Opportunity Zone Investing Trends For 2023, An OZ Pitch Day Panel

In this panel from OZ Pitch Day Fall 2022, Paul Saint-Pierre and John Sciarretti discuss current trends in the OZ marketplace and what this means for OZ investors.

Episode Highlights

  • Details on the pace of fundraising for OZ projects and the totals since inception of the program;
  • Breakdown of the asset classes attracting the most OZ capital;
  • Why it will take time for OZs to become widely accepted by wealth managers;
  • Discussion on the prospects for the OZ reform legislation being passed this year;
  • Live Q&A with webinar attendees.

Featured On This Episode

Today’s Guests: Paul Saint-Pierre and John Sciarretti

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.

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Show Transcript

Jimmy: So, this segment’s gonna be “Opportunity Zone Investing Trends.” Paul Saint-Pierre is a wealth advisor with PSP Advisors, has a lot of Opportunity Zone expertise, has been on panels all over the country, and has written for “Opportunity Zone Magazine” in the past as well, I believe. And John Sciarretti is with Novogradac, which is the professional services firm that…I don’t think there’s a professional services firm out there that has more Opportunity Zone experience and expertise than Novogradac does.

And Novogradac has a qualified opportunity fund survey that they do to try to corral all of the data around Opportunity Zones and just exactly how much equity has been raised by all of the different hundreds, if not thousands of Opportunity Zone funds all around the country. So, I wanted to start there with you, John. Could you share with us how much equity has been raised so far to date by Opportunity Zone funds all around the country? And maybe you can drill into some specifics on what type of equity raised in what types of properties.

John: Yep, sure. So, we’ve been tracking fundraising since early ’19. You know, we don’t obviously track all of the funds. We think we’re probably capturing 30% or more, a little more, of the marketplace. And right now, we’re tracking 1,613 funds, and of which, 1,231 of those funds have reported fundraising to us. So, we think the real total is three to four times what we have in our fundraising report. The funds that we track are gonna be your public funds and funds that we, sort of, direct survey, but they’re all multi-investor funds that we’re tracking. Through the third quarter of this year, Jimmy, our total’s $32.6 billion. So, we think, you know, we’re probably upwards of around $100 billion on the total marketplace.

Jimmy: Good. Well, that’s what I’ve been telling people. That it’s been over $100 billion for a little while. So, it sounds like I’m in the ballpark there.

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John: I think you are. I think you are. It’s interesting, this year, we’ve reported that $8 billion’s been raised through 3 quarters. So, we’re on sort of a $10 billion year, which would be the biggest year. So, you know, we’re seeing some downward trends in the last two quarters. So, what I mean by that is the last two quarters, that’d be the third quarter of this year and the second quarter of this year, there was $2 billion raised out of that $8 billion.

And so, you know, the first quarter of 2022 and the fourth quarter of ’21 were $4 billion quarters. So, you’re seeing a little downward trend. And when you look at timing in this investment, obviously, there’s a lot of things that trigger investment. You know, the third quarter tends to be a trigger point because partnerships and the like, that’s sort of their deadline because the pass-through deadline is through the due date of the partnership tax return.

So, when you look at this year’s third quarter, it was about 20% less than last year’s third quarter. So, it does anecdotally, kind of, represent a little bit of a slowdown in fundraising. As far as what assets are being invested in, primarily real estate, at least of what we’re capturing. 75% of the money is actually targeted to multi-family. I think we’re up to like 125,000 units in our survey. But the lion’s share of the money is multi-family.

Only 8% of investments in our survey are targeted to operating businesses. And, you know, I think it tends to be the big funds that we’re surveying. I think a lot of operating business investment in this space gets done privately and a lot of it’s smaller chunks over longer periods of time, not these big chunks, you know, for real estate. So, that’s, kind of, where we are on the fundraising and the types of assets that are being invested in.

Jimmy: Great. Well, thanks for laying the groundwork there, setting the stage for us, John. I love that survey data. I wrote an article about your survey that came out. I’ll link to that and I’ll link to the survey itself in a minute here in the chat. Paul, I wanna turn to you now. We’ve got some mixed signals, I feel like, from the OZ marketplace.

On the one hand, Opportunity Zone equity raising keeps treading along pretty nicely. We’re on track for $10 billion of equity raised this year according to the Novogradac survey, which would indicate probably really, you know, $30 billion to $40 billion considering how much of the marketplace they’re able to capture. But at the same time, someday, we may see a slowdown here. There’s a little bit of a lag with Opportunity Zone funding in that, you know, it usually takes place within 180 days of a capital gain event.

