go to learn more about you?
Vanessa: They can go to our website. It’s sturgeondp.com. It includes a link to our opportunity zone webpage. You can see the projects that we’re working on, and then we can connect via that method. And then from there, if you want to look at our PPM, you get signed up and logged into our portal and you have access to all of that information, including the anticipated returns for the fund.
Jimmy: Terrific. And for our listeners and viewers out there today, as always, we will have show notes available on our website at opportunitydb.com/podcast. There we’ll have links to all of the resources that Vanessa and I discussed on today’s episode, and please be sure to subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episodes.
Vanessa, thanks again for joining me today. Appreciate it.
Vanessa: Thank you very much, Jimmy.