OZ Pitch Day - July 20, 2023
Automated Opportunity Zone Compliance, With Landon Johnson
Opportunity Zone investing is simple, until it’s not. While the overall program is simple enough to comprehend, the devil is in the details. Complying with the statutory and regulatory requirements can be overwhelming for many fund managers, real estate operators, and investors.
Landon Johnson, chief marketing officer at CapZone Analytics, joins the show to discuss best practices for Opportunity Zone compliance, and his firm’s automated solution.
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- The technical challenges involved in designing an automated compliance product for the Opportunity Zones industry.
- The different compliance needs of different Opportunity Zone stakeholders, from communities to real estate developers to fund managers to investors.
- How the compliance process can help analyze and prioritize different risks involved with Opportunity Zone investments.
- The importance of compliance and data reporting for the industry.
- How AI may shape the future of automated Opportunity Zone compliance solutions.
Guest: Landon Johnson, CapZone Analytics
About The Opportunity Zones & Private Equity Show
Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.
Jimmy: Welcome to the “Opportunity Zones & Private Equity Show.” I’m Jimmy Atkinson. Opportunity Zone investing is simple until it’s not. The overall concept of the tax incentive program is relatively straightforward and simple to understand, but the devil is in the details, as I like to say. Complying with the statutory and regulatory requirements can be overwhelming for many fund managers, real estate operators, and investors. Joining me today is Landon Johnson, chief marketing officer at CapZone Analytics. Landon, thanks for coming on the show. Welcome. How are you doing?
Landon: It is my pleasure, Jimmy. Thank you. Thanks for having me.
Jimmy: Absolutely. Great to see you again, Landon. We grabbed a cup of coffee, you and me last summer, I think it was out in Dallas when you were first starting with CapZone Analytics. And a lot has transpired for you and your firm, CapZone, over those last 10 months or so, I guess it’s been.
Landon: Feels like both a day and a decade at the same time.
Jimmy: I’m sure. Well, Landon, I’m guessing that some of our audience of high-net-worth investors and advisors have probably some level of familiarity with CapZone Analytics already. But for those who aren’t yet familiar, can you give us a brief introduction to CapZone and what your role is there?
Landon: Absolutely. Absolutely. And before I do that, if I may, Jimmy, just thank you for what you do here. I think we’re at a point in time in the industry now where sharing information and thoughts are needed and important. And yours is an important voice out here, so thank you for that.
Jimmy: Oh, thank you.
Landon: I’ll start by telling a story. Okay? We believe that a story is being written through the Opportunity Zone program, right? We can go back to the early days five years ago where the hook was drawn and the regulations were passed. And they were passed in a way that was both mysterious and wide open and alluring and mysterious. And that kind of gave birth to this industry and the beginning stages, the beginning chapters, if you will, of the story.
Now, certainly, no one could have predicted an epidemic, a worldwide epidemic, pandemic. No one could have predicted a real estate in an economic downturn. So, like any good story, there were plot twists along the way. But here we are five years later and we’re still in the middle of our story.
The founders of CapZone Analytics, and I’ll get to kind of my involvement here, but the founders of CapZone Analytics saw the early crafting of that story. And I suppose in a pick-your-own-adventure type of way, they really saw the promise of the program being, you know, a great opportunity for investors to take advantage of a program by the IRS to avoid paying taxes and drawing that capital into areas of distress, the Opportunity Zone program.
Again, in a pick-your-own-adventure type of way, if we think of it towards the end of the story, and we can kind of picture this triumphant parade of all the great stories that will be told, and in some ways are being told right now in these distressed areas of how the capital’s flowing to these areas and the program is humming on all cylinders, that was really started as the genesis of the vision for the company founders.
I was approached in late 2021, early 2022 by our CEO, Jonathan Ewert, and he had been attempting to explain the Opportunity Zone program since 2017 to me to more or less of success. But this time, he was really intent upon it. He said, “Landon, I need you to understand the program because I would like your help in building out the team and building out the product.” And that was right before, this may be six weeks before our coffee in Dallas in early 2022.
He was successful in helping me understand the program and the vision for the real need, the gap that existed with respect to risk management and compliance in the space. So, hopefully, that does a decent job of explaining both kind of why we’re doing what we’re doing and my involvement in the space.
