Capital markets have been volatile as of late. All forms of investment have been impacted, and Opportunity Zones are no exception.

Ross Baird, founder of Blueprint Local, joins the show to discuss that impact, plus, some of the biggest lessons that he has learned after investing $200 million of OZ equity over the past four years.

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Episode Highlights

• Some of the biggest learnings after deploying $200 million of equity into Opportunity Zone deals over the past four years.
• Opportunity Zone projects that deliver the highest levels of impact.
• The geographies with favorable demographic trends, and thoughts on the potential for oversupply in these areas.
• How volatile capital markets have affected Opportunity Zones over the past year.
• How an upcoming recession may impact Opportunity Zones, and what the future may hold for OZs.

Guest: Ross Baird, Blueprint Local

• Ross Baird on LinkedIn
• Blueprint Local | Email Ross: [email protected]

Featured On Today’s Episode

• Lynx Ventures
• Hatch Local
• Barrett Linburg on the Opportunity Zones Podcast
• Clint Myers on the Opportunity Zones Podcast

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.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones & Private Equity Show.” I’m Jimmy Atkinson. How are Opportunity Zones positioned to perform in today’s volatile capital markets? Joining the show to discuss this topic and more is Ross Baird, CEO and founder of Blueprint Local. And Ross joins us today from Purcellville, Virginia, about an hour west of Washington, D.C. Ross, thanks for coming on the show today. It’s great to see you and meet you, and really appreciate you joining us today.

Ross: Jimmy, great to be here. As they say, longtime listener, first-time caller. I’m a huge fan of your podcast, and you’ve had some wonderful people on, and I’m really thankful for the invitation.

Jimmy: Yeah. Thanks, Ross. You’ve been around doing this for a really long time. I’m actually surprised that this is the first time we’ve had you on the podcast and the first time we’ve spoken, I think, as well. So, it’s been long overdue, Ross. I’m glad to have you here today.

Ross: Ditto.

Jimmy: Better late than never, right?

Ross: No, no. Ditto. And I really, I mean, I really appreciate everything you’ve done to build up the whole ecosystem around Opportunity Zones. I mean, there are thousands of projects across the country that are making a big difference in their communities, and the ecosystem of project developers, and tax experts, and investors, the people you’ve convened, really greases the wheels for that. So, yeah, good to connect directly.

Jimmy: Fantastic, yeah. Happy to help, and happy to dive in with you today, Ross. You know, as I mentioned, you and Blueprint Local, you guys have been doing this for a while. I can’t believe we haven’t had you on the podcast. You guys have been doing OZ projects since the early days, dating back to early 2019. So, my guess is that a lot of my audience of high-net-worth investors and advisors may already be somewhat familiar with what you do and who Blueprint Local is. But for those who may be unfamiliar, can you tell me about Blueprint Local, and what your role is there?

Ross: Sure. So, Blueprint Local, we’re a private equity fund, investing in real estate. We have invested about $200 million through funds and specific vehicles and Opportunity Zone projects. We’ve largely had a focus across the Southeast and Texas, with really, a long-term view towards creating attractive returns and also creating meaningful impact in the communities where we invest.

Like you said, I met the group EIG, the think tank that was the initial champion of the Opportunity Zones idea, I believe in 2014. I had been working with another group doing investing in similar types of projects. We were doing investing in Opportunity Zones before there were such a thing as Opportunity Zones. We had a number of different projects that were really meaningful, and I think going to be financially successful, and building policy around driving capital to these kinds of projects seemed interesting. So, when the Opportunity Zone legislation passed, setting up Blueprint as a standalone entity was just kind of a culmination of a number of things that I and a bunch of partners have been working on.

Jimmy: That’s true. You guys were doing OZs before they became cool, I guess, or before you were incentivized.

Ross: Something like that. Well, look, and I think this is a macro conversation or a conversation… I don’t believe a tax incentive is a reason to do something you wouldn’t otherwise do. I think Opportunity Zone investors, you know, if you’re investing in an Opportunity Zone in Dallas, for instance… We’re working on a project in Dallas, and we, for a 10-year hold, think, you know, over the next 10 years, this neighborhood is gonna transform, we believe, in a very positive way. When I talk to people who are Dallas lifers about this project, who are big-time investors or successful business people, like, “You’re investing where? Oh, that’s an awful part of town. Why would you do that?”

And, A, you know, the people building things in this part of town are building things that are really making the neighborhood better. And, B, you know, we think if you take a 10-plus year view… Bill Gates once said, “You always underestimate what you can do in a year, and you…” It’s the other way around. Bill Gates said, “You always overestimate what you can do in a year and underestimate what you can do in 10 years.” And the greatest benefit of the Opportunity Zones, I believe, is it encourages investors, developers, partners, to take a long-term view and say, “Yes, you know, this part of Dallas has not received investment. It’s traditionally been pretty rough around the edges, but if you take a long-term view, yeah, within a generation, it can really change and be a very positive place to be.”

Jimmy: Yeah, for sure. That’s the intention of the program in general, anyway. I’m sure that holds true for many localities all around the country. You guys currently have… You’ve been very successful. You have $200 million of Opportunity Zone equity invested so far. What are some lessons you’ve learned, or what have you learned in general?

