Disruption Squared - Blockchain Combined with OZ

Kyle Walker

The Opportunity Zone Expo Podcast
Disruption Squared - Blockchain Combined with OZ


Jack: Well, welcome back everybody to the OZExpo Podcast. I'm your host, Jack Heald, and we're here today with Kyle Walker, Agora AltX. I've got to work my way through that name. Kyle, welcome to the show.

Kyle: Thanks Jack. Thanks for the time.

Jack: It's good to have you here today. So, tell me, tell me a little bit about yourself. First of all, who is Kyle Walker? Where'd you come from and how you get into this Opportunity Zone business?

Kyle: Yeah. So, about a decade-plus in the real estate business, myself and two partners have a company based in Phoenix, Arizona called NewGen Worldwide. NewGen has a background in hospitality real estate. We own it. We've developed it, we've managed it. We have a brokerage company that helps buyers and sellers transact. You know, with the financial crisis, we got creative on capital sources because the banks pulled some of those commitment letters.
In doing that, we set up the first regional center in the state of Arizona for the EB5 program, raised about $150 million of capital there and stepped a bit outside of just funding our own projects in hospitality but also in education and health care. So, that gave us the intimate interaction with fund management and managing a lot of investors across this wide geographic location, which was the nature of the EB5 program, which was immigration based.

Jack: Right

Kyle: So, we're all international, that program largely, contracted here recently because of some backlog issues and other things, we were following Opportunity Zone legislation closely. So, you know, coming out of December of 17, I guess when that tax bill passed, we had read it, we were very interested. We were following the state's process of designating these census tracts and waiting anxiously for Treasury to come out with the rules of the road.

Obviously, that's been a little slow and incomplete, but we should have that second tranche by the end of the month, which will give us greater clarity. And along the way, we looked at this program and we've always, NewGen worldwide, we've always made investments into technology companies that are synergistic to our core businesses.
And back in 2018, and the first quarter of the year we invested into Agora AltX. We were the only investor and this was a Blockchain company and not using Blockchain for digital assets, but rather using Blockchain to solve the trust gap with private offerings. And so, focusing on fund administration, lowering transaction costs for fund managers, and reducing the friction in that transaction process.

So, obviously given the EB5 experience and what we were doing on the fund management side, very much had the subject matter expertise there. And saw a clear need for a solution. so that really was the birth of Agora AltX. My partner in that company, Nico Willis has the fin-tech background of 20-plus years. And so the two of us got together and created Agora. Additionally in the OZ space, I was one of the founding members of the Opportunity Zone Association of America, which was the first trade association for Opportunity Zones. So, those are my hats and that's where we come from.

Jack: That's a lot of hats. And, and for our listeners, when Kyle and I first connected here this morning, he was wearing a Washington baseball cap, Washington. God, I wanted to say the Senators.

Kyle: You were right

Jack:  Good God.

Kyle: It was the old Senators.

Jack: Now it really was a Senators hat. Well, no wonder it seemed so familiar to me. So, he wears other hats as well. Hey, this is not Opportunity Zone specific, this is Kyle Walker specific. So, when you said you did education investment, talk a little bit about that. I'm fascinated with that.

Kyle: Yeah. So, look, I was born and raised in Arizona. We are not typically known for ranking very high in education. Where are usually…

Jack: Hey, we're in the, we're in the top 90%.

Kyle: You know, I don't want to take a jab Mississippi, but they are the only one that ever does worse than us. And look, I don't know if it's taking myself out here, but I'm a product of Arizona public education and I turned out okay. But, look, I saw a clear need in Arizona when I was doing undergraduate studies at ASU. I actually worked for awhile on setting up a charter school with a professor of mine.

So, charter schools were something I was passionate about because in Arizona there was a real need, especially in communities with lower income levels. They just didn't have the options for college preparatory education or other things like that. So, we partnered up with a developer and we use EB5 funding to build from the ground up a charter school down in Casa Grande, Arizona that provided all day kindergarten for school to do that in Casa Grande and a college preparatory education.