So, 14 months ago, we started the process of building our risk management and compliance platform. And then I guess the quick update includes at the end of 2022 in the fourth quarter, we released, or we went into a beta mode where we onboarded a handful of clients’ data to beta test the system. It was a successful beta. So, we launched officially in the middle of January and are in the process now of adding clients to the platform and certainly going gangbusters in refining the platform.
Jimmy: So, you’re a few months in now post-launch. We’re recording this episode in the middle of April 2023. So, it’s been…I guess it’s been about three months since you did your full launch of the product, the compliance solution that you rolled out for the Opportunity Zone industry. But I’m curious, can you tell us a little bit more, what is it exactly, first of all, and also I’m curious how it was designed. I would imagine it was a huge technical challenge to design this automated compliance product for this relatively new niche tax incentive program that is Opportunity Zones. Can you walk us through that process and who was involved?
Landon: Yeah. I’m glad you said…you left off the process because it really was a process. I’m going to hold off on the technical response in a moment and I’ll talk about how we kind of created, I’ll say, the requirements for the product. You know, our space, the Opportunity Zone space is a unique one in that there are a number of players, thousands of players, maybe tens of thousands of funds out there, fund managers and individual investors. And there’s an army of accountants who have built up expertise in the space and attorneys who have built up expertise in the space. And at times it feels like these expertises and these experiences are really distributed and don’t come together in a kind of a communal way.
So, we, sensing that, we went on just a really intense roadshow in the end of 2021 and 2022 and literally sat with some of the best minds in the space, some of the attorneys who get the thorniest problems sent their way and who are responsible for setting up some of the most sophisticated funds out there, some of the accountants who in the reporting aspect of fund management, you know, see those challenges come across and get a lot of…frankly, get a lot of at-bats at working with Opportunity Zone funds.
We sat with them and started asking really basic questions like, when you get a new client, what type of information do you capture? Do you collect in order to get a sense of their operation? It started with really basic questions like that, and then over time and over many sittings, we got down to what are some of the more common problems that you see them, some of the more common traps, if you will.
You just had a wonderful section with Plante Moran team on the traps of the OZ program. Things like that came up. And so, that helped us to really start getting our arms around, if we were to start building a product that helped our clients to track and manage the vast amount of data required to ensure that they’re compliant, how should we start? And so, we used that inspiration from some of the best minds in the industry to just start. And frankly, that’s where we are. We’re just starting the process. I’m happy to explain a little bit more about where we are and what’s coming. But that’s really where we started the requirements gathering and kind of the product visioning aspect of it.
Jimmy: Yeah. You say…
Landon: From a technical… Go ahead.
Jimmy: I was gonna say you say you’re just starting still. You already have put in, according to your website, you put in, I think, tens of thousands of hours of R&D into this product, and you’ve talked with some of the most brilliant and expertised accountants and attorneys around the country that have become experts in the Opportunity Zone program. So, what’s next now for the product?
Landon: Well, it turns out, Jimmy, this will not surprise you, our space is complex, right? That will surprise nobody at all. The product, I can really simply describe the product from a technical architecture standpoint. We have a data collection layer, which is designed to capture data from, you can think of a fund. And our target market is really existing funds. The more complex, the better, so multiple investors into a fund and multiple projects. That’s really where we’re designing our product too because we know that once we nail that, we can handle the simpler cases of OZ funds.
Now, we have a data collection layer designed to capture that information at the investor, at the fund, and the business level. And then we have an analytics layer, which we are programming to basically codify the Opportunity Zone IRS tax code. We estimate there is at least 200, maybe many more discreet rules within the Opportunity Zone code. And we have a running start on the rules that we programmed into the analytics layer to take client data, run the rules, and then the third layer, take those rules and prepare the output.
So, very simply, data analytics output. The output for now is largely reports. So, the platform that we’re building is tech-enabled. Our analysts are the ones with fingers on the keyboard and then interface with our clients. And our use really is in the form of reports. We’re looking ahead. We’re also envisioning supporting dashboards and feeds into their fund administration or accounting systems. But for now, they’re basically reports, if that makes sense.
Jimmy: It does. So, you mentioned you’ve codified over 200 rules so far with Opportunity Zones. Can you give us an example or a couple of examples of what are some of the rules that you mentioned there?