Ross: You know, I think the first thing, going back to fundamentals, I think the…almost… No, I’d say not almost. Every single project we have been involved in, in the form it’s taken, likely would not have happened without the Opportunity Zone legislation. So, the legislation has created I believe thousands of projects that have accelerated because of the way it’s focused people in these projects.

I would say the second thing is, there are a number of projects out there where the people working on them have said, you know, “Without Opportunity Zones, this may not make sense financially, but if you add the Opportunity Zone layer, you know, all of a sudden it’s an amazing project.” And almost to a T, those projects just have not worked. I think the business fundamentals absent the tax incentive have to be there.

Now, where the Opportunity Zone projects, I think, in almost every single one of our projects, has made the biggest difference is, again, this time horizon. So, there are a number of projects taking, that example neighborhood in Dallas, where if you have a one, two, five-year horizon, a lot of work has to happen to clear away abandoned buildings, and improve infrastructure, and infill areas that have been blighted. And that, you know, one, two, three years might not work, but if you take a long view, if you take a 10-year view, it could be quite successful. And so, you know, I think the biggest lesson is focusing people on holding an asset long-term, and being focused on improving things over the long term has been successful. I think the kind of, you know… The thing that’s been the biggest failure is when people have used this as a marketing vehicle to fund projects that otherwise just wouldn’t work.

So, I remember, when the legislation was passed, you know, you had this person and that person raising a $3 billion fund that was gonna do amazing things. I don’t think any of those kind of flash-in-the-pan things happened. And because people, you know, people moved on to crypto or moved on to, you know, NFTs, or moved on to the next flavor of the month. And the people who have been… There have been about $100 billion invested in Opportunity Zones, largely by very good operators, and the people who have stuck with it for, now, 5 years since the legislation passed, in another, you know, 5 to 50 years will succeed. So, I think that’s lesson one. You know, it can make a good project that will take a long time, a very attractive project. The incentive is not gonna turn a bad project into a good project.

I think the second thing is incentivizing… You know, I think we have a number of public-private partnerships, and I think that typically, real estate developers and public officials are at odds with each other. And yeah, that has still happened in the Opportunity Zone world, but incentivizing real estate developers and investors to take 10-plus year views, all of a sudden align projects with city and community master plans, you know, which are extend, 20, 30-year master plans. So, for instance, we have a large project in Charlotte, that is right on top of the building of the Charlotte Light Rail, which is a bipartisan initiative that has taken 30 years. And the Cross Charlotte Trail, which is a major parks initiative in Charlotte, which has taken 30 years.

And I will say, you know, having public transit, having public parks immediately next to this project, those may not come together for the next 10 years, but the project may not come together for the next few years. That is long-term alignment, whereas typically, you know, communities say, “How are these people gonna come in, extract as much value as possible, and leave tomorrow,” and then they don’t, you know… The project doesn’t get what they want or what they need, and it doesn’t happen? So, yeah, I mean, I’d say taking a long-term view helps you find allies that ultimately make for better investments, and making good investments great versus trying to make bad investments good are the two big observations.

Jimmy: Yeah, those two big observations both deal with the investment horizon, right? Oftentimes, Opportunity Zones look kind of scary to certain classes of investors, because when they hear about, “Oh, I have to keep my capital locked up for 10 years,” that’s viewed as a bad thing. And it can be if you need that liquidity sooner than then, depending on your individual situation. But I always like to say, “Hey, this is kinda like a super Roth IRA.” You get tax-free growth within this investment vehicle. You want it. You want your money locked up as long as you can, as long as you don’t need the liquidity.

And then, you’re further saying, “Hey, that’s actually kinda ties into how this program is succeeding,” because now, that long-term view helps projects pencil that may not have otherwise with a one, three, five-year plan, and it helps align you with the goals of the economic development leaders or the city planners in city hall, or whoever the powers may be in that local jurisdiction. I think that’s really insightful. I haven’t really heard anybody else talking about exactly that point, that that longer investment horizon helps these projects succeed in a way that a more traditional real estate, private equity, real estate investment, that typically looks at a three to five-year hold might not. So, the other thing with…

Ross: Yeah.

Jimmy: Go ahead.

Ross: So, and the other thing, I think, and maybe this is where you’re going, Jimmy, you know, we are in a very volatile, and to many investors, scary time, with interest rates all over the place, commodity prices up and down, banks under stress. And, you know, my business partner, our chief investment officer, came from a well-known hedge fund, which is one of the biggest hedge funds in the world. He, you know, did and is the type of investor that buys great real estate, and will sometimes hold forever, and just collect, you know, great cash flow from that. And I asked him once, you know, “What did you learn from working for one of the greatest investors in the world?” He goes, “Yeah, I learned that when you’re investing in real estate, you need to predict nine out of the next two recessions.”

And so, you know, the other thing which taking a 10-year view helps for is when we are looking at deals, when we are underwriting them, I think that the assumption if you’re gonna hold for 10 years is you’re gonna go through 2, 3 bad economic cycles, and you’ll also go through good economic cycles. So, timing interest rates, timing the stock market, all of that, you know, figuring that out as a way to make money, it’s just not in the picture for the sophisticated Opportunity Zone investor, because who knows what the stock market’s gonna look like in 10 years? So, don’t underwrite your investment philosophy based off of that. Say, you know, in good times or bad, this neighborhood in Dallas or this, you know, project next to the transit and the park in Charlotte will be a fundamentally, you know, good and appreciating asset over the long term, and there will be good times and there will be bad.

