Industrial Sector Growth In Opportunity Zones, An OZ Pitch Day Panel

In 2022, the industrial real estate sector was one of the top-performing sectors, with e-commerce growth, supply chain diversification, and new inventory management strategies being key growth drivers. The Opportunity Zone tax incentive further boosts its attractiveness to investors.

Today’s episode is a recording of a live segment from OZ Pitch Day on July 20, 2023, wherein panelists Peter Ciganik, Brian Duren, and Jim Lang discussed all things Opportunity Zones and industrial real estate.

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Episode Highlights

  • How the industrial sector, particularly logistics-based industrial has shown remarkable growth in recent years, despite other real estate sectors facing volatility.
  • The significant overlap between Opportunity Zone areas and regions ideal for industrial assets, and how this overlapped has helped to facilitate investment manufacturing and distribution.
  • How the industrial sector should be thought of, not as a monolithic category but one of various subtypes, including cold storage, manufacturing, flex industrial, small local storage, and supersized logistics warehouses.
  • How industrial properties with a mix of long-life and short-life assets can take advantage of cost segregation and bonus depreciation, which can translate to significant tax savings.
  • Examples of data centers as OZ deals, and why they are an excellent real estate asset class.

Guests: Peter Ciganik, Brian Duren, and Jim Lang

About The Opportunity Zones Podcast

Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones industry.

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Show Transcript

Jimmy: Industrial was one of the top-performing real estate sectors in 2022, and it looks poised to outperform for years to come. There’s a lot of tailwinds with regards to this sector. E-commerce growth, supply chain diversification, and new inventory management solutions have been several of the key factors driving the growth of this sector. And when paired with the Opportunity Zone tax incentive, industrial real estate looks more attractive than ever for investors.

Welcome to our morning panel, the Industrial Sector and Opportunity Zones. I’m Jimmy Atkinson, founder of OpportunityDb and WealthChannel. I’m going to serve as the panel moderator. Joining me on the panel today are three titans in the Opportunity Zone industry. Peter Ciganik is Senior Managing Director at GTIS Partners. Brian Duren is a CPA at CliftonLarsonAllen. And Jim Lang is a Corporate and Tax Attorney at Greenberg Traurig.

Gentlemen, welcome. I’m going to kind of go around the horn here to each one of you to kind of chime in on this discussion. I’m going to hopefully just kind of be in the back seat and let an organic conversation unfold on industrial real estate and how the Opportunity Zone incentive can help leverage this growing sector.


Peter, I’m kind of hoping you can start us off here today. You joined me on the Opportunity Zones podcast a short while ago, and we did an episode on the rise of logistics-based industrial real estate. Maybe you can just touch on, very briefly before we move on to our next couple of panelists, the growth of logistics-based real estate, logistics-based industrial real estate, how you see that sector and some trends there, at a high level.

Peter: Sure. Good morning, Jimmy. I’m Peter with GTIS Partners. We are an opportunity fund manager and a real estate fund manager based in New York with about $4.5 billion of AUM across multiple property types. But industrial is one of our largest allocations and has been really interesting for well over a decade, rising from a somewhat sleepy sector 10 or 15 years ago to really the darling of investment and allocation for many opportunistic and value-add investors.

We have about 14 million square feet of industrial space. And when Opportunity Zones came about, we realized that these locations where Opportunity Zones were designated were in some ways a perfect fit for the program. As you will recall, the definition of “Opportunity Zones” is based on household income. And you have to be below 80% of the median income in the area in order to qualify, among other factors. Of course, the selection process was long and arduous. But when we looked at the final maps, we realized that a lot of places where we do our industrial investing fell into Opportunity Zones because they have no households. Surprise, surprise. When you define it that way, it kind of falls into your lap.

And so we decided early on that industrial would be a large allocation in our Opportunity Zone fund. We have a number of properties in our Fund I, which was a $630-million-dollar pool of assets between industrial and residential. And these days in our Fund II, which we launched a little over a year ago, it’s actually a larger piece of that fund. Because industrial has continued to be the strongest property type across real estate. With multifamily, of course, being kind of the solid rogue, but other sectors, such as office and hospitality, going through a lot of volatile periods.