Landon: Right. If I actually said that we have codified them, then I’ll correct the record. We estimate that there are 200-plus rules. We’ve started the codification of those, again, with the most important rules we believe in mind. And I’m happy to give you many examples. We could run out the clock on these. But for instance…
Jimmy: Just give me one or two. Yeah.
Landon: Yeah. For instance, so we’re doing…we’re basically doing our own version of thin slicing, asking questions that will help to understand if more attention is required in a particular area. I think, again, to reference back, I think it was on the Plante Moran…your Plante Moran’s episode where they talked about the bank account. That is literally one of our rules for a QOZB. Does the QOZB have its own bank account, as an example?
Now, the IRS code doesn’t require that it has its own bank account. This is an example of a little bit of a peripheral approach to it. What we learned from our fact-finding and researching is if it doesn’t have its own bank account, then so many of the downstream requirements will literally be unable to be ascertained. You won’t be able to tell if they’re…if the money moved into the account in a timely fashion or account for how it is being used from a working capital standpoint.
Jimmy: So the statute, neither the statute nor the regulations explicitly require that a QOZB have a bank account, but it’s impossible to really operate a QOZB without one in terms of actually tracking how the money flows and whether or not the fund is then in compliance with the regulatory and statutory requirements. Is that right?
Landon: Exactly. You got it. You nailed it. Another example might be something like original use. Original use is its own, you know, set of questions and contemplations about is this original use, and therefore does substantial improvement have to take place in a property that’s being owned? We probably have a set of eight questions surrounding substantial improvement and original use that allow us to dive into that part of a QOZB for our clients and return…basically, return a red, yellow, green with the source requirements and regulations that indicate what the regulations state as far as substantial improvement and what we call analyst comments, which really capture the actual unique essence of a particular client’s setup.
And as you know, every single client will set their Opportunity Zone fund up and their QOZB up separately. There’ll be their own fingerprint on it. So, basically, rule by rule, we’ll be able to capture data from our clients, run our rules through the analytics engine, and output reports on, is this something that seems like it’s following the regulations, or does it require more attention? And that require more attention is probably worth a deeper discussion. But that’s…hopefully, you’re getting a picture of the platform that we built.
Jimmy: Yeah. I think I’ve got a pretty good picture of it. So, what would you say is the main problem that you are attempting to solve for most of your clients? And I get the sense that your clients are mostly Qualified Opportunity Funds, is that right?
Landon: Yeah. Yeah. All of our clients would be…would have…I mean, we would onboard an existing Qualified Opportunity Fund onto our platform. So, by definition, yeah, a Qualified Opportunity Fund is the starting point. So, our actual client might be the CEO of that fund or the fund…you know, the chief compliance officer of the fund or CFO of the fund.
As far as the main problem that we’re solving, I don’t necessarily think of it as a problem that we’re solving as much as the arena that we are operating in because this is a really, really interesting arena. It’s basically an intersection, a collision almost, of a number of different spaces where you have our sophisticated attorneys that have developed an expertise in Opportunity Zone programs that are setting…that are working hard to set up the Opportunity Zone fund and the integration to the QOZB in just the right way. And you’ve had a number of them on your show.
They’ve developed an expertise, they have a keen understanding of the program, they’ll set up the program in the right way. And largely, then they’ll step away as the fund starts to operate, brings in money and investment projects. You’ve got your accountants, similarly, who have developed expertise and there’s…you’ve had ’em on the program and they are popping in at self-certification times and of your tax returns and expert at making sure that boxes are checked, timelines are being kept, and reporting is being made.
Nobody’s really sitting in that space between the legal documentation and the accounting documentation. Add to that the complexity of the fact that we’ve got…I mean, this is a real estate intensive industry, so we’ve got, you know, real estate projects operating on developers’ timelines in the spirit of the developer, which is getting the project done as quickly as they can, very achievement-oriented, not necessarily concerned so much about…or at all maybe in some cases, about OZ compliance or information dissemination.
And what we’ve seen as we…you know, through our work with our clients is there’s major gaps in here where nobody’s really sitting, who is looking at both the accounting information and the legal information and the project information. And where that really comes into play is certainly at self-certification times and end of the reporting, or when a particular issue pops up in the actual structure of the OZ program, it turns into a fire drill. And we would love to think…I mean, if there’s one problem that we’d love to solve for our clients is to help them avoid costly and anxiety-inducing fire drills.