But I think, yeah, a number… You’ve seen a lot of headlines probably about how commercial real estate is in big trouble, and all these operators have too much leverage, and it’s very bad. I think if you’re buying something, putting a bunch of debt on it, trying to flip it in two years, timing matters. If you do that in the right timeframe, you can do extremely well, but if you do it in the wrong timeframe, you can lose everything. I think, you know, Opportunity Zones, in some ways, have incentivized investors to be a lot more rational about how things are going to look over the long term. And so, of course, anyone investing wishes it were a better market versus a worse market, but preparing to hold something for 10-plus years, I do think the Opportunity Zone market is well-poised to weather a lot of the volatility we’re seeing, because of that built-in long-term time horizon.

Jimmy: Yeah, that’s another great point. I think we’ll talk about that a little bit more later in the conversation today. But yeah, that long-term view helps out in a variety of ways. With your investors, with your capital base, are you finding that the types of people who invest in your Opportunity Zone deals, do they already have this mindset coming in? Are they folks who have patient capital and this is exactly what they’re looking for? Or do you oftentimes have to convince the investor why a long-term view is advantageous to them?

Ross: You know, I think it’s actually much more the latter, Jimmy, and I think that’s a reason why the policy’s been very productive. So, you know, the typical Opportunity Zone deal… You put in, let’s say you make a dollar today. You put a dollar of capital gains into an Opportunity Zone deal. One common misconception is that your dollar is locked up for 10 years. That, in many cases, is not true. So, but it is locked up for, let’s call it, three to four years. So, you put a dollar into a project. It’s gonna be illiquid. You’re not gonna see that dollar for three to four years. Now, we might take that dollar, build a building with it. It’s leased, people are living there, we’re making income. We might refinance it. We might send you 50 cents on your dollar back three years from now. That’s great. You’re still like, “Well, the vast majority of my money is locked away.” Then we might send you some income. We might send you 7 cents for every dollar from, you know, 3 years to 10 years. That’s also nice. A 7% yield would be a nice outcome. You say, “Still, the vast majority of this is locked away.” Then we sell the building in 10 years and you get all your returns. The vast majority, you’ve gotten some interim income, and that could be great, but the vast majority is locked away.

Now, the average person would say, “Why would I do this, see nothing for three years, and lock up my principal for 10 years when I could buy into a REIT, a real estate investment trust, which will send me 6 cents on the dollar tomorrow? Or buy a treasury bill at 4%, and I get 4 cents, you know, and then I get that indefinitely?” And I’d say, “Well, it depends.” And Jimmy, you raised that point. I mean, we had one person that I spoke to who owned some properties, and their entire income was drawn from these properties. And they sold the properties, they got a very nice offer. But their entire, you know, their living expenses, their kids’ college tuition, all that came from the income from the properties.

And so, I talked to them about some of the things that we’re doing, and ultimately I said, “I don’t think you should do this. You know, if you need this cash in the next three to five years, you’re probably not gonna see any of it for three years, and you might see a little bit after that, but, you know, you should probably do something else where you get current income. But if you don’t need the cash to live off of tomorrow, if it’s something that you can defer, much like an IRA, a Roth IRA or something, if it’s something that you can defer, particularly the tax-free compounding can be quite interesting.” It’s like Warren Buffett said, you know, “The two most powerful words in the English language are compound interest.”

And so, a lot of the conversations I do with our new or our existing investors is kind of like compound interest 101. Like, here’s how tax-free compounding an appreciating asset can be a favorable investment. And it may not be ours. It may be an IRA, it may be different… There are a bunch of different ways to do long-term compounding hold investments, but a lot of… Yeah, I mean a lot of the… And I think this is very positive for our country too, where, you know, short-termism in the stock market, short-term decisions, have long-term externalities that ultimately lose people money and have a negative impact. I think that the educational process of “here’s how taking a long-term view can make you more money and ultimately yield a more productive asset,” or whatever it is, that’s been a conversation I have all the time that I think has been very positive all around.

Jimmy: I love that Warren Buffett quote, and I think it was Albert Einstein, a few years before him, said something to the effect of “compound interest is the eighth wonder of the world.” It really is pretty powerful financially once you wrap your mind around it, and Opportunity Zones can do that absolutely, in spades, and tax free. It’s a hugely powerful tax incentive, as you and I know, and my listeners I think are pretty familiar with as well. So, we’re maybe preaching to the choir here, but always important to point out, “Hey, that compounding within that OZ deal is extremely powerful.”

Shifting gears a little bit here. Wanted to get to the root of Opportunity Zones and its reason for being, essentially, is that Congress wanted to spark or catalyze impact in these certain communities all around the country, these 8,600-plus low-income, for the most part, Opportunity Zone communities. Question around impact for you, Ross, is well, one, how do you define impact? What does that term mean to you? And two, what are the kinds of projects that you’re working on that you think deliver the highest impact?

Ross: Sure. Well, I think the first question, you know, we are active in a dozen cities. We focus on the Southeast and Texas. And in many ways, you know, the communities and the cities themselves determine impact through city priorities. So, for instance, you know, we look at impact metrics when evaluating any given project. In some cities, like Charlotte for instance, there are about 200 people a day moving to Charlotte. It’s top five fastest-growing cities in the country. It’s got huge traffic problems. It’s got huge housing shortages. They’re 32,000 market-rate units short of demand in Charlotte, let alone, forget affordable housing or any kind of affordability.

