What are some of the key similarities and differences between Sun Belt Opportunity Zone deals and Midwest Opportunity Zone deals?
Lawrence Jatsek is managing partner of CRE Development Capital, a real estate development and investment firm focused on mixed use and multi-family, industrial, and storage development opportunities in the U.S.
Click the play button above to listen to my conversation with Lawrence.
- A history of CRE Development Capital and the firm’s various investments in Opportunity Zone real estate and businesses.
- The impact of an increase in the capital gains rate on the Opportunity Zones marketplace.
- How accelerating migration to the Sun Belt compares to the Midwest U.S.
- The factors that make a “well rounded” Opportunity Zone investment, and how CRE’s partnership with the Arizona OIC is maximizing the impact on the local community.
- How the slow and steady economic engine in the Midwest U.S. creates attractive long term investment opportunities.
- How the Ohio tax credit for Opportunity Zone investors further enhances returns.
- The sources of investment into Opportunity Zone programs in 2021, including individuals from across the country, RIAs, and family offices.
Featured on This Episode
Industry Spotlight: CRE Development Capital
CRE Development Capital is a real estate development and investment firm focused on mixed use and multi-family, industrial, and storage development opportunities in the U.S., including Opportunity Sones.
Learn More About CRE Development Capital:
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. And joining me today from the California Bay Area is Lawrence Jatsek, managing partner of CRE Development Capital. If you attended my summer OZ Pitch Day event a few months ago, you may remember him and we’ll be talking about some of the OZ markets that he is participating in throughout the course of the episode today. Lawrence, welcome to the show.
Lawrence: Thank you, Jimmy. Great to be here.
Jimmy: Glad to have you on Lawrence. You and I just spent a weekend together a few days together out in Provo, Utah, visiting the Hall Labs campus and touring the area. That was a lot of fun. Great to have you on the podcast now to discuss your fund and some of the deals you’re in. To get us started, why don’t you just tell us a little bit about CRE Development Capital?
Lawrence: I’d love to Jim. Yeah, that was a great weekend, a lot of fun. And it was a heck of a BYU game, by the way.
Jimmy: It was.
Lawrence: I’m Lawrence Jatsek, CRE Development Capital. And we have a couple of funds that are in different areas of the country. CRE Development Capital really started with Opportunity Zones that got put into place, and a couple of our projects happen to get the lines drawn around them, and so here we are with Opportunity Zone funds, and along with other funds for other projects that we have that are in non-Opportunity Zones. So my partner, Dwight Alexander, and I decided to put this company together to raise the capital for not only our projects but other projects as well. And so now fast-forwarding, we are accepting invitations to invest into other people’s projects, as well as our projects. And we have a single asset fund, and we have a multi-asset fund. And we’re also getting ready to launch a fund that will look at investing into Opportunity Zone businesses.
Jimmy: Excellent. I want to talk with you about the different projects that you’re investing in, in a couple of different Opportunity Zones, a couple different areas of the country in a few minutes. But some news broke overnight or this morning. We’re recording this episode on Monday, September 13th, I don’t know exactly when it’s gonna air. I think it’ll air later this month. But the news that broke was, this morning the Democrats on the House Ways and Means kind of finally got to releasing a draft of its tax proposals. And we’ve learned that they’re planning on increasing the capital gains rate as we were expecting, but the increase is not quite as harsh as we thought it might be. The increase on the capital gains rate would go from 20% to 25%. Lawrence, what are your thoughts on that? And how do you think that might impact the Opportunity Zones marketplace moving forward?
Lawrence: That’s a great question. And I didn’t read that news today. So thank you for sharing that. My first reaction is, well, when people have capital gains, that’s good news. You know, a 5% bump is all that harsh. Although, when you’re looking at investing in an Opportunity Zone and saving, you know, 25% on capital gains, it’s still pretty significant. I mean, if you’re investing a million dollars, that’s $250,000 that you don’t have to pay to the federal government in 10 years. And although most of us were expecting something up near a 40% capital gain, which would probably have driven even more people to Opportunity Zones, and we’ll see what happens with this. I think people still look at the fact that saving 25% on capital gains is going to be a positive thing. And it’s still going to drive a lot of investors towards Opportunity Zone funds. And more people are learning about the Opportunity Zone funds finding out as we go along. And a lot of it has to do with you Jimmy, and creating more and more opportunities for people to learn about them. And I think just the threat of higher tax had created a lot more awareness around Opportunity Zone investing. We will see what happens.
Jimmy: Yeah, we’ll see.
Lawrence: The fact that it is only 5%. Yeah.
Jimmy: Yeah, only 5%. That does come as a surprise to me because I think we were fearing that they might try to raise it up to the income tax level close to 40%. And then some were expecting, well, maybe they’ll land at somewhere around 28% for the cap gains rate. So the fact they’re coming right out of the box with an increase only from 20 to 25 is good news, I think. But still, yeah, the Opportunity Zone benefit, I believe, still provides massive benefits to investors who have capital gains.
So let’s dive in to the meat of our episode today, Lawrence, because you’ve got a few different deals around the country that you’re looking at, targeting two very different markets, one deal in Phoenix, and you’ve got a handful of deals in Cleveland and the greater Midwest area. So first of all, let’s get into these different markets. The Sunbelt, very high growth area, contrasting with the Midwest, which is a more stable or steady area. How do you view the two different markets, the Sunbelt versus the Midwest?
Lawrence: That’s a great question. I think most of us can agree that there’s been a migration to the south, southeast, southwest to the Sunbelt, if you will, for quite some time, and that just got accelerated with the pandemic in a huge way. And the Midwest has kind of always been that slow and steady area, right? It doesn’t really grow in double digits, you know, kind of, for me, it stays in around the mid-single digits in terms of growth, if it grows at all, depending on the areas. And I know the local politicians in a lot of these cities have recognized that they need to do more to keep people there and attract people. So a lot of that’s going on, and people who have traditionally invest in the Midwest tend to stay in the Midwest. But what we find, and along with everybody else, is that with the great migration to the Sunbelt, you’re seeing massive double-digit growth, and money is gonna go where it’s treated best. So that’s the big difference I see in terms of raising capital for a lot of these projects that are in the Midwest versus raising capital for projects that are in the Sunbelt. It’s definitely a lot easier for projects that are in the Sunbelt. And I work with a lot of people and to find ways to attract more capital to these Midwestern cities, it can be challenging for a lot of people, although a lot of people are having a lot of success. And we have some great projects in the Midwest as well as the Southwest that provide investors with stellar opportunities for stellar returns. And we just have to dig in and really educate people on the Midwest who don’t traditionally invest in the Midwest.
Jimmy: Right, so you’ve got projects on both sides of the dividing line. Some in the Sunbelt, some in the Midwest. Let’s focus now for a minute on your Sunbelt project. It’s a single asset fund that has invested or will be investing in a deal in downtown Phoenix, what can you tell us about that deal, what you like about it?
Lawrence: Yeah, Jimmy, that deal there turned out, for us at least, to be one of the best well-rounded Opportunity Zones deals that I’ve seen. And I say well rounded is because not only is it in one of the best, if not the best location in downtown. Also, the social impact on it is huge. And here we are with a…we’ve got an entitled project that is 700,000 square foot plus tower that is across the street from the Talking Stick Arena where the Phoenix Suns almost won a national or a NBA championship. And it’s two and a half, three blocks from Chase Field, and two and a half, three blocks from one of the largest convention centers in the country. And Phoenix is on a redevelopment train right now. I mean, it’s just flying down the tracks, and there’s so many great things happening there, and this project is smack dab in the middle of it. It is a roughly 233 key 5-star hotel with approximately 160 or so branded condominiums, as well. And right now, Phoenix does not have a five-star hotel downtown, and they have very low product for sale downtown, which is something that they wanted, and something that we’re happy to provide.