Jimmy: So, you just identified a whole host of problems that your product actually helps to solve. You said it wasn’t a problem, but there are some problems. I mean, the main problem I think that you identified was there’s gaps. There’s a gap between when the attorney first sets up the fund and when the accountant comes in to do your tax prep or end-of-year tax returns. There’s a gap in between that time and every year really, there’s this gap oftentimes where the chief compliance officer, the CEO, may need some assistance with staying on top of all of the different compliance requirements…
Landon: Got it.
Jimmy: …timing issues, cash flow issues, you know, how the capital flows that your product helps with. Your product helps address that gap. It fills that void, I guess.
Jimmy: So, your clients are primarily the Qualified Opportunity Fund, exclusively. The Qualified Opportunity Fund is where you start with. You mentioned oftentimes it could be a CEO or a chief compliance officer that’s interfacing with you and your team and the product. There’s other stakeholders that are involved that… Do they necessarily interact with your product? Do LP investors in the fund get reporting from your product? Do the underlying Qualified Opportunity Zone Businesses, I guess there aren’t a lot of operating businesses, but maybe that’s a real estate operator or developer, do they interact with your fund as well?
Landon: So, first of all, we are seeing more operating businesses, which we’re very excited about. We believe it to be one of the, you know, shining promises of the program. CapZone Analytics is ourselves an operating zone business located in a zone. And if I may just run off on a tangent, one of the things we are…
Jimmy: Please do.
Landon: Well, one of the things that we are doing in addition to our product is we really want to create the template for the operating business operating within the operating zone program. So, every single thing we’re doing, this is really kind of a neat feature and a fun part of working at CapZone Analytics, every single thing we’re doing, we’re trying to create a template to offer to the rest of the industry as more operating zone businesses are being built up. And I’ll just give you one example.
We, you know, probably four or five months ago at this point in time, created our…upgraded our accounting system and redid our chart of accounts. And we literally, for every single one of our expenses have in zone or out of zone, just as one little…the first we believe of any chart of accounts to have in zone and out of zone. But this is the mindset that we are bringing to the operating zone, business as an operating zone, OZ company ourselves, operating business OZ company ourselves.
But you just…you might just open a can of worms because here’s another gap that we really…we get excited about operating in. Do other stakeholders come into play outside of the Qualified Opportunity Fund? The answer is yes, and it’s kind of a big deal. We see the space because we put on our compliance and risk management lenses, we see the space as almost a liability heat map. Okay?
On one level, certainly, the Qualified Opportunity Fund is a central source for money coming in and money coming out. And there’s…you know, the Opportunity Zone program is built around making sure that that mechanism works. But if you think of the liability heat map, it is that fund manager that has signed the original 8996 that basically puts them on the hook for the information that they’ve captured is sufficient, substantial to do their self-certification, and operate effectively within the program. They’re signing that upon fund formation.
So, that right there puts them on the hook to make sure that they have the necessary information to ensure they’re in line with the program. That’s one liability. And, certainly, being our primary contact, we’re working with them to ensure that they have the right information, but that’s not where the liability ends, right? There’s all the investors into the fund or into the Qualified Opportunity Zone Business.
The investors are on the hook too, because at the end of the day, their tax return, their initial capital gains investment, or other investment into the program, that’s the thing that’s going to get inspected as the IRS continues to pay more attention to this program, as they should, to the Opportunity Zone program, as they should. Because we geek out on this, we follow the TIGTA reports that…
What does TIGTA stand for? Treasury Inspector General Treasury Tax Report, the TIGTA reports. And you can just see their numbers ticking up as far as the funds that they’re inspecting. The most recent number was 140 funds at the end of last year, and 5,000 individual investors. They’re kind of tucked in there on page 60 of these TIGTA reports. But the IRS is starting to look at more of these, and ultimately, at the end of the day, it’s the investors that will be holding a liability too, and at risk is their initial investment as well as their entire tax return, right?
It’s gonna get…it would get messy if that ended up kind of taking off. So, we see it as a liability heat map, and we’re trying our best through the fund, because that’s where all this information is flowing, to investigate, monitor, manage, and ultimately report on these things so that we can push resources to where they’re best able to be used to manage this risk.