And with the markets turning down the way they are and a lot more investor uncertainty and interest rates going up and inflation rearing its ugly head, and maybe we’re in a recession or heading toward a recession, there’s a lot of macroeconomic uncertainty, how do you put all that into context with respect to Opportunity Zone investments, and how do you consider OZ investments for you and your clients?

Paul: You know, let me tie into John’s comments. I mean, I’m one of the oldest veterans on the panel here. But, you know, the OZ program was created in the Tax Act…in the tax code. So, I consider the QOF as another tax creature. It wasn’t created in the securities laws, it wasn’t created in state laws. It’s really a creature of the tax laws as John’s firm well knows. There’s only a couple other tax creatures that preceded it. It’s the investment companies of 1940 was the first tax creature in the tax code. The REITs were created in 1960. The business development companies were tacked on in 1980 out of the ’40 Act. And then along comes the QOF bolt-on in 2018. The results are exceptional.

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I was in the REIT market in 1986, ’87 before all the real estate developers got outta debt trouble and converted into REITs. But before the growth in the REIT market, it was a backwater business. And so the market cap of REITs was only about $8 billion or $9 billion when I was involved in it. And so these results of capital that’s being swept in to the Opportunity Zone market, you get inflation adjusted, whatever. Go back and look at the growth of the ’40 Act companies. Hockey stick, very slow traction and adoption for both the REIT market and the mutual fund market.

The results here for the qualified opportunity funds is exceptional when you consider the headwinds. Two years without regulations, regulations finalized the day of the emergency declaration for COVID. So, big backwater there. Then we have the COVID years where investment capital, you know, sort of, that freeze of we don’t know what we wanna do, but we certainly know we gotta deal with COVID, and now we’re facing a recession. But the numbers are exceptional.

I was really impressed by the first IRS, by the Treasury reporting, you know, I guess John knows, $20 billion into qualified funds from tax data. This data is exceptional. So, the problem is, or the challenge really is, first, let’s talk about wealth advisors. Wealth advisors managed trillions of dollars of managed wealth. It’s the registered investment advisor market. I’ve carried those credentials for the better part of 40 years of being on the advisor side. So, that is the area where we need to do a lot more penetration to educate wealth advisors about how this fits in to investor portfolios. And there’s more that comes to the table than just the client and the wealth advisor.

This is a sophisticated product. It’s not complex. I hear people don’t wanna do it because it’s complex. No. It’s a sophisticated product and it should appeal to the intellectual curiosity of the wealth advisors. But I always say, you know, the estate planner needs to come to the table during those discussions, the tax planning professionals all need to come to the table. It takes a village to quickly grasp the understanding of how this product works for the clients. I think the wealth advisors are behind the eight-ball on this.

If you look at many of established wealth advisor channels, the big brands, they don’t touch anything until the product goes through central due diligence for these wealth management firms. So, it’s gotta go through centralized due diligence, then it’s pushed down to a product down the shelf that the wealth advisors can show. So, keep in mind we’re going against long-term history of, “This is the way we do it for 20 years, and this is the way we’re gonna do it for 20 years.”

So, when it comes to alternative investments and things that don’t normally sit the box, it takes time to go through the top of the funnel, the wealth advisor companies, due diligence of the product, educate everybody how it works, how it fits in the client portfolio. Unfortunately, it takes time. And I always…whenever anybody asks me, we don’t have time to waste. And the wealth of managers to get on board, waste no more time. This program’s only open to the end of 2026, so get on board and make the program work. I have more to say about it, but I’ll certainly lace some more comments in the rest of the panel time here, Jimmy.

Jimmy: Yeah. Well, let’s get John to give a response to that. John, do you agree with Paul, there’s been, kind of, a slow uptake from the IRA and wealth advisory community? Do you agree with that? And why is that and what’s the solution?

John: A slow uptake?

Jimmy: A slow uptake. It’s been slow. I think I misspoke. But the wealth advisory community’s been, kind of, slow to pour energy into the OZ program.

John: Yeah. I mean, I don’t… Yeah, I think high net worth family office is the lion’s share investment, although we do have some clients that have made their way into the wealth advisory community. And yeah, I think it takes time, you know. The problem is we don’t have a lot of time on the back end.

Paul: Yeah, we don’t.

John: And then, you know, sort of, being once we move from this sophisticated investment, it’s probably a more difficult sell, I would think. Because now you have, sort of, the tax benefits you’re explaining on top of your normal economic benefits of an investment, you know. So, it takes…there’s a learning curve in how to sell it.

Jimmy: Is there a headline risk there too, given the response that this program received from the media when it was first brought out in 2019? Do you think that’s still a fear for the wealth advisory community and also some of these larger institutional players that haven’t really come to play yet?

John: Yeah, I mean, potentially, it could be. I mean, I don’t know for sure. But I know there are some, you know, wealth advisors that…you know, large wealth advisors that are participating, so that you would think would be just as concerned about headline risk as some of the others. So, it’s you know, maybe not.

Jimmy: Yeah. Fair point there. What about other trends that both of you, kind of, have your eye on as we wind down ’22 and head into 2023, particularly given the current macroeconomic climate with respect to Opportunity Zone equity raising and capital deployment? Any trends that you’re anticipating? So far, to date, multifamily’s been by far and away the most popular asset class. Do you expect that to continue or change, or any other thoughts that you may have? Paul, I’ll open it up to you first.

Paul: Yeah. I think there’s a lot of upside here. One of the comments I really wanna make, if you take the last presentation, for example, well done. I tremble when I have to follow Jill Homan. I mean, she’s got way more medals in terms of contribution to this industry. But when I look at the last presentation, you know, these programs, all these funds, all these investment initiatives, they work for taxable investors as well. This is not just for the QOZ investor, for that club. We always say it’s the deal, the deal, and the tax benefits are purely upside optionality.

And I think the industry, to the extent that it can keep attracting even non-OZ capital because there’s a fundamental economic premise here, these are great deals, that’s the upside to keep attracting capital to these deals. I think one of the panelists just talked about distressed QOZB deals. I’ve certainly been thinking about it. I’m not afraid of it. It’s probably a great opportunity to buy into partly completed projects in OZs without having to take the three years of zero return on a pre-development pre-shovel-ready project.

The wildcard is gonna be federal tax legislation. We don’t know what it is. We don’t know when it is. I tell everybody in OZ works, “Don’t pray for it.” We have a program that works here in the OZ program. There is no time to waste, get on with it, make this program work. If there is federal tax legislation, I hope it’s all positive benefits and not further takeaways.

Finally, with regards to reinvestment and all the other things, these OZ census tracks expire on December 31st, 2028. It’s a hole in the program. There is no identification of what all the census tracks are gonna be after 2028. For those who are thinking of reinvestment, the reinvestment wheel will stop in 2028 unless there’s some identification of version two of census tracks. But basically, I’m very, very positive about this market. It’s really dollars and deals. How do you raise enough dollars to get the money invested fast enough into shovel-ready projects? Dollars and deals. Anybody in this business who’s trying to balance, that really difficult challenge is dollars and deals.

Jimmy: Absolutely, Paul. Yeah, the ’28 thing is kind of interesting. You’re right that the zones technically are only in existence through ’28. I have hope that they’re gonna get that sorted out. By the way, I spoke on a panel last month at the OZ Expo with a member of Secretary Mnuchin’s team at the Treasury Department that wrote the regulations. And I won’t mention him by name, but you could probably guess who he is. He mentioned he didn’t think that was an issue at all. Either it’s not really gonna be an issue for whatever reason or it’s gonna be resolved.

Paul: It’ll be resolved.

Jimmy: John, Paul brought up, you know, tax legislation possibly pending here. Maybe with our final few minutes here before we get to a couple of questions, we just had an election yesterday. We don’t know the outcome for certain in all the races. It looks like the Senate may very well be determined yet again by a runoff election in Georgia. Maybe the Democrats will already gain control before we get to December 6th in that runoff election.

Meanwhile, on the House side, it looks like the Republicans are going to retake the House, but even that’s still a little bit too early to call, though it looks like it’s probably gonna be Republican based on the projections that I’m looking at now. Probably in the 80%, 85% range. John, with all that said, if we have a split Congress, assuming that we do get a Republican House and a Democrat Senate, what do you anticipate in terms of that OZ reform legislation that I’ve already covered throughout the course of the event today? Do you think it’s gonna pass? When do you think it’s gonna pass? I’m gonna ask you to gaze into your crystal ball here.

John: So, my predictions are a little less accurate than real clear politics.

Jimmy: Fair enough. Great caveat.

John: But no, I think…I mean, I think…I’m encouraged because I think that, you know, having a split Congress, there’ll be some interest in the Democrats getting some things done before year-end. You know, we have to have an extenders package or some tax title. Likely, this would be part of an extenders package, which would be part of a bigger bill. So, I mean, assuming it gets tacked on the omnibus bill or something like that, there’d be some negotiation.

I know that in that extenders package, the Democrats are real interested in the Child Tax Credit not being reduced, which is supposed to, sort of, partially sunset this year. So, it’s…you know, I think it’s important for them to get extenders in if they can do it. And the fact that it’s split, you know, this is a bipartisan bill, so I think we’re sitting in a good spot that we have a bipartisan bill and a split Congress. And, you know, again, I don’t have a crystal ball, but it could have been a worse outcome, I think, for us.

Jimmy: Yeah. Well, that was… Go ahead, Paul.

Paul: Yeah. One of the more interesting things in there that I’m focused on is the fund of funds provision. You know, if we get a fund of funds provision, I would expect a certain element of Wall Street to come on board in this program to form and run fund-of-funds. So, that’s further upside if that tax bill happens, I think, in terms of money flows.

Jimmy: Good.

John: I did say Congress was split. I guess I was, sort of, relaying my thoughts. It isn’t yet, right?

Jimmy: No, it’s not yet.

John: So, it may end up being red, but…

Jimmy: It looks like that’s probably where we’re headed, about an 80% chance that we end up with a split Congress, but it’s too early to call still. I was hoping we’d have a kind of advance on that.

John: If it’s not split, if it ends up red, I think, you know, there’s probably a good chance nothing happens this year, but it doesn’t mean it’s dead, you know, so.

Jimmy: Yeah. Well, the good news is then the brilliance of this…the Opportunity Zone Act as it was initially written, it’s a bipartisan and bicameral bill, and the reform legislation that got introduced in April is also bipartisan and bicameral. So, we’ll keep our fingers crossed hopefully that passes. We got a couple more minutes, I wanted to get to a couple questions here. We’ve got two questions from Michelle, actually. Michelle asks, “How can we get a comprehensive QOZ fund report since there isn’t an integrated federal system? Can you anonymize the funds and report out by region?” I guess this is a question for John. And I just linked to your most recent report in the chat also.

John: Right. So, we publish that twice a year, and it’s on our website. So, if you link it, that would be the only place I know to get it.

Jimmy: There you go. So, Michelle, check out that link to the Novogradac survey data in the chat there. That’s probably as best as we’re gonna get with, you know…in lieu of a federal report. Michelle also asked, “Of the multi-family investments that have been made in OZ funds, how many are using federal funds to also create affordable housing?” Do you have any insight into that, John?

John: I mean, there are…I don’t know the numbers. You know, I’d say the majority are market rate, but there are funds that are focused on affordable housing that have done a number of deals. I lead our Opportunity Zone working group, which we have, sort of, worked through some of the issues in the regulations that we felt we could modify to help the investment on the affordable housing front. And so we’ve actually spoken to treasury about these modifications and felt pretty good about the response, but we’re still, sort of, waiting for [inaudible 00:21:18], but.

Jimmy: Good. We got time for one more question here from Bruce. He asks, “Do the investments in OZ funds track roughly the same as the public REIT market?” I don’t know if either one of you is tracking how OZs are flowing into…or how equity is flowing into OZs versus the public REIT market? That question’s up for grabs for either one of you if you know.

Paul: I think there’s a question there about fees. I mean, the REIT market is, you know, hundreds of billions of dollars now. It’s, you know, $700 billion, whatever the market cap is. It’s huge. They’re all internally managed, they’re not externally managed on the REIT world. So, management works for the REIT. They’re employed by the REIT, for the most part. Very different creature, very different tax creature in terms of the compensation and things like that. I haven’t seen anybody put together a fee chart of all the OZ funds, but you…

John: I would guess that the REIT market would have more stabilized assets, you know, Opportunity Zones…

Paul: Yeah, they don’t take it all out.

John: …have to have value-added assets. There’s a little more risk, a little more return around it. But the REIT markets tend to be stabilized.

Jimmy: Yeah. Not as many opportunistic investments in the REIT market. And by definition, all of the OZ funds have to be opportunistic. And just to answer Bruce’s question, he asked, “Do we have a chart of investments that outline the funds, fees, and charges?” Kind of yes and no. So, it’d be very difficult to put together such a chart because the fee structures of these different QOFs oftentimes are so different. It’d be like comparing apples and oranges in many cases based on the different prefs and waterfalls and how they calculate the pref, whether it’s compounded or not compounded, and over what time period, and what type of asset management fee there may or may not be, development fees, acquisition fees. It’d be very difficult to do.

That said, for the funds that are presenting on this event today, we are going to have as much information on each of them as possible in an investor deck that we’re gonna circulate to everyone who registered for this event today. We’ll get that out probably in the next day or two, so sit tight there. It’s easier said than done, but we’re doing our best to do it. That’s it for our time today, gentlemen. Paul, John, thank you so much for joining today. Really appreciate both of you gentlemen being here. And thank you for your leadership in the OZ industry.

John: Thank you, Jimmy. My pleasure.

Paul: Thank you for inviting us to participate on your panel. It’s a pleasure.

Jimmy: Absolutely. Thank you, guys.