So that project financially is going to be really, really solid and provide our investors with something that will provide a lot of hot of return for a long time to come. But the great thing about this project as well is the social impact. And what I mean by that is our partner in this project is the Arizona OIC. And the OIC is the Opportunities and Industrialization Center, and that has been in Phoenix since 1967. And since then, this group has put together, it’s a nonprofit group, and they have put 65,000 people through their program. Have educated them, and given them workforce skills, so that they could go out and provide for themselves, provide for their families and really create a lot of opportunity for each individual person that comes through there. That has been their goal from day one, and it is their goal today. And by us partnering with them on this project, our intention was to basically have them never have to raise money again, outside traditional fundraising for nonprofits, but also have them be able to employ their students into this project, into the businesses that will be created through this project. So it has to do with hospitality, and construction, and building maintenance, and that’s predominantly what this program trains their people to do. And it should make their program last in perpetuity.
Jimmy: Excellent. So when you think of luxury condos or five-star hotel, you don’t really see, oftentimes, the social impact that it creates, but the job training program combined with the fact that you’re bringing a lot of jobs to the area, that helps create that impact, right?
Lawrence: That’s right. Right, isn’t that what Opportunity Zone’s about?
Jimmy: I think that’s what it’s about.
Lawrence: Lift the area and bring in more people and uplift not only the people but the whole area.
Jimmy: Yeah, I view Opportunity Zones as being about two things, one leads to the second. So one is it provides a massive tax benefit for investors, right? You’re incentivizing high net worth investors, institutional investors with capital gains, to put their money into areas that maybe they wouldn’t otherwise, or to juice the returns on areas that need this type of investment. And then that leads to the second reason, which is job creation. That’s what this is all about is being an engine to create jobs. And, you know, it doesn’t necessarily matter if it’s… Oftentimes, it doesn’t really matter exactly what the project is, but it’s just going to bring some more economic activity and jobs to the area. I think that’s the important thing. So that’s your Phoenix project. But let’s look at your Cleveland fund, a multi-asset fund, you’ve got a handful of projects identified. And I know you’re open to other project sponsors bringing their deals to you as well. So talk to us a little bit about your Cleveland fund and the pipeline you have there.
Lawrence: Yeah, so we call it the Cleveland fund, because I’m originally from Cleveland, and love Cleveland. And even though I’ve been out of the area for a long time, you can take the boy out of Cleveland but you can’t take the Cleveland out of the boy. And so there’s a lot of Opportunity Zones in the Midwest, as you know, and particularly in the Rust Belt swath of the area. You know, we’re seeing a lot of projects come to us from Detroit, Buffalo, and particularly in Cleveland. And you know, one of the reasons we targeted Cleveland because we know a lot of people there and have a lot of connections there still. And so, Cleveland, going back to the beginning of this is…and we talked about the difference between Midwest and the Sunbelt, and the accelerated growth versus the non-accelerated growth. You know, Cleveland is…I kind of look at the whole swath of the Midwest as kind of the tortoise and the hare, and the Midwest being more of the tortoise. You know, it’s a slow and steady and consistent in terms of returns, and you don’t get these huge spikes. And you don’t get people rushing to the areas, and you don’t get people rushing out of the areas so much. That may not be completely true during the pandemic in some of the areas up in the northeast. But it’s interesting to see what’s happening in these areas, and so like during the pandemic.
Before the pandemic, Cleveland was on this great steady growth, some really big beautiful projects were being built in the area. In fact, there was a tower that…one of the largest tower, brand new ground-up development towers in Cleveland, right in downtown, Playhouse Square was built. And it really raised the bar for the area in terms of apartment buildings and towers, in particular. And so this one being ground up was really going to raise the bar for the area. And it did. It was a little slow to go out of the pandemic rate and the pandemic when they came out to lease it up. But you know, today, it seems like everybody’s kind of rushed back into the core, they feel good about what’s going on. They’re positive. Cleveland’s done a really good job throughout the pandemic. And people have come back into the core, like a lot of places, they ran to the suburbs when the pandemic hit, but now they’re rushing back. And all these buildings are getting over 90% leased up.
And case in point is, a close friend of ours was looking for a new apartment in downtown Cleveland. And she put in nine applications, and she lost out on every one of them because she thought she could get these things and people were lining up. I mean, there are multiple applications for these units now. And it seems like there’s a little bit of a shortage for now, you know, where a lot of people thought there was going to be a saturation. So, so far, that’s what we’re seeing in someplace like Cleveland. Now, Columbus has always been looked at and it’s constantly growing, particularly because of the university and a lot of the employers of the area go down there because of the university. That’s always been a nice growth area for the Midwest. But you know, the whole reason we wanted to start this one for the Midwest, is because there’s a lot of opportunity there. And you may not see 30% IRR over a 10 year period, you’re gonna see strong IRRs over a 10 year period in these Opportunity Zone projects.
And all the cities are really bullish in terms of creating jobs, attracting employers there. For example, Sherwin-Williams is building a brand new headquarters smack dab in the middle of downtown Cleveland. And other employers are moving there as well, they’re moving headquarters. Their offices from other areas are moving there, to take advantage of the tech friendly environment that Cleveland has provided for businesses to move into. So are thousands of people going to move there like they are to Phoenix or Arizona? Probably not as fast. But over time, yeah, I would see that happening. It’s a great, affordable place to live. So you can get housing there. You can buy housing there, you can rent there probably half the price you can in some of these Sunbelt areas. And it’s a beautiful area, right on the shores of Lake Erie.
Jimmy: Yeah, absolutely. And if you can get through the winters, at least it’s not a bad place to live. You’re right about that. Ohio offers a tax credit for OZ investors as well. Am I right about that? What can you tell us about that?
Lawrence: Yeah. So very quickly, it’s a very conforming state, and they have a 10% tax benefit to OZ investors there as well. So you’re not only getting the federal tax benefit, but you’re getting a state tax benefit on top of that. So if we’re going to 25% and you get another 10% on top of that, you’re saving quite a bit.
Jimmy: Yep, exactly. It’s free money in a way as I like to say. What else can you tell us about your Cleveland fund? What types of deals are you looking for? For anybody out there, maybe someone listening today has a project in Cleveland, they’d like to get in front of you. What are you looking to see specifically?
Lawrence: Multifamily is first and foremost, and industrial is another thing that we like to see as well. And then, like I said, Opportunity Zone businesses within those industrial areas and if there’s an Opportunity Zone business that’s a retail business going into one of these projects. That makes sense for us, too. So multifamily, industrial, and OZ businesses to some degree, are first and foremost, what we’d be looking for.
Jimmy: Good. Gotcha. And I want to ask about your investors. Who are they? I know you found some specifically through the OpportunityDb OZ Pitch Day event that you participated in a few months ago, earlier this summer. But where else are you finding your investors? Where else are you finding your OZ equity from? And who are your investors? Basically, what kind of types of investors are they?
Lawrence: Yeah, it’s really all across the board. We have a lot of individual investors, really, from all over the country. It’s really interesting, but most people seem to be not afraid of the Sunbelt, like, money always goes where it’s treated best, right? And people who traditionally or live in the Midwest and understand the Midwest seem to want to invest in projects in the Midwest, and people like to invest where they’re comfortable, where they understand, and also with people that they understand and are comfortable with. So that’s why…you know, I find that a lot of the investors who have asked us about our Midwest fund, Cleveland fund, are kind of based in more of the East, Midwest, and because maybe they have invested in the Midwest, they live in the Midwest or the east, and they understand the areas and they’re comfortable with that. Almost all investors across the country will go towards the southeast and want to look at the southeast, and southwest and Sunbelt, predominantly, because of the headline through the migration, the great migration. So that’s kind of where we’re seeing that. It doesn’t matter if it’s individuals, family offices, or institutional investors, they want to invest where they know and what they know, is what we’re finding.
Jimmy: And who are most of your investors? Are they high net worth, self-directed types? Are they are IRAs who are placing capital for their clients? Or, are they family offices? Are they institutional? Or what are you seeing mostly come into your fund?
Lawrence: Right now I’m seeing a pretty good balance of everything you just mentioned.
Jimmy: Excellent. A good mix then. What have been some of the biggest challenges you’ve had, in terms of getting your fund up and running, raising capital for it and finding deals for your pipeline? What have been some of the biggest challenges specific to being an Opportunity Zone developer?
Lawrence: That’s a great question. I think one of the biggest challenges is really educating the investors, particularly individual investors, who haven’t had the time to learn about Opportunity Zones and how the investments work. That’s always been something that I love to do it. I love to talk to people and answer their questions, and really spend time with them. And we encourage all investors to spend time with us, meet us especially through a video call, on particularly Zoom because that’s like first and foremost on everybody’s mind. But I think one of the biggest challenges was at the beginning is particularly with the pandemic is, we have this Midwest, Cleveland fund and everybody’s looking at…again, we’ve gone into great migration to the Sunbelt, particularly with people being able to work from anywhere now. And that being highly accepted amongst employers, and then trying to convince people that there’s still great investments in the Midwest. I would say that would be one of our biggest challenges right there, is just the differences between the two. And you know, we have projects in both places, but it’s interesting to see that. We’re finding more interest now in the Midwest than we had at the beginning, and so that’s a good sign.
Jimmy: Yeah, that’s a good sign. Well, you mentioned rushing back into the core. I think that’s helping. And speaking of that, conferences are also rushing back into the core. And in fact, just coincidentally, we have an upcoming Opportunity Zone conference coming to downtown Cleveland in a few weeks here. Novogradac is throwing their fall Opportunity Zone conference at the Hilton Cleveland downtown. I know you’re going to be there. What can you tell us about that? When are you planning on going? And could we check out your sights while we’re in town?
Lawrence: Yeah, so we’re talking about possibly, let me gather a little tour of some of the projects that we’re targeting at this point. So stay tuned for that. And Novogradac will probably have an announcement on that, we’ll work with them in terms of putting something together there. I’ll be there all days of the conference. And I’m really looking forward to that because it’s kind of my old backyard and I’m really happy that they’re doing that in Cleveland, particularly, that’s gonna pay big dividends for attention to the Midwest, and investors who may not particularly pay attention to the Midwest, I think it’s gonna be good educational platform for everybody.
Jimmy: Agreed. And I’ll be there. I’m looking forward to it. And if nothing else, we’ve got a Cleveland Browns game that night that I’m going to try to wrangle you into going there with me. That’ll be fun.
Lawrence: Oh, yeah, for sure. Gotta go. I love the Browns.
Jimmy: Exactly. Well, hey, Lawrence, it’s been a pleasure chatting with you today. Thanks for your insights. Before we go, where can our listeners go to learn more about you and CRE Development Capital, and if they want to reach out to you about learning more about your fund or any of the products you have going on in Phoenix or Cleveland?
Lawrence: Yeah, find us at credevelopmentcapital.com, you can send an email to us through our general email at [email protected], and also just call us directly at 415-323-6575. And happy to hop on the call, hop on a call, set up calls and talk further about everything that we have going on, and even talk a little bit more on what we are planning for the future as well.
b Fantastic, Lawrence. Thanks again. For our listeners out there, I will have show notes on the Opportunity Zones database website. You can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Lawrence and I discussed on today’s show. I’ll be sure to also list that phone number again, email address, and link to the website, credevelopmentcapital.com, so make sure you check it out. Lawrence, thanks again for joining me today. It’s a pleasure.
Lawrence: Always a pleasure, Jimmy. We’ll talk soon. And I look forward to seeing you in Cleveland.
Jimmy: Awesome. You bet.