Jimmy: So, you identified this liability heat map. It kind of centers around both the fund manager, but then also that LP investor. I guess the fund manager is filling out IRS form 8996, and then the LP investor who’s filling out form 8997. If I may borrow your expression, geek out a little bit. What are some of the…some other risks that are involved for each of those two parties? Like, have you seen…or if you have any examples of some landmines that you’ve seen people step on and how do you help your clients prioritize those different risks and what they should be watching out for?
Landon: Yeah. One risk that popped right into mind, and it’s a systemic risk, but it’s visibility. So, if the liability is held at the QOF level, the fund manager, and the investor level, a vast majority of the activity that needs to be tracked and managed is at the QOZB level. Now, we kind of already talked about…we didn’t talk in detail, but we mentioned, insinuated that the QOZBs are…there’s a varying degree of motivation for the QOZB to provide any of this information. I’ll just put it that way, right?
And we’ve seen it ranging from highly motivated because there’s a tight integration, which is great, to we actually don’t talk to our QOZB, they’re not talking to us right now and everywhere in between. But the reality is, is that if you’re genuinely, and with data, going to be self-certifying on the 70/30 and the 50/50 rule and the 90/10, then you need information from the QOZB level. And it’s dependent upon what stage you’re in. And construction, not so much going on, operating, much more. So, if you’re talking about operating business, you’re talking about monthly payroll information that has to be captured.
So, to answer your question about the risk, there’s a visibility risk. The liability is at the QOF level and the LP level. Visibility into operational data at the QOZB level, that’s a big gap, a big visibility issue, and frankly, a risk that…I mean, the obvious answer is that we’re stepping into to try to bridge. So, that’s one systemic risk that pop right in mind when you’re thinking of risk.
I mean, there’s…you get into the details of each and every one of the rules. And, you know, the IRS has done such a really inspired job to craft these rules in a way that is both at the same time, you can operate within them, and also some of us can’t wait for deeper interpretations of them or tests of them so that we know how are we actually supposed to do this. There’s, you know, each one of these 200 rules probably we could do, it’s our own webcast on.
Jimmy: That would fill up almost an entire calendar year if we wanted to do one a day, I guess.
Landon: Either you make your viewership go like this or like this. I don’t know.
Jimmy: Maybe a little bit of both. No, but it is quite a challenge. There are a lot of different risks out there. Thanks for identifying a couple of ’em right now for us as some examples there. So, as we talk about your automated compliance solution and how it helps to manage these different types of risks and incorporate these different rules, these compliance rules, where do you see your clients using your product the most?
I mean, can your product be used at the very start of a Qualified Opportunity Zone project or fund? Can it help identify the site selection? Can it help with launching or fundraising? Is this the type of reporting that you provide that can help be marketing essentially for the fundraising portion of the funds operation, or is it more meant to just be after-the-fact backend reporting after capital has flowed into the fund?
Landon: There’s like five different ways I wanna take this, Jim. But let me…
Jimmy: Take it in all five of the ways.
Landon: Okay. Okay. Let me start…I’ll start…
Jimmy: Really unpack it.
Landon: I’ll start right up the middle.
Landon: And this’s basically shout out to our clients out there who have so graciously invited us into their main challenges and allowed us to learn from them because we are still, and probably will forever, be led by our clients as far as what they need and how they need it. But right now, the initial challenge sure seems to be that visibility component that I was telling you about. If we’re to evaluate how my portfolio set up is set up and how my businesses are being run, can you help provide me visibility into my adherence to the rules?
Okay. So, first and foremost, there’s just a visibility challenge that we’re helping them solve through that initial reporting, for sure. I’ve been sensitive from the very beginning about not wanting to be the team or the company that is constantly just delivering problems and shining the spotlight on areas of shortcoming.
Our clients immersively helped us understand, “Hey, if you could take now, if you could take all of this data that you’ve provided and all of these red, yellow, green lights and these dashboards and help us prioritize these, that would be great.” And so, that helped give birth to what we now call the Opportunity Zone risk register, which is basically…I mean, risk registers are a well-established tool used within corporations to prioritize the risk that they have, and a major corporation that might include things like currency rates and fluctuations of political wins and that type of thing.