And the model there was, we funded the developer and then he did a lease to own with the operator and now actually the operator has bought the school with municipal bonds. They own it themselves and it provided a pathway for them to do that. So, charter schools are a little complicated in funding the building initially, but after they get set up and they stabilize, there were a lot of financing vehicles, so we were using EB5 to solve that short-term gap in financing that it was available for.

Jack: Gotcha. Well, as a longtime resident of Arizona, I'm very appreciative of the charter school program because it does provide an awful lot of options that wouldn't exist otherwise for lower- income families. Right.

Kyle: It’s not always the same outcomes as you go state-to-state. But Arizona, it's definitely been a force for good.

Jack: Yeah. Alright. So, let's talk about the Opportunity Zone market and Agora AltX in particular. The first thing that struck me was the name itself. Did you inherit that name, or did you guys name it once you invested?

Kyle: We, we came up with that name together. Yeah.

Jack: So, I'm going to ask why, why Agora?

Kyle: So, you know, Agora these where these old central gathering places, whether it's in Rome or I think most of the times people think of Greece these days in the Agora there, which is now largely a pile of rocks, but still a good place to visit. But this was a central gathering place where everybody in the community came down, exchanged information and while trading in marketplace components developed information and the exchange of information was at the center of it.

And we really liked that, as kind of a parallel to what we were trying to do and within private placement offerings. And so "Alt" is a reference to alternative investments. And so within these private placement offerings, there has been a huge a trust issue between sponsors and investors because of the kind of inherent opacity to these structures. These are not public companies. They do not demand, you know, these kinds of strict and regularly formatted reporting requirements. And, we were seeking to bring some normalcy to that reporting framework and bring away for investors to validate or verify the information they were receiving from these fund managers.

And that wasn't possible until Blockchain Technology came. And so we saw this tremendous opportunity and while everybody was very excited about cryptocurrencies and the, the tokenization and all these other kinds of buzzwords we hear a lot about today, we were taking this back to kind of boring old bookkeeping and solving the trust issue there, which was very much at the foundation of these private placement investments. And as we moved forward, we knew we had to find a niche within the alternative investment space because it is quite large.

And when Opportunity Zone came out, it actually offered us a very unique opportunity because we saw this, while one of the overriding principles was for this program to be simple, there were plenty of complexities in it and those complexities drove transaction costs and also at the foundation of this program is cost basis accounting. It's a tax program related to capital gains. And my partner Nico Willis, in his company NetWorth Service, has a background in automating cost basis accounting for Fortune 500.

So, we saw an opportunity in a place that had a great deal of record keeping requirements because of the nature of managing these various qualifications within the Opportunity Zone program. And with that record keeping, they created an additional duty for the fund manager to report to their investors, to not just say, “Hey your money is safe and we're doing what we said we were going to do with it and it's generating some sort of return for you.” But also saying we're following through on managing to these qualifications that result in ultimately attaining this tax benefit that you're after.

Jack: So, when I first started studying this, I thought, well I can definitely see why there would be demand on the investor side, but not so much on the sponsor side. But now correct me if I'm wrong here, it is because of the Opportunity Zone regulations that there will also be or there probably is demand on the sponsor side of, of the transaction. That's, that's the space you're filling.

Kyle: Yeah. And look, the sponsor is my core focus. They are my number one customer. And, in going to the sponsor, they are the ones that are architecting these deals and we're doing both doing both bank account administration and fund administration. So, we are providing the service to them. And we have a bank as a co-participant on the Blockchain and we have a patented technology called Pathchain, which is a path of funds, Blockchain system. And it is really the fund and the Qualified Opportunity Zone business.

And by hosting their accounts, their bank accounts, with our partner bank, that is what allows us to create this verifiable and immutable path the funds record that sits at the foundation of all this fund administration work we do on top of that. And that's where we can, do a great deal of automation, which really differentiates us from our competition, which rely on a lot of human processing that ultimately drives costs.