So, here we are looking at industrial real estate. Which is still growing rents, and in some markets is heavily under-supplied. Happy to touch more on that in detail as to the drivers of real estate demand for industrial, but that’s the basic setup.

Jimmy: Yeah, let’s touch on those drivers throughout the course of the panel today. I wanted to hear from some of our other panelists here. Brian Duren, what are you seeing as a CPA at CliftonLarsonAllen in terms of industrial sector macro trends from some of your clients? And I understand that you work very closely with Greenberg Traurig, and you and Jim share a lot of clients. Jim, feel free to chime in when you’d like here.

Brian: Yeah, thanks, Jimmy. And I’m excited to join the panel today and share some observations. So, CLA, just for a bit of a background, is the largest professional services firm in the U.S. that works with private businesses. We’ve got three distinct business lines, traditionally, along the CPA services, tax insurance, consulting. We have a big outsourcing practice as well as a wealth advisory…registered investment advisor with assets under management.

And so serving privately held businesses across different industry sectors gives us a look into some of the bigger trends that our different industry groups are seeing. And specifically right now, manufacturing and distribution, transportation and logistics, we are seeing a heavy inflow of mobilization of corporate headquarters, supply chain pieces integral to the delivery of product, warehouses, manufacturing facilities. A lot of those spaces are being invested in the U.S. from the standpoint of either a lot of our domestic clients, maybe re-mobilizing, reconfiguring some of their supply chain, trying to get, you know, nearer to the end market of the user. But then also global companies are reshoring a lot of their operations into the U.S.


And that’s driven by a host of factors around the world. You know, typically, you know, we’re seeing supply chain compression be one of the stronger drivers of that. You know, continued fallout from the pandemic and, you know, the uncertainty with supply chains has caused a lot of manufacturers, specifically in the distribution side of the channels, to want to get closer to those end users and really shorten the length of time that it takes to get a product. I mean, the rise of Amazon delivery over the last couple of years, as well as other e-commerce, and we’re just seeing a lot of this tightening. Which is resulting in higher activity for construction in this type of sector in the U.S.

And so when you overlay that with Opportunity Zones, just as Peter said, you know, the maps almost, you know, ideally lay in where you would invest in those type of assets. We’re definitely seeing it across our client base. And part of what our real estate group at CLA does is work seamlessly with our different industry groups on trends, issues, planning, and that sort of thing. And so where Opportunity Zones come in, I think, is a perfect intersection.

Jimmy: Jim, let’s hear from you, let’s bring you in. You’ve been quiet today, we’ve been hogging all the time. So, let’s give you the stage here for a couple of minutes. What are you seeing in terms of both macro trends in the industrial sector, maybe from some of your client base, and also why Opportunity Zones, why establish industrial real estate assets in Opportunity Zones, and are there any challenges associated with doing so?

Jim: No, that’s a great question. And thank you for having me this morning. It’s great to see Brian. We work with CLA a great deal. And so glad to be on a panel with him. And I believe either today or yesterday, we just closed across the table with GTIS on a QOZ transaction. So, happy to be here with both of you.

So, we do a whole lot of Opportunity Zone transactions, QOZ, QOF transactions. We’ve done $14.5, $15 billion now of QOF offerings since the legislation. And with that, have seen about 800 now QOZB deployments. A lot of that…now, most of that has been real estate, as we’re talking about today. 75%, 80% of that’s been real estate. We’re seeing an uptick on operating businesses. But in the real estate market, like we’re talking about, most of it has been in multifamily. However, we’ve seen a great growth in industrial.

So, early on in the incentive, we saw hospitality, we saw some office. Obviously, COVID happened and those things went to the sidelines. Now, we’re seeing a heck of a lot of…while multifamily remains very active, we’re seeing a lot of industrial. We’ve done a lot of large industrial parks across the country in QOZs. And as we heard earlier, Qualified Opportunity Zones and where you would normally place industrial in the industrial zoned areas in many of our major metro markets across the country, they overlap. The QOZs happen to be in where we’re already doing industrial activity in the country. And so particularly the logistics, that is growing in a major way to get those products into urban centers around the nation. So, we’ve seen lots of industrial park activity in the QOZ space.

I would say…I would echo my fellow panelists that it’s a very large growth market. Industrial is just like the real estate market in general. In the QOZ space, industrial is a very large growth market. We’re seeing specified Qualified Opportunity funds just to go into industrial development. And we’re seeing some of the traditional multifamily QOFs transition a little bit to go into industrial, as well, because it’s such a large growth market.

I would say in terms of challenges, what we find is the greatest legal challenge in the QOZ world and in making industrial work is if you build-the-suit, and you’re going build-the-suit for a large tenant in an industrial space, we have to be very careful about triple net lease issues that are associated in the QOZ world, and we have to work around those. And there’s legal structures that we have to put around to make sure that we are not running afoul of the QOZ code regulations in terms of triple net leases and we’re making sure that we’ve got active income coming into our Qualified Opportunity Zone businesses that are leasing the space, say building and leasing the space, to our tenants. But that’s something we’re now familiar with, we’ve done it now since, I guess, 2018. The law was 2017.

So, we’ve done since 2018 on these industrial spaces, we know how to do it. It can become a little bit more difficult depending on who the tenant is. If the tenant is a large Fortune 500 company or particularly if it’s a defense contractor, that can become a more difficult conversation, and how we structure those leases to make sure that we are active income. But that’s the greatest challenge that we see in the industrial space, is making sure we’re avoiding the triple net lease restrictions.

Jimmy: Good. Well, we’ve completed one lap around the horn. We’ll do another lap or two, and maybe we can just get some popcorn going here. You guys can just feel free to jump on top of each other if you want to, if you want to respond to any individual points. I want to just stay out of the way.

As a reminder, in case you’re just joining us, this is our morning panel, the Industrial Sector and Opportunity Zones. I have linked to each of our panelists’ LinkedIn profiles in the chat if you want to read up on Peter or Brian or Jim. And then I’ve also got the schedule for what’s on tap for the rest of the day today. If you have any questions for the panel on industrial or any OZ topics, feel free, please submit those questions using the Q&A tool in your Zoom toolbar.

Peter, let’s circle back to you now. You mention that there are some key drivers that are acting as tailwinds for the industrial space. A two-part question, I guess, actually, Peter. First of all, maybe just, like, a very basic question, what do we mean by industrial? Maybe what’s included in your fund? And what are some of those key drivers that are causing this boom in this sector?

Peter: Sure. Just like every other major property type, industrial has a number of subtypes. And you could be investing in anything from a local storage shed or outdoor storage area all the way to a 2-million-square-foot Amazon super warehouse that’s the size of a dozen football fields. There are also differences in what’s inside those warehouses. You could have cold storage, which distributes mostly food, obviously. You could have manufacturing uses inside industrial. Some people break that out as a separate property type as manufacturing. But to us, it’s kind of the same location. And there is light manufacturing, heavy manufacturing. Those facilities are mostly owned by their users, but some are leased.

And then within the logistics warehouse, which is kind of the classic investment property subtype, you have differences by use and size. There is flex industrial space, which is smaller storage or distribution units with some office. Kind of like your roadside industrial park where you have some retail frontage, maybe a tile manufacturer or a car parts distributor who also has a showroom in front of that storage space, that would be called flex. Then there is a midsize distribution space that a lot of retailers, your classic, you know, Walmarts and clothing retailers, would use for distributing their products. And then there is the logistics super warehouse, usually Amazon these days but there are a few others, where a huge amount of goods flow through supplying an entire region. So, those are regional or even national warehouses for logistics e-commerce.

Brian: You know, thinking with my CPA tax advisor hat on for a moment, one of the things that makes industrial assets quite valuable in an OZ standpoint points to one of the comments that the last presenter made about the depreciation recapture and how, under an Opportunity Zone investment, investors are able to avoid depreciation recapture, making that benefit essentially a permanent deduction. With industrial assets, depending on the type… And thank you, Peter, for the broad cross-section of industrial. Depending on the type, it’s quite possible to have a high amount of very specialty items that could be classified as short-life personal property.

And so when we are talking about cost segregation analysis, identifying certain costs that can be written off over a shorter life, including through the bonus depreciation regime that’s currently set to be phasing out over the next few years, anything that we can do in an Opportunity Zone setting to accelerate and advance those deductions forward is going to save a lot of tax overall in terms of the life cycle of the real estate project. And so different asset classes that lend itself to higher values attributable to these lower-life segregatable assets, I think, just enhances the tax benefits for OZ investors.

Jimmy: What type of impact does that depreciation and the lack thereof of depreciation recapture have on after-tax returns? And what about bonus depreciation for this year and the next few years? I know it’s going down. I think we’ve got 80% bonus depreciation still available for 2023. Can you speak to that a little bit, as well, Brian? And, Jim, feel free to jump in if you have any thoughts on that.

Brian: Yeah. So, the bonus depreciation was enhanced as part of the 2017 Tax Cuts and Jobs Act. It was 100% through the end of last year. In 2023, it’s scheduled to scale down 20% per year. So, we’re currently in an 80% bonus environment. And then it goes to 60%, 40%, 20%, and then it’s phased out completely, absent any new legislation. That other delta still gets written off over the normal depreciation schedules for short-life assets. But the ability to deduct that much of a property’s acquisition costs, I mean, you’re talking about in some cases deducting, you know, over 30% or more of the property’s acquisition, or construction cost in the case of new development, in a very early period.

And so that part of the tax benefit becomes permanent. And so you quantify that. And when we’ve analyzed OZ deals versus non-OZ deals, I mean, we’re consistently seeing the difference in after-tax rates of return with a jump of at least 500 basis points. Much of that is attributable to the fact that depreciation now becomes permanent. And so not only is your appreciation permanent, but your depreciation is also permanent in an OZ standpoint.

Jimmy: Well said there. Go on, Jim.

Jim: You know, I would echo much of what Brian says there, in that I always like to say that the best asset to put into…with some minor exceptions, the best asset to put into a QOZ setting is a high-appreciation asset on a post-10-year horizon. That’s what the entire incentive was essentially built for and that’s where it makes a lot of sense. In the real estate world, that can add significant increase to your IRR after 10 years. And one reason for that is if you’re able to do cost segregation, if you’re able to get that tangible personal property, particularly in industrial where you see a lot of that, on the front end in accelerated depreciation and you don’t have recapture on the back end after 10 years, that can add to your after-tax IRR on a significant basis for investors. Whether you’re a fund manager or you’re an investor, that can mean a whole lot after 10 years to your after-tax return.

Having said that, there is planning, there is reasons you have to talk to people like Brian and you have to talk to people like me on the front end on that. Because to be able to take that bonus depreciation, you have to have tax basis to do it. And if… Remembering that an investor’s investment, capital investment, into a Qualified Opportunity fund gets zero basis on the front end until they pay their tax at the deferred tax date. Which is now December 31, 2026, hopefully it becomes a later date in the future. But as of today, it’s December 31, 2026. You get zero basis on the front end. And so you have to get your basis usually through debt. And that’s either through recourse debt or, in a real estate deal, through qualified nonrecourse financing.

And that’s how you’re taking your accelerated depreciation. But you have to plan that on the front end, you have to plan, “How much of that do we need to get us through December 31 of 2026, or a later date, when we’re going to get our bulleted basis for paying our deferred tax?” So, it’s important to do that type of planning on the front end. Or you would have to suspend those losses, and then you’re not getting the same advantage you would otherwise.

Jimmy: Jim, a lot of the viewers on the call today, I suspect, are passive LP investors who may be investing into someone else’s QOF. Is establishing basis anything that they need to be concerned about, or does that happen at the fund level?

Jim: No, it is something they have to be concerned about. They have to make sure the fund that they’re investing in has planned for their base. Because when they invest, again, their capital is getting zero tax basis on the front end. So, they have to make sure that that fund, or to work with their advisors and make sure that that fund, has planned for how they’re getting their tax basis at the end of the day and how they’re getting… I guess a greater question, to speak outside of industrials, is, “How are they getting their liquidity? Or are they not getting their liquidity, are they going into their pocket in 2026 to pay their tax?”

Jimmy: Yeah, that’s another huge issue. And I brought that up in my OZ101 crash course that I presented at the top of today’s event. There is a liquidity…a need for liquidity in 2027 when your tax bill comes due at the end of…when you recognize that initial gain at the end of 2026.

What about geographies? Maybe, Peter, I might turn back to you here. Where does it make sense to invest in industrial? I think that someone made the comment earlier that the Opportunity Zones happen to overlap in a lot of desirable locations, but what areas around the country are you focused on, Peter? And then same question for Brian and Jim, referring to your client base. What are some of the best geographies for industrial today?

Peter: Sure. I’ll come back to that in a second, just one quick note on the depreciation recapture or other tax benefits that are available for industrial that we have fortunately come into with the passage of the IRA Act, the big bill that supports renewable energy. Lack of basis in Opportunity Zone property is a tricky issue and you should definitely talk to your advisors about that, but one area where we actually don’t need it and get a fantastic tax benefit that may be even better than Opportunity Zones in some ways is in renewable energy installation. And warehouses are a perfect asset class to put your solar panels on the rooftop. With the IRA, the government will essentially pay you half of that cost upfront and you claim a tax credit. You have to hold it for 5 years, but we’re holding it for 10 anyway. So, another perfect fit with Opportunity Zones. And we claim a very generous tax credit for installing solar panels on our warehouses. And we’re doing that across our portfolio.

So, maybe we’ll come back to that, but it ties into tax incentives that are available. And specifically for Opportunity Zones, that tax incentive for solar panels goes from 30% to 50%. And there is no such other program that will pay you half of your cost. This is… I don’t think people have quite realized the magnitude that that incentive can support.

Now, back to your geography question. Markets are different, obviously. And you have to follow growth and population and income, just like any other basic real estate investing. That doesn’t change. But what’s different about industrial is that it comes through usually points of entry. A lot of goods that are transported come through trade. And trade patterns have shifted quite a bit, both before COVID with problems in the Chinese supply chain and all the tariff wars that we had. We now have forgotten all about that. But it was all the fun, if you recall President Trump’s antics in 2017 and ’18. And then COVID hit and completely scrambled the supply chains.

So, when companies, retailers, distributors, industrial producers look at their supply chain and the risk associated with relying essentially on one source of their product, which used to be China, they’re really changing their planning here and looking at other ports of entry. And not many people know, but, right around COVID, the Panama Canal was enlarged to accommodate the world’s largest container ships. So, they do not have to now dock in L.A. or Long Beach. They can actually pass through the canal and come to the ports of Houston, Charleston, Savannah, the East Coast.

And just in the last three years, the Port of Savannah, for instance, has become the nation’s third largest port, after L.A. and New York. That’s a pretty small town in the Southeast, but really supplies an area where we’ve seen population growth for well over a decade hit 2% to 3%. 100 million people now live in the Southeast, but they only have… And that’s about, let’s call it, a little less than a third of our population. But they only have about 10% of the industrial distribution space.

All the space that’s been built over many years is either in L.A., Inland Empire, or in rail hubs, like Chicago and Dallas and the Midwest, Memphis, places like that. Well, the goods are not coming through there. Even if they could dock in L.A., the strikes there and the labor strife that they’re going through have been very tough on the efficiency of distribution from the ports of L.A. So, a lot of that traffic has shifted to the Southeast, to the Port of Houston, for Texas, which has been a huge growing market, and the ports of Savannah and Charleston on the East Coast.

So, we’re focused on those areas that have seen population growth, income growth, and a shift in the trade pattern. There just isn’t a lot of backup in those ports, in terms of warehouses, when those goods come in. You’re literally seeing…if you tour the market in Savannah, you’re seeing containers just in outdoor storage these days. They have about 2% vacancy.

And so geographically, the demand varies. You probably don’t need another warehouse in Chicago. You probably couldn’t build one in Inland Empire because they won’t give you permits. They won’t allow you to build anything there. But you certainly need it in ports in the Southeast.

Jimmy: So, Southeast, a booming place to build a lot of construction, quite frankly. But industrial, no stranger to that trend, as well.

We’ve got about three more minutes left before we have to move on to our next segment. I did want to get to a couple of questions that we had here. Brian and Jim, feel free to chime in also with any trends that you’re seeing in terms of geographic locations, if you want to answer that question. But a question here from Scott asks, “Are there any Qualified Opportunity Zone funds that are investing in data centers?” I don’t know that I am personally aware of any. I’m sure there are, but, Jim or Brian, maybe you’ve seen some?

Jim: Yeah, we’ve done a few. We’ve done a few data centers. It’s a great asset. In fact, if you call it a real estate asset class, which you should, it’s about the highest rent you could possibly charge per square foot, for data centers.

So, we’ve done a few data center QOZ deals. I think that those can be very attractive when they already make sense, just like any QOZ deal. If they already made sense on the front end, this makes them make a lot more sense. But we’ve seen data center deals in several different markets.

And going back to geography, we do QOZ deals across the country, every market in the country. Industrial, the Sun Belt, the major entry points in the country, are where we’re seeing the most activity. So, particularly secondary ports that have not been as active as, say, New York and Los Angeles. So, yes, Savannah, we’ve seen Charleston, we’ve seen Houston, New Orleans, Tampa, all of these ports that traditionally have been sleepy ports, we’ve seen a lot of industrial activity around.

Jimmy: Great. One more question.

Brian: Yeah. I’ll echo the… Oh, sorry.

Jimmy: Go ahead, Brian. Yeah, go ahead.

Brian: No, just a quick echo. And we’re all in unison on the Sun Belt. You know, I think about some of that macro trend, the population growth, you know, migration to the Sun Belt, that leads to demand for goods, which leads to infrastructure, and so on. And so, you know, I’ll echo what my fellow panelists have said, and I’ll add that there’s sometimes this rippling effect in terms of all of the other businesses that impact the supply chain. So, maybe not the direct warehouse or distribution center, but all the other ancillary businesses that participate in that supply chain for that geography.

Jimmy: Good. I love the data center question, because data centers seem that they should be location-agnostic. You can probably put them anywhere in the country. Why not put them in Opportunity Zones?

We had one more question I wanted to get to here before we cut you loose. We got about 90 more seconds before we have to move on. This question comes from Bob Dykstra. Bob’s always at these. And great question here, Bob. Thank you for attending today. Bob says, “Even in Opportunity Zones, land costs are increasing, construction costs and time to build are not getting any shorter, with higher interest rates. Is there a slowdown coming or will demand pay the higher rents?” I don’t know if this is industrial-specific, but it should apply to industrial, as well. Quick thoughts from anybody who wants to chime in there, we’ve got about another minute.

Brian: Well, I’ll share, you know, sort of echoing the same comment I made earlier about what we’re observing in our client base. We are seeing that the rents are supportable and the pro formas do pencil out, even given the rise in construction costs and the uncertainty with interest rates. You know, we’re just…we’re seeing it because of all of these other macro trends, that the demand for industrial space in a lot of our markets… And we’re active in all the major markets across the country within our industry groups. But we are seeing that there is still a long runway ahead. And so a lot of tailwinds in this space.

Peter: And the key to that, Jimmy, is that real estate and rent is actually a relatively small part of the total basis and cost for an industrial company. Maybe 5% to 10% of their budget goes towards rent. And an office tenant who is a law firm, let’s pick on one, if they’re leasing an office, that’s a very major line item in their cost, other than paying the lawyers. Maybe in residential, it’s about 40 to 50%. In industrial, 5% to 10%. So, when you increase your rents, yeah, the tenants will complain. But at the end of the day, if they need the space, it’s a small item in their total budget. The major item is transportation costs, that’s what’s costing them a ton of money.

Jimmy: And, Jim, we’ll give you the final word here, if you have any last thoughts.

Jim: I certainly agree with that in industrial, that the land basis is less meaningful and that these are in areas of…because of their QOZ status and otherwise, that they’re less meaningful. But I go back to if the deal makes sense without the Qualified Opportunity Zone incentive, then it’s going to make a whole lot more sense because of it. And maybe this is the last push over that threshold. And that’s what we’d like for our policy purposes, we’d like to see that this is the incentive that actually makes a deal that is on the border make sense. But at the end of the day, underwrite a deal without the QOZ incentive, and then the QOZ incentive can make a deal a whole lot better afterwards.

Jimmy: Well, perfect. Well, we’ve hit time. I want to thank all of our panelists for joining me today. Peter Ciganik, GTIS Partners. Brian Duren, CliftonLarsonAllen, or CLA. And Jim Lang at GT Law, Greenberg Traurig. Thank you so much, gentlemen. I just linked again to your LinkedIn profiles, if anybody wants to click those in the chat to follow up with you or to learn more about you and your firms. Thank you so much.

Jim: Thank you.

Brian: Thanks for having me, Jimmy.

Peter: Thank you.