In the OZ world, the prioritized risks are really what is the likelihood of this thing…of this risk coming to happen, and then what’s the financial impact if it actually does happen? So, we’ve taken the initial reporting, red, yellow, green dashboards, if you want to think about it, and started creating the Opportunity Zone risk register, which is a prioritized, hopefully, manageable set of risks that have been identified. And then, obviously, that would extend into the mitigation actions, right, the work plan, who owns the thing, how’s it gonna be addressed, and how do we know that we’re successful?
And this all gets to really this…you know, the IRS, again, has built in this spirit of the law into the OZ program that allows us as operators to basically, we’re doing our best right now, the ability to show that we’re doing our best to show a program of we’re programmatically identifying issues, tackling ’em, fixing them, and we have a body of evidence to show over the past months and years to prove it.
We believe that the Opportunity Zone program is set up so that that would be looked upon favorably by anybody, any regulators knocking on the door. So, that’s one, but I’d call that kind of right up the middle as far as a use case for this. Now, your point about the front end of the business raising money, and I’ll even say distinguishing oneself in the marketplace, it’s a competitive marketplace especially those that are trying to raise significant capital.
We believe, and it’s just a belief right now, it has not…just because of lack of time in at-bats, it has yet to be proved out, but we’re operating in the assumption that if there is competition for investment dollars, that those investment dollars, all things being equal, are going to gravitate towards a fund that is operating in a transparent manner fully aligned with the code and has reports like the ones we’re talking about available and they’re pursuing this program of continuous improvement and risk mitigation. Again, still remains to be seen, but in other industries, in the financial world and peripheral industries, this has certainly been the case. Some of our more savvy clients are basically banking on this in the competitive marketplace.
Jimmy: You’re hoping you provide these reports, you provide some form of almost third-party validation that, hey, this fund is using our product to improve their likelihood that they’re going to be in compliance with the program. That’s a pretty good mark to have in their pitch deck or their investor summary, what have you, when they’re going out to raise capital in this. And you’re right, it is a competitive marketplace right now.
Landon, what’s the overall role? How would you characterize the role or importance of compliance and data reporting for the broader Opportunity Zones industry? I think you hinted at this a little bit in your previous answer. And also, do you think it…? You know, currently, the form 8996 is very limited in scope. It doesn’t really collect a lot of information. But there are some in the industry, actually, many experts in the industry believe that at some point, more data collection will be required by the Treasury Department. Do you think that’ll come to fruition? And then, yeah, getting back to my other question, what’s the broader importance of even collecting all this data on an industrywide basis?
Landon: Okay. So, you kind of… Couched in there was the suggestion of regulatory changes, part of which includes increased reporting requirements. We certainly look at that. We’re watching it closely. I have no information that anybody else doesn’t have. So, my crystal ball is still murky about whether it happens or whether it doesn’t happen. Certainly, if it happens, it would be a very quick transition to more reportings required. And I think, you know, the sophisticated funds out there have already started to look into how do we make that happen? We would love to certainly be a solution towards that.
Another dynamic that’s important to keep in mind is the ability to roll up funds, this funds of funds consideration. The space is at such an interesting size. The size is not big enough yet to draw in, and hopefully, they’re not listening to this podcast, to draw in the 800-pound gorillas in the compliant space that would be pointing their canon to a solution in this space. But it’s certainly big enough for the need to have it happen because it’s big enough now to warrant the interest of the IRS and people are asking questions about the program. So, there will be more oversight regulations aside.
The ability to have elegant responses and established responses, we have our data, we’ve been tracking and managing it, we’ve been fixing our problems is of value. But back to the fund-to-fund size, there is…in order to take this from…I mean, I believe that, you know, we don’t have perfect visibility into this, but I believe that this year, we’ll pass $200 billion of investment is what we believe somewhere in there.
It gets to be real money when institutional financing comes off the sidelines. And they’re not gonna be doing their investing until they’re sure of what the rules are, who’s playing by them. And until that happens, until that stamp of approval is kinda what you’re getting at, stamp of approval happens, that will be required when the institutional money comes up with the sidelines.
So, we’ve got this confluence of dynamics. I mean, it is so fun to be playing in the industry at this point in time even with the mystery of regulations, what are they gonna look like? If that happens, it becomes clear. And if it doesn’t happen, the space still has to mature to the point where collecting data will lead to increased confidence in the space, will lead to more investment in the space.
One more point about data because this…I mean, I don’t think you’ll find this on our website, but it is something we very much have a mind towards, starting with a means to go on, is that we believe, as part of that story that I talked about in the beginning, we believe part of the story is truly changing the communities that are being invested in, truly changing it in a measurable way. And so, as part of every onboarding we do, we capture the baseline metrics of poverty level, income level. We’ve got 17 metrics that we’re capturing for every onboard that we do in that particular census tract, in that particular area with a mind towards tracking that and tracking the changes over time.
How awesome would it be if we…and this might take some time, in a year or two or three from now, we were able to help contribute to the story of Opportunity Zones about how in a particular geography or in a group of geographies, here’s how much the Opportunity Zone program, how much of an impact the Opportunity Zone program had on some of these really important societal metrics, almost in a way that delivers the promise of the program. So, we are capturing and tracking data straight up the middle to ensure our clients can confidently do business. We also have some ulterior motives to help the Opportunity Zone program get wings and be successful.
Jimmy: Oh, I think that’s great. You mentioned a couple things in your last response there that I picked up on and wanted to ask you about. This is kind of a, maybe a geeky, overly geeky technical question, but I’m wondering if you have an answer to it. So, you mentioned that you’re kind of starting to track, or your goal is to track changes to these communities over time, if I picked up on that answer of yours correctly.
The technical challenge there, I think, correct me if I’m wrong, is the Opportunity Zones, the designations were made according to the 2010 census map, and the map has changed as of 2020, the geographic boundaries no longer correspond exactly one-to-one with the 2010 map. Is that a challenge that you’re facing?
Jimmy: And what’s the…? How do you solve that challenge and being able to track…
Landon: [crosstalk 00:37:25.596].
Jimmy: …these when the boundaries physically change?
Landon: Yeah. We’re gonna have to call Peter Ciganik back in to help with that question. And fortunately, there are people…there are geolocation experts and incredible solutions out there. That is a phase B solution. Right now, we’re a compliance platform and we’ve gotta nail that well and really to fill in that confidence gap that we see in the industry.
We see an information gap too surrounding location, everything. Where is the money coming in? Where is the need? Where are projects shovel-ready? Wouldn’t it be great if there were a database that could not just provide all of that information and kind of reduce friction, increase fluidity in the industry, but also do all the mapping and overlays of the different census data and things that track data by area code versus census track?
There are some real technical challenges in there, and I’m basically gonna punt on the technical solution to it because they’re smarter people than I digging into this right now. But there’s a need for it. And it’s not just the Opportunity Zone program, unfortunately. So, I have heard that there are smart people and highly capable organizations that are working on it, and I am their biggest cheerleader to solve this because we want to quickly get to a space where we’re also providing the necessary overlays for the industry so that site location, project location, mission location even is a potential search capability out there. But yeah, you just hit a nerve of the industry right now. Why did they have to change things on us?
Jimmy: It is tricky to be able to track it. But, yeah, they changed the map and the census track boundaries actually…not a lot, but they changed enough to matter a little bit on the edges at least every 10 years. You also mentioned in your previous response, Landon, that your firm is anticipating that the industry will exceed $200 billion raised by the end of this year. That’s a big number. I’ve estimated that $100 billion has been raised, $100 billion of equity has been raised. You know, at some point last year, I think we crossed that threshold certainly going into this year. Where do you have us?
And by the way, nobody really knows the exact answer of exactly how much equity has been raised by this program to date. And if you wanna…I suppose if you wanna add the debt component as well to the overall amount of capital that’s flowed into the program, maybe that gets you to that $200 billion. But can you qualify that number a little bit? What do you currently have the industry at roughly? And I know it’s a ballpark figure, but it’s probably an educated estimate, at least.
Landon: If it was one of those tests where I had four numbers to pick from and $180 billion were on it, I’d pick $180 billion.
Landon: And honestly, again, I have no more information than anybody else. And there’s…you know, there’s great reports coming out from Novogradac all the time about where that money is and how many investors. You know, they have a spectacular view as good as anybody’s, I think short of the IRS, into the space. Wouldn’t it be great if we had more visibility into that? And I think if there’s a surprise to be had, nothing more than my gut, but my gut tells me we would be surprised on the high side as opposed to a low side about what the actual factually accurate number is.
We’re anchoring it with what we know right now, which is a natural bias, and collecting information and then kind of working from there. I believe that there’s so much that we don’t know that would drag that number up. And as I said, the best I can do is if there was a surprise, I’m going on the higher side, my gut tells me. If there’s any IRS people involved out there and they’re listening, more visibility would be great.
Jimmy: I think they try to get the data out to us as early and often as they can, but it does seem to lag by a couple of years, two, three years in some cases. Well, certainly, I think we’re somewhere between that $100 billion and $200 billion market. I hope you’re right.
Landon: That’s right.
Jimmy: I hope we do hit $200 billion at some point this year. I think that’d be great. Certainly, the program has…I think it’s exceeded expectations in terms of the amount of capital that has already flowed into the program. Well, I told you we might save this question if we’ve got a little bit of time toward the end. I think we’ve got a few minutes left. Your solution is an automated tech solution. So, artificial intelligence has been in the news a lot lately here in the first part of 2023. What about AI for Opportunity Zone compliance? Do you see AI helping with that at some point in the future? What’s your overall thought on that technology and how we can leverage it?
Landon: I don’t think you can have a technology today without having this question being asked of you, what role does AI play? For the record, we do not have AI in our product just now. We spend a lot of time and have a lot of fun talking about what role AI could play. And maybe we’ve started creating a list of requirements that may fit into the roadmap at some point in time.
But the reality of the OZ space and the reality of the challenge that we’re…and the sticky part of the problem that we’re diving into is there’s a lot of data, a lot of data. There’s operational data at the OZB level on a monthly basis. There’s fund data, there’s investment flow data. There’s a lot of data from a lot of different sources, and we’re asking a lot of questions of it. So, even just, you know, across a program that has $100 billion to $200 billion and tens of thousands of players, and Lord knows how many projects, this is just the…just by describing it that way, it’s set up for an AI application.
Could you imagine using artificial intelligence to prompt questions about what questions we should be asking about this particular QOZB? It’s set up…it has this profile, it’s a multi-family dwelling unit in construction. What questions should…? In this particular location with these state laws in place pointing back to the tax code, what data needs to be captured from this particular QOZB this month?
It feels like a prompt that I would love to ask my ChatGPT prompt screen. And it doesn’t feel like it’s far away when we get the data ready. The ability to train on that data could be really interesting. And there’s all kinds of barriers being put in the way in addition to confidentiality and training on data and intellectual property that make it something. We’ve gotta hold off just a little bit, but it feels like all the pieces are in place to have it be a really interesting application for AI.
Jimmy: Maybe I’ll ask you more about that the next time we talk, Landon.
Jimmy: Well, we’re running low on time now, but I did wanna mention, you know, I was perusing your website, the CapZone website in preparation for this interview, and it says on your profile that you know a few dad jokes. We love our dad jokes over here at OpportunityDb and “WealthChannel.” Andy and I are always trying to one-up each other. Do you got a good one for me?
Landon: I am known for any birthday card that I write to a niece or a nephew, or a brother or sister, I’m known for including a dad joke. So, they’re often pretty recent. Okay. The most recent one I put in a card. How much room does fungus need to grow?
Jimmy: You tell me.
Landon: As mushroom as it takes.
Jimmy: See, that’s good. I love that one. I love that one. Do you wanna hear my joke about paper?
Jimmy: It’s tearable.
Landon: Yes, it is.
Jimmy: That’s all I got for today. That’s not bad.
Landon: And you don’t even know how funny that is because I literally am known, I’m infamous for not doing paper. I don’t have paper on my desk. I don’t print anything out. So, that’s even that much funnier, Jimmy.
Jimmy: There you go. Well, you can use that if you want to. Hey, Landon, I really appreciate you sharing your insights with me and my audience of high-net-worth investors and advisors today on the podcast. Before we go, where can our audience go to learn more about you and CapZone Analytics?
Landon: We are at capzoneanalytics.com. And our LinkedIn page is pretty active, @CapZoneAnalytics.
Jimmy: Fantastic. I’ll be sure to link to your website and your LinkedIn page on the show notes for today’s episode, which will be available as always at opportunitydb.com/podcast. And please be sure to also subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episodes from us. Landon, thanks so much again for joining me today. Really appreciate your time.
Landon: Thanks for having me.