And so, with a unique technology, we are able to focus in on those areas that are driving costs to the fund manager. And we also have a unique business model in that we look to our banking partner to pay our fees and not the fund sponsor. So, it's very disruptive, in that assuming the fund sponsor is managing a minimum balance in those accounts, they are not responsible for paying us anything.

Jack: Is your goal to create essentially a reporting standard through the use of your services, I guess. Yes?

Kyle: Yeah. So, look right now we're starting an Opportunity Zone system that's been built from the ground up with Opportunity Zones. We will expand beyond just Opportunity Zone offerings. I look at, you know, the Opportunity Zone program as an offering enhancement, right? If you do these things, your investors get this additional benefit. And as a result, that's an enhancement to a private placement offering.

In the same way EB5 was an enhancement, that was immigration based. We've got all sorts of programs that do this and so we will expand beyond Opportunity Zones, within that umbrella of alternative investment offerings that are managed through private placements. And we do see through time being able to start to have a standard within this private placement, an industry where investors can expect that if a fund manager is using Agora AltX, they are getting a verifiable, immutable path of funds record and getting real time transparency as transactions take place. And a whole host of other reporting points that are very germane to the offering enhancement that that sponsor chose to use. In this instance, Opportunity Zones. So, when we talk about 70% test at the business level or 50% gross income or 5% nonqualified financial property or 90% tests or semiannual tests. Right? Run down this list, right, which starts to become this number soup of Opportunity Zones, are helping them address that and report to investors on that in timely manner.

Jack: Is this is Agora AltX, a true distributed ledger?

Kyle: It is a true distributed ledger. Now it is, however, a private Blockchain, not a public Blockchain. So, we are using Hyperledger Fabric and we thought that was very important for the security and permission layers that are essential to large financial transactions, especially, as it relates to these private placements and the way that these funds sponsors are looking at this.

But also, look at the investor audience that is really driving this Opportunity Zone industry and they tend to be qualified purchasers or above. And so a qualified purchaser, more than $5 million of investible assets. When you look at these family offices, these are very wealthy individuals and they do not necessarily like having all their trades available in the public, even if it is under a pseudonym. So, that was something that was important for the target market we were going after was that we were doing it on a private Blockchain.

Jack: So, how is, how does a private Blockchain differ from a public Blockchain other than there's a more limited pool of people who are involved in it? Is there a technological difference or is it merely a procedural difference?

Kyle: Well, when you hear about Bitcoin and Ethereum, and those public Blockchains, you have this whole proof of work thing happening, right?

Jack: Right.

Kyle: And all these other people are participating in mining the coins by basically lending that CPU power. Right? Right. That is not true in the private Blockchains. That's where we have a distributed set of computers that are all processing this. But it's within a known environment. And that is where, you know, the Blockchain evangelist might beat us up a little bit because there is a component of central administration to that. However, that is how we achieve the privacy and the security that we thought was needed by our consumer.

Jack: Alright, that makes sense. I come from a family of computer geeks and I think we've been batting around all the pluses and minuses Blockchain around the dinner table. So...

Kyle: It's fun conversation and full of, I think a lot of misconceptions and I'll tell you right now, I am not the tech person in our partnership. I've been fascinated by Blockchain following it very closely. I'm excited to see what comes of tokenization. But on that side of the aisle, that digital asset side, we have a technical solution without a legal or regulatory framework to move with it. And that's in flux right now. But not being a tech company at my core, I wanted to make an investment in something that could use the advantages of Blockchain, in the existing framework. So, we are dealing with fiat currency with your old banking institutions and really using Blockchain around the records of these funds and solving that trust gap there.

Jack: The value proposition seems pretty straight forward. What kind of pushback are you getting, if any?