So, you know, a ton of people moving into a city that was relatively small until very recently, and now has exploded. So, the city of Charlotte has said, you know, “Our goals are increase the housing stock of all income levels, increase transit-oriented development.” They’ve spent hundreds of millions of dollars on a light rail and a park that is, it’s a North/South spine, much like the High Line in New York City or the BeltLine in Atlanta. These big civic infrastructure projects seek to change the kind of long-term sustainability and livability of places.

So, we worked with a couple partners to acquire, a couple years ago, 12 acres right on top of one of the light rail stations, to create a mixed-income, mixed-use district there, where employers can move. And we have a couple of, you know, we have positive traction on the commercial piece of it. We are working on building multifamily housing that is within, you know, the affordability metrics that would make a dent in Charlotte’s workforce. And, you know, is that gonna solve Charlotte’s housing problem? Is it gonna turn Charlotte into a carbon neutral city? No. Are lots of projects like this gonna make Charlotte much more livable and sustainable? Absolutely. So, that’s an example of where what we’re doing and what the city wants are very much aligned. So, that’s kind of a macro level.

I think on a micro level, different metrics that we look at all the time are how many units are building, and what’s the affordability ratio? So, in Dallas, Austin, Houston, San Antonio, we’ve done big multifamily projects in all of them. Texas is also, you know, it’s the fastest-growing state. Its cities are among the least affordable, so building housing stock there is important. The other thing we look at is small businesses and the business environment. I know you’ve had other folks on the podcast who have done OZ business investments. We haven’t, and there are a number of reasons why. But to the extent we can engage local businesses in our projects, I think that accrues to the benefit of all.

So, as one example, in Richmond, we’ve worked with a partner called Lynx Ventures to invest in a mixed-use project. Lynx runs a group called Hatch Kitchen, that’s an incubator for local food businesses. So, like, if you have a food truck and wanna open a restaurant, or if you’re baking cakes out of your oven and take them to church every Sunday and wanna start a food truck, this is a place that has cold storage and a commercial kitchen, that basically helps people start food business. They have over 100 entrepreneurs. We opened a food hall in our ground floor called Hatch Local, where we have eight graduates of the Hatch food incubator, a ninth, a local celebrity chef. And it’s been a very popular, cool kind of node of the local food ecosystem as our main street Opportunity Zone entrepreneurial center. So, that’s been a huge aspect of it.

So, Tim Kaine, senator from Virginia, is my senator, and I was recently speaking with him. He lives right near Hatch Kitchen, and he was asking me, “How are Opportunity Zones going? What’s going on?” And I talked about some of the macro things. And, you know, there’s a phrase, “people remember facts for a minute and a story for a lifetime.” I started talking about all the facts, you know, $100 billion invested, all these jobs, and he was like, “Okay, that’s great.” I was like, “And, in your hometown of Richmond, we did this thing, Hatch Kitchen.” He’s like, “Oh, my wife and I go to Hatch all the time. That is the coolest thing in Richmond. So, that’s what Opportunity Zones did. That is fantastic.” And so, you know, you start to see these anecdotes of, you know, “There was nothing there. That was a vacant parking lot five years ago, and now it’s this awesome entrepreneurial ecosystem.” And that’s really where I think you start to see the impact in these communities, of, “five years ago, it was nothing. Now, you know, it’s a food hall that, you know, a U.S. senator and his wife go to all the time,” and he’s like, “Ah, I get it. That’s very cool.”

Jimmy: No, that’s great. And to your point, you know, he’s not gonna remember the facts that you gave him about the $100 billion raised or how many census tracts or whatever, but he’s gonna remember Hatch Local Kitchen, and that he and his wife go there. I think that’s absolutely right, Ross. That’s …

Ross: Yeah, I mean, that’s my hope. You know, the next time Opportunity Zones come up in the Senate, he’s like, “You know, these people that I met did this. You know, did this food hall and we love it. It’s great.”

Jimmy: Yeah. So, in that way, I think, impact, I picked up on two different aspects that kind of drive impact. Well, first of all, they’re kind of in-line with the city’s needs, first of all, but those two needs, for the most part, at least where you’re investing, attack the housing shortage. So, building more housing. And then the other thing is catalyzing entrepreneurialism, entrepreneurial dynamism, giving more opportunities for more entrepreneurs, especially if there’s some sort of operating business component that could be wrapped into Opportunity Zones or an Opportunity Zone real estate project. I think both those help deliver impact. Basically, more jobs and more housing, right, at the end of the day? More jobs, more housing, more economic vitality.

Ross: Yeah. And, you know, one thing I always say about impact. Early in my career, I had an idea. I was living in Atlanta, where I grew up, and I had an idea to raise a fund that would do basically what we do now, is because we try and seek competitive, profitable returns, you know, that would be competitive with any investment strategy hopefully we’d look at, and also impact. And I pitched this guy who was a very well-known local business guy in Atlanta, one of the kind of godfathers of the city. And he said, “Young man, this is a very interesting idea.” I explained what I was trying to do. And he said, “But I got two pockets. You know, with one of them, I run my company, and we do very well. And, you know, with my other pocket, you know, with what I make from my company, me and my family, we try and give it all away.” And he goes, “Boy, which pocket are you asking me for?”

And I said, you know, “Respectfully, sir, I see things a bit differently. You know, I think companies that are run well and do good things in the community are gonna have better financial performance, you know? And I think that, you know, if you do the right thing, it’s good for the long term.” I was not very coherent at all, but basically what I was saying is, you know, I think impact amplifies profits, it doesn’t take away from them, and he did not end up funding me with either pocket. He was thoroughly confused. And so, that was a very unsuccessful fundraising meeting. However, that phrase of two pocket, one pocket, I do think is a philosophy here.

So, I mean, when people say, “Oh, Blueprint, impact, are you a philanthropy?” I mean, there’s a lot of things that philanthropic dollars are a perfectly appropriate and wonderful use for, and we applaud that. For instance, I mentioned we have not done any Opportunity Zone business investment, mainly because we couldn’t find the business case for it. However, a couple of team members of ours raised some philanthropy, spun out a group called Catalyst, using kind of concessionary philanthropic dollars to support these funds in places like Opportunity Zones. So, there are certain things that are, I think, not investible. But if you are looking at investing and you are looking at making attractive returns, I think the one-pocket philosophy of, if you do right by the community, it will accrue to everyone’s benefit in the long term, is kind of how we roll. So, I don’t, again, think, “Hey, Opportunity Zones are gonna lose money, but there’s a tax advantage,” and then I say the projects that take that approach, I just haven’t seen work, but, you know, we’re gonna take a long-term view, and this impact is actually a feature, not a bug of the investment piece, more how we think about it.

Jimmy: And again, the long-term view helps beget that, the amount of impact that it can have, and also the profitability that it can have on top of the impact. Well, what about geographies that you like? You mentioned you’re in Charlotte, North Carolina, you’re doing some projects in Virginia, you’re in several cities in Texas. What other geographies do you like, and why do you like those geographies?

Ross: Yes, I grew up in Atlanta. My business partner grew up in Charleston. The Southeast, I think, is really where growth is going. You know, we’ve done investments in Texas, Alabama, through a partnership with a group called Opportunity Alabama, who I think has been on the podcast. Georgia, the Carolinas, Virginia, Maryland. And I think, you know, historically, that part of the country has been disinvested, and then in these cities, you know, there are historic regions where there’s a rich part of town and a poor part of town, and that’s…

But there’s also population growth, there’s job growth, there’s momentum. And so, you know, if you’re taking a long-term view, I think we’re very long in Texas, I think we’re very long in my hometown of Atlanta, very long in the Carolinas, Virginia, etc., for different reasons. And so, I think you can only do so many things, and focusing in a region where we know, where we have investments, where we have partners, and then focusing on product types. We’ve done mostly multifamily, some mixed-use. We’ve done one industrial, though we’d like to do more, but all within a specific geographic region has been helpful and focusing for our team and our investors.

And I also think, you know, we’ve got a lot of macro issues. Interest rates are going up. Construction costs have been all over the place. The fundamental twin tailwinds of population growth and job growth, that I believe will sustain across the Southeast and Texas over the next 10 years are tailwinds that can encourage you to take long lease. So, even if, you know, costs are higher than you might like to be, if you’re in a growing region, it might give you the patience to ride some of that out.

I mean, we’ve got projects for instance where… We had a project in Austin, Texas where we were originally slated to break ground last June, and costs were so high it just didn’t make sense. We put the project on pause for six months. Because of the way commodities have gone, costs have come down 20%, and now we’re proceeding with the project. But Austin has continued to grow since June. Like, if you’re fundamentally long an area, you know, you can start and you can put things on pause, I think, with a little more margin of safety.

Jimmy: Yeah. A lot of tailwinds in all of those locations that you just mentioned, and a lot of other real estate developers are focused on those same locations as well. I mean, this isn’t the first time I’ve had someone on the podcast that says they like the demographics in Texas, and the Southeast, and the mid-Atlantic regions where you’re in. Are you worried at all about oversupply, in the long term, given this equity rush, so to speak, into these different geographies? Is that anything that’s of any concern to you, or do you feel like the undersupply currently is such a huge problem that there’s always gonna be more and more demand for real estate products like the ones that you’re building?

Ross: Yeah. Oh, sure. So, we’re certainly worried about oversupply. I think there are…you know, Charlotte, for instance, is a place that anybody who’s a real estate investor has had to take seriously over the last 10 years. I think there are two things that we look at. I think one is, you know, taking multifamily, for instance, just basic supply and demand. What is current and projected demand, and what is current inventory? So, Charlotte, for instance, has 200 people moving a day. It has a 32,000 market-rate shortage today. There are thousands of units under construction today in Charlotte. There are tens of thousands of people that will need units moving to Charlotte. So, if you look at a graph, the supply curve, even in a city that has a lot of construction, like Charlotte, cannot keep up with the demand curve. I think that’s one thing.

I think the second thing in terms of investor capital is submarket. So, believe it or not, in cities like Dallas or Charlotte we… And the name Blueprint Local, I think this has been one of the biggest surprises. I originally thought local investors would be interested in funding local projects, and that’s cool, you’re connected to your community, all that. In Opportunity Zones, we have had, even in a big market like Dallas, we’ve had a very hard time attracting local investors because of perceived biases. So, for instance, you know, the Dallas Farmers Market is a well-known landmark, and it’s probably, you know, I think it’s a very attractive, cool place for young folks to live. Or the Bishop Arts District is another one. If you talk to experienced investors who have a lot of money, who live in Dallas, and say, “Hey, we have this at this address near the Dallas Farmers Market,” they’ll be like, “Oh, my goodness. I would never go there. Like, what in the world are you doing? What in the world are you doing investing there?”

And still, today, you know, it’s not, like, you know, the high-end, white-columned, gold-plated part of Dallas, but that is an organizational inefficiency. That’s a bias in the investment market that I think is a time horizon thing. So, if you say, “Listen, if I were gonna buy an apartment today and try and flip it in two years, maybe this isn’t where I would buy.” But the good news is, the people with money in Dallas aren’t buying there either, because they think it’s distressed, or maybe is rough around the edges, or not a place that they would want their kid to live if their kid were renting an apartment or whatever.

That’s a built-in investment bias that Opportunity Zones, in some ways, can leverage, an Opportunity Zone investor, developer can leverage to their benefit, because they’re gonna say, “Listen. Great. That’s great that you don’t like this site because that means you’re not gonna bid against me for the site. I can buy it and do this and do other things, and develop it for 10 years. And I’ll know something you won’t. And when the 10 years happens from now, you’ll be like, ‘Oh, my goodness, that neighborhood has changed so much in the 10 years.'”

Like, yeah. And yeah, we are going to charge you for that premium of how much…

Jimmy: Yeah, then they’ll be ready to buy, right?

Ross: Right. Totally, and that’s fine. You know, there’s a partner we’ve invested in, Barrett Linburg of Savoy Equities. He’s been on your podcast.

Jimmy: He has. Yeah. No, I know Barrett. He was on the podcast a few weeks ago.

Ross: And so, so you should listen to Barrett’s podcast because he’s been slowly buying up, like, block by block, this one neighborhood that… The Lake Cliff neighborhood and where, you know, we’ve invested with him in his last three projects. And, you know, he’s got a 10, 15-year vision, but if you drive through today, you wouldn’t see, if you just randomly drove through. If you drove through with Barrett, saying, “Here’s the plan for that vacant lot and here’s the plan for that burned-out building,” like, you can start to see how it comes together. So, macro, we look at supply and demand in a market, and then micro, we also say, you know, “What are the places where people with money might have some bias against?” So, land is gonna be 30% cheaper than we think it should be, but in 10 years, you know, this land will be at full price next to that land.

One of my great mentors, Steve Case, who was an early champion for Opportunity Zones, the founder of AOL, has this book and this thesis of “Rise of the Rest,” where he says 80% of venture capital is in New York, Massachusetts, California. And he does startup investing. He says, you know, “If you invest in a great company in Dallas or Charlotte, and those exist, you get the same benefit.” There’s some arbitrage there, where, because the New York and San Francisco venture capitalists are not looking for the next great company in Dallas, you might buy in at a 30% discount, but then when the company becomes a billion-dollar company and they, you know, go public or sell to Microsoft or Oracle or whatever, you know, the buyers pay full price. It’s both the right thing to do to invest in places that have been under-capitalized, and it’s also, there’s a lot of economic arbitrage if you believe, hey, this neighborhood in Dallas or this part of Atlanta is really undervalued by people with money who don’t like driving there.

Jimmy: Yeah. No, I’ve had Steve Case’s colleague, Clint Myers, on the show. It’s been a while, been a couple years, but I’ll try to link to that episode in the show notes for today’s episode as well. We discussed that concept of 80% going to those three locations, Massachusetts, New York, and California, and the “Rise of the Rest,” and what they had going on there.

Shifting gears again a little bit, actually kind of taking more of a macro view, a zoomed-out macro view now, as I teased in the intro, capital markets have been a little bit volatile lately. And with the interest rate rising the way it has, interest rate levels rising the way they have, they’ve freezed up quite a bit over the last few months here in some places. How have those volatile capital markets affected Opportunity Zones over the last, say, 6 to 12 months? And what do you think will come of that in the near term and long term?

Ross: Yeah, I think it was also Warren Buffett who said, “Leverage is a hell of a drug.” I think that the vast majority of real estate investments over the last few years have not been Opportunity Zone investments. They’ve been short-term, debt-fueled investments of, “Hey, I’m gonna buy this fairly low-end apartment building. I’m going to put a bunch of debt on it. I’m going to replace the refrigerators and maybe paint the floors, and put new tile on, and then raise the rents 30%. And we’ll see how things go, because debt’s gonna stay low and rents are always rising.” And that entire industry, there are some very good players, but there are also a lot of speculators. And that entire industry I think has been blown up by much higher interest rates. And so, interest rate hikes have hurt opportunities and projects, in that the debt is harder to find.

Going back to the same mantra, an Opportunity Zone incentive can make a good project great. It’s not gonna turn a bad project good. We are aware of a project that we are working on. There are four other projects who are all, had much higher debt assumptions, and I think much higher rent assumptions, and to the best of our knowledge, the financing has fallen apart for all four, and they were more kind of land-buying, speculating, trying to throw things together. So, if you have a fundamentally good business model, you know, the debt costs rising will hurt your returns a little bit, but you should have planned for that when you underwrote it, and the deal should still make sense. Deals that are built in with high debt and very thin margins are falling apart across the country, and so that’s one effect.

Now, for the Opportunity Zone investor, who buys and holds for a very long time, one of the knocks that we’ve gotten over the years, because we’ll go into projects, we’ll do 50% leverage, 55% leverage, a lot of higher-leverage projects will have 70%, 75%, 80% loan-to-cost value. You can’t get debt at that rate today. You could two or three years ago, but we talked to investors who would say, “Well, the returns on this other thing I’m looking at are much better, and I get my money back in two years. Why would I do your thing?” And I’d say, “Well, you know, you might be right. But, if there’s an economic crisis, the margin of safety on this is basically nothing, and there’s a lot more resiliency built in to the long-term investment.” So, you know, we believe, you know, there is a cost with those higher returns on paper, and that cost is substantially higher risk.

And so, you know, I think we’re seeing, across the board, most of the Opportunity Zone investors I know use much lower leverage assumptions, because you’re holding for a long term, much more conservative rent growth assumptions, because you’re holding for the long term, and who knows. And as there’s an interest rate storm, I think Opportunity Zone projects, largely, which have been very conservative on the debt they take out and their cost assumptions, I think largely have weathered it pretty well. And so, you know, holding a less-flashy but safely-appreciating and compounding long-term asset is a great place to be in a recession, I believe.

Jimmy: Yeah, we may be headed toward a recession, right? It looks like GDP growth is slowing. And I think you’re absolutely right that, well, recessions might hurt projects that have shorter time holds, but if you’re looking a decade or more out, you know, recession, the last, like, couple of years might end up being just kind of a blip, and gives… The long-term hold of the Opportunity Zones does give it a lot more resiliency, and makes it…

Ross: Yeah, to the joke of…

Jimmy: …maybe not recession-proof, but certainly recession-resistant, right?

Ross: Yeah. Well, to the joke of, you know, to be a good real estate investor, you need to predict nine out of the next two recessions, you should have built, over a 10-year hold, 2 recessions into your modeling, and say, “Listen, if rent growth goes to zero for a period of time, are you still gonna do okay financially? If debt goes crazy, are you still gonna do okay financially?” Because if you look at any point in American history, it’s all up in… Like, it will happen. And so, you know, the best Opportunity Zone investors I know run all those analyses and say, “Listen, if you’re gonna hold for 10 years, we can’t promise you 10 amazing years. That’s never happened in American history. We can promise nothing, but we can demonstrate at least if one or two bad stretches happen over 10 years, which is extremely likely, like, you’re still gonna be very happy with the outcome.”

Jimmy: Good. So, amidst all this uncertainty that we’re currently in now, but long-term, things will probably be pretty good for Opportunity Zones, I think, and I think you share that view, what does the future hold overall though for Opportunity Zones? What do you see unfolding for Opportunity Zones down the road here?

Ross: Yeah, so, there’s, you know, I think there are three things, I’d say. One, going back to the Tim Kaine story, for a number of years, because these projects take a long time, it takes three to five years to develop, there haven’t been that many stories of what an Opportunity Zone project is. It’s been very theoretical. So, number one, as we see projects open and, you know, the U.S. Senator and his wife go and get a chicken sandwich from the husband and wife who’ve just opened their restaurant, like, I think the program itself is getting more and more popular, as people have more direct experience “with that thing happened because of Opportunity Zones, and this is great.” So, that’s, yeah, I think the program…

And we’re seeing, you know, I think the Government Accountability Office did a survey of state and local elected officials, where they looked at, they asked, “How do you think of the program?” I think positive responses outnumber negative 20-to-1. So, I think there’s a lot of positivity out there, and there’s a bipartisan bill to extend the program and make some improvements. And maybe you’ve talked about that on prior podcasts, but that’d be important.

And the second thing is, in the bill, a few things would be important that are currently being considered by Congress. I think one, there’s reporting and tracking of projects and impact that, you know, we voluntarily do, a lot of good players voluntarily do. It wasn’t in the original legislation, but putting some reporting around the program I think would be important and helpful, because I think there are very good things to report.

The second thing, I would say, there’s a common misconception that the Opportunity Zone program, you’ve probably gotten this a lot, like, it expired in 2021, or it expired… The tax deferral currently expires at the end of 2026. Now, one of the things that a lot of projects have been able to do… You know, let’s say you make a dollar, you owe 24 cents in taxes. That’s deferred to the end of 2026. A lot of projects earlier on have been able to have a convincing case that we’ll be able to send you enough cash to cover your tax deferral by the end of that. As 2026 gets closer and closer, I do see interest in the program waning, and there is a proposal to extend that tax deferral, which I think would be a big boost to the program.

There are other big boosts to the program, like a lot of the… This goes to the 10 years thing, and the person in Dallas who’s like, “Oh, that neighborhood is rough. Why would I ever go there?” A number of neighborhoods in the original Opportunity Zone legislation, which was based on the 2010 census, were very rough in 2010. Now they are not. And they’re no longer low-income neighborhoods, though they still count as Opportunity Zones, so part of the proposal is to sunset the neighborhoods that are no longer poor, which I think is, net, a good thing, and introduce new neighborhoods that may also benefit from the program, and are low-income. So, I think a reshuffling of the map, an extension of the tax deferral, an introduction of reporting. You know, we’re very supportive of the current bill, and I hope it passes in the next year or two while the program has momentum.

I mean, I think that the positive thing is, going earlier, I think that a lot of the 101 education has gotten out, and there are some… And I think a lot of the bad actors who thought this would be an easy money grab have also moved on to other things, because this is a very hard system to game. If you have your money locked up for 10 years, you better be a true believer. So, I think the marketplace was mature thanks to you, Jimmy, and many others who’ve been building it. And so, I really would like to see the program reformed and extended while there’s such good momentum.

Jimmy: Yeah. Yeah. You and me both. We’re big supporters of that legislation, that reform bill as well, and fingers crossed it gets passed. It was hopeful it would get passed the end of last year. It didn’t. So, I’m looking now toward, I don’t know if it’s gonna happen this year, but hopefully, it happens at least before this current session of Congress at the end of 2024. Ross, we’re kinda winding down here, I’m gonna try to …

Ross: Yeah, I think what we’re … they gotta knock out the debt ceiling first. And if you have any ideas on how to solve that problem, you know, you…

Jimmy: That’s priority number one. I don’t have any ideas there. That’s above my pay grade.

Ross: America will thank you if you can bring Republicans and Democrats together on the debt ceiling. Then we can move on to Opportunity Zones.

Jimmy: Yeah, exactly. That has to happen first, and then we can talk about tax legislation and Opportunity Zones. Ross, I’m gonna get you outta here in a minute or two, but wanted to get your thoughts, as you have a lot of expertise with investment fund management and real estate investment over, you know, a couple of decades. Do you have your eye on any trends across, put OZs aside now, just broader private equity real estate markets, the landscape with real estate investing overall? Any trends you’re keeping your eye on?

Ross: Yeah. So, I think one of the things that I hear all the time, that I don’t think is true, I hear people say all the time, you know, “There’s distress in the market, but this is really where you make your money. When there’s blood in the streets, buy property. There are gonna be once-in-a-generation deals here.” I think the stress in the market is highly concentrated to certain product types and certain geographies. So, you know, people say, “How am I gonna get a once-in-a-lifetime deal on industrial real estate in Texas, or a multifamily project in Atlanta?” You’re not. Multi-family continues to perform really well. Multi-family tends to do better in high interest rates and recessionary times. People don’t buy homes as quickly, or can’t afford homes. People don’t move as quickly, etc. So, there are certain product types in certain markets, like Georgia and Texas and the Carolinas, that continue to perform.

Now, if you wanna buy a 80-story office tower in downtown San Francisco, you could probably get it for 10 cents on the dollar. That is the once-in-a-generation deal. And maybe there’s someone who makes a billion dollars off of buying central business district office buildings, for buying it for nothing. However, it’s gonna take an insane amount of capital and an insane amount of time to turn those around. Maybe that is the right kinda thing for an enterprising Opportunity Zone play, but, you know, if you’re going to turn around the central business district of Seattle, which I think has lost 50% of its occupancy, that’s a very long-term land, that, it’s going to be very difficult.

So, you know, one of our partners, Third & Urban, our partner on the Charlotte project I mentioned, for instance, has bought a suburban office building outside Atlanta, is working on a office-to-multifamily conversion. There are a number of people working on how do we turn these abandoned office buildings in cities like Atlanta, that have multifamily shortage, how do we convert those? How do we take dead or unused space and find very different uses for it? So, I would just say, you know, if you are bargain hunting in the real estate world, the answer is office, office, office, especially, like, Class B and C 1980s office, but there is no easy or passive way to turn it around. You better know what you’re doing, or hire a developer who knows what they’re doing.

You know, I would say the sectors that we’re in, you know, multifamily, industrial Southeast, we’re largely just trying to stick to our knitting, because I think we have seen… You know, we didn’t see booms in ’21, ’22, and we haven’t seen busts in ’23. I think it’s, you know, we’re just kind of the little engine that could, just doing what we do. But if you really wanna do make a once-in-a-generation deal, especially bad product office can be bought cheaply. And there are a lot of very thoughtful people thinking what to do with it. That’s not exactly where our head is at, but someone should make a run at it. Easy for me to say, you know, with other people’s time and money. Someone should make a big run at it.

Jimmy: Not for the faint of heart, and definitely not a get-rich-quick system, but that’s, interesting insights there. Hey, Ross, really wanna thank you so much for joining me today, giving me some of your time. Where can our audience of high-net-worth investors and advisors go to learn more about you and Blueprint Local?

Ross: Yeah. So, my email is [email protected]. Our website is blueprint-local.com. So, you know, drop us a line. Love to hear from you.

Jimmy: Fantastic. We’ll be sure to link to your email address and your website in our show notes page for today’s episode. That show notes page will be available, as always, at our website, opportunitydb.com/podcast, and we’ll have links to all of the resources that Ross and I discussed on today’s show. And please be sure to subscribe to us on YouTube or your favorite podcast listening platform to always get the latest episodes. Ross, this has been awesome. Thanks again so much for joining me today. Really appreciate your time.

Ross: Jimmy, thanks for your incredible leadership in the ecosystem. It’s a pleasure to be here. Thanks.

Jimmy: Thank you.