Kyle: You know, I think it's emerging that. Look, I come from a hotel background and so I've used this term which, which doesn't necessarily come off as sexy, but they call us a select service fund administrator and that's a reference back to select service hotels. There were some things we're going to do that's in that fund administration bucket and there are other things that we aren't going to do and we largely draw that line based off of what can we automate with a great deal of accuracy and the level of quality, that likely a bunch of humans could not reproduce.

And, what is the other side of that where you do need a lot of human involvement in order to process or deliver that service. And we say, we don't want to go there. That's not something we're interested in. And so it tends to be, I think the funds that find a sweet spot with us are all the way from the smallest fund up to about, call it $150 million.
Now once a fund goes over that $150 million point, they're likely using a UNB, an SSC, a Wilmington Trust. They're using these big full-service fund administrators that are actually getting involved in moving some of the dollars, right? Taking on some of the liability of making those decisions as it relates to administering to those fund documents. That is a line that we do not cross. And as a result, you know, you see these $3 billion Opportunity Zone Funds.

They would likely look at this and say, "Oh, this is very interesting", but we have to build this in a different way with some of these other institutional controls that you cannot provide. And then I think the second one is, as I explained early in our business model, our banking partner is central to what we're doing here. And so, somebody who's using our service is going to have to work with our partner.

Today we’re working with Western Alliance Bank if you're in the west and they own Torrey Pines Bank and Bridge Bank, and you know, in Phoenix you very much know Alliance Bank, right?

Jack: Yup, sure do.

Kyle: Big and prominent. But if I go to the Southeast for example, they might not know that brand quite as well. And so one of the things we're working on in the background is we are adding more banking partners because no matter what people say, and no matter what online banking has become when it comes to business, banking is very much a local sport, right? People like to know who they’re banking with and understand that brand name.

And so, I think that would be another place that I think eventually people get over at Western Alliance Bank is a very big and profitable bank. They have about $20 billion in assets. So, they aren't like the Appalachian Hills Community Bank. Right? I mean there's some notoriety and size to them. But that is a point of push back is we do talk to some of our potential customers.

Jack: That makes sense, wasn't remotely what I was expecting, but that makes a lot of sense. So, Kyle Walker. Outside of this Opportunity Zone stuff, the financial stuff, what are you particularly good at?

Kyle: Well, I would say probably, if you asked my business partners and others that are close to me, I am good at forming relationships with people, doing it relatively quickly and forming deep relationships. And that's, something I both pride myself in, but something I enjoy very much. I enjoy connecting with people. I enjoy understanding what they do, what they're passionate about, where their pain points are, and hopefully providing value somewhere in that equation, to help them realize what it is they are trying to do.

Jack: When did you realize you were good at that?

Kyle: I think it was probably after I spent a fair amount of time abroad from about 2010 to 2016. More than half of my year was spent over in Asia. I had an apartment in Shanghai and as I was getting my feet underneath me and doing business abroad, I am not gifted with language. I was very poor at Mandarin and maybe outside of directing a taxi cab or ordering some food, I was pretty limited.

But, I think when I went abroad and was interacting in a place where I didn't speak the language and I still found that I was able to form these relationships and still today, I’ve got some lifelong friends that I look back at my time abroad and, think very fondly about. But I think that's where, for me, I internalize that a bit more and a realized what a strength that was.

I think especially in today's more digital economy, if anything that has made it more important than ever to be able to form these relationships because there are more and more barriers between us, forming those deep relationships.

Jack: Isn't that ironic that that's the skillset that you bring? And yet you're, you're involved in a Blockchain organization.

Kyle: Right. Which Blockchain it was going to solve it all right? We never had to trust each level or have any relationship. It was going to, you know, solve global poverty and hunger.

Jack: Yeah, that's been part of the conversation around our dinner table. We may talk about that off the air. So, we know what you're good at. What drives you out of your mind?

Kyle: Oh, I could probably go on for a little while on this, but given we're talking about Opportunity Zones and given you’re sitting in Phoenix, Arizona, I'm flying to Phoenix, Arizona tomorrow and have companies there.

You know what drives me out of my mind about Phoenix, is Phoenix has always been this city that is going to be the next great city. But then the next financial crisis comes and pulls the rug out from underneath us.

And, when I talk about Phoenix, I'm not just talking about the Phoenix city area, I'm talking about the greater metropolitan area, 20-plus cities that make up this mass of 4.5 million people. And one of my degrees from ASU was in urban planning. I love to travel and look at cities of the world.

Jack: Hmm.

Kyle: I have a development background, so I think about how cities and buildings are constructed, and Phoenix has lacked a soul in some ways. And I'm born and raised, I love Phoenix, but it's lacked this soul because of this urban sprawl that in some ways has taken the components of a community and spread them out over this geographic area.
So, the only way to access all the things you need to have a thriving community, you have to get in your car and drive around.

Jack: Yep.

Kyle: I think for the first time as Phoenix is starting to diversify away from a construction-based economy, we're starting to get a lot of tech workers and really compete for business locates. So, you know, of a business expanding after being in California for a long time and it's like Phoenix and Austin and Salt Lake are competing for these companies and Phoenix is winning time and time again. Downtown Phoenix, people are starting to live there, not just to work there.

Jack: Yep.

Kyle: And you're starting to see some of this integration come. And I think Governor Ducey did a great job with selecting these OZ Census Tracts in Phoenix. And they focus in on areas that can help address the infill that we'll be bringing a coherence in, an integration to the community that's been lacking for a long time.

Look, being born and raised in Phoenix, going to university, they're starting my companies there. I was not always so optimistic about Phoenix. But as of the last, I don't know, 12 to 18 months, I'm starting to be a little less jaded and believe that we can finally turn the corner. And I think programs like the Opportunity Zone incentives can help drive capital into some of those areas that really needed to create a more integrated social fabric in this massive, massive landscape we have in terms of the geographic area of Phoenix.

Jack: I'm glad to hear you say that. I've, I've been in The Valley for, for those of you outside of Phoenix, "The Valley" is what we call it here. I've been in The Valley for about 22 years and as much as I love it, I think you're spot on in terms of the lack of a soul and it's a difficult thing to articulate. It's something more felt...

Kyle: Right.

Jack: …than actually seen. But, I agree with you. It is changing. It is definitely changing. And I think you may be right. The Opportunity Zone program can play a big part in that.

Kyle: You know, one of the things that I always tell people with these Opportunity Zones, I mean we're sitting at 8,762 census tracts that have been designated Opportunity Zones across the United States. And not all 8,700 of those census tracts are created equal and some state executives did better than others in engaging with their community and selecting those tracts.

I really do believe that Phoenix is one of those areas where the tracts were designated well, but also Phoenix as a market is positioned to see great appreciation over the next 10 years. And this program has three benefits at its foundation, right? Deferring your initial capital gains tax, reducing your initial capital gains tax. And then the third one, which I think is the most important, which is no capital gains tax on that new investment if held for more than 10 years.

So, I think this is a time and a place in a program where Phoenix can punch above its weight. Phoenix can be a more appealing investment than New York City who has seen this massive price appreciation. And I question the ability for New York, let's say, to have that same massive price appreciation over the next decade where they're starting to see a loss of population to lower-cost of living centers like Phoenix.

Jack: Yeah, exactly. I like to hear that as somebody who has no plans of leaving The Valley anytime soon, I would like to see that. How do you expect the Opportunity Zone program to change? Specifically looking forward to, after December 31, 2020.

Kyle: I believe this is good policy and this is policy that's received by both the Ds and the Rs. However, it hasn't really had a great chance yet to kind of spread its wings and deliver the outcomes that we're all hopeful of within the policy.
And that's largely because it got a slow start. I mean, it's funny because everybody talks about, Hey, this program was designed to attract patient capital to communities in need. Well, funny thing about patient capital is it's patient.

Kyle: It’s patient going again and it;s patient coming out. So, you know, you be careful for what you wish for because if you're attracting patient capital, get ready to wait for a little bit and when the rules aren't fully baked out. And look I really feel for Treasury, they've got some tough work here making this program work within the confines of the existing tax code. Which is obviously extremely flex. But where I think this policy in some ways has hurt itself is with these fixed dates and you know the fixed date of the five-years and the seven-years and what becomes 2026. Right?

Jack: Right.

Kyle: This fixed tax payment date. And so with that Treasury's been a little slow. You've got patient capital waiting for the rules of the road to be well defined so they can understand what the middle of the fairway is. And so, we are pushing up against these timelines of realizing the full benefit of the program. I was sitting and talking with a very large national financial institution who launched an Opportunity Zone fund early with their own gains, with a focus on Community Reinvestment Act and in the alignment with that. And they told me, they said, "Kyle, we are going to shut down our Opportunity Zone Fund at the end of 2019 because we lose out on that additional 5% step up in basis and our numbers no longer makes." That's heartbreaking to me.

Jack: I think you articulated in one sentence the core problem that I have sensed but haven't been able to put into words and that is the patient capital that is interested in this kind of investment is just as patient getting in as they are getting out.

Kyle: If you're in a multifamily office, maybe you have let's say somewhere north of $30 million of investible assets in a single-family office, you're probably north of $250 million of investible assets. Folks with that sum of money tend to be very methodical. It's how they got there.

Jack: Right.

Kyle: And I think you have to expect that. And you know, I just got back from a conference out in San Francisco and you had a lot of family offices up there talking and they said, "Look, we expect to see a surge of activity in May and June of this year because our investors largely realize these capital gains or can realize capital gains within partnership entities." So they can push out the start of their 180-day clock to the end of 2018 and so that means their 180-day window is effectively going to end at the end of June, right. And at the end of April here, we're likely going to get 158 pages of new regulations that deal with a lot of questions that still remain.

And so here is this window from the end of April to the end of June where we have the rules of the road more clearly defined. And these large investors are at the end of their investment window for gains that they saw in 2018 based off of their ability to push to the end of the calendar year. Because they did it as an entity and not at an individual. So, we might be going a little far in technical weeds with that.

Jack: But that's the kind of things that that our listeners need to know about.

Kyle: Yeah, so that's where I'm optimistic about what May and June hold and look from a policy side of things. I am hopeful. Getting back to your original question about how does this program change over time as we get into 2020.
I am hopeful that folks on The Hill consider maybe some technical corrections that make these rolling dates or at the very least push things out and call January 1 of 2020 the start of the program because we really didn't have the rules for the program to start. So, let's just, you know, give everybody a Mulligan. Say, "Hey, we've got what we need out here. We kind of understand this thing a little better. Let's start now."

Jack: Seems to be a lot of support for a rolling set of dates rather than these hard dates. I'm hearing that over and over again.

Kyle: Yeah, that might have its own political challenges.

Jack: You don't think that would have political challenges.

Kyle: Yeah, Washington's “easy” and “civil.”

Jack: Civil, right. Exactly. Oh, my Lord. How do folks get a hold of you if they want to know more about, Agora AltX or any of these other activities that you're involved with?

Kyle: Yup. k.walker@agoraaltx.com

Jack: And I want to remind our listeners that all of Kyle's contact information will be available on our podcast site. Anything else you'd like to add before we wrap it up for the day, Kyle?

Kyle: Nothing right now. I'm excited for the second tranche of regs to come out. I think that is going to have a huge lift to the marketplace and a lot of these funds sponsors are going to, I think, finalize their documents and push out into the marketplace. As they do that I'd like them to give me a call, talk about the Agora AltX solution, let me show you a demo and let me show you that we can really lower the cost of administering that fund, induced the friction in interacting and reporting to your investors and ultimately de-risk your GP manager role a bit, as you work your way through this very complicated. Very good. Well, I appreciate it.

Jack: Kyle Walker of Agora AltX thank you for your time. I am Jack healed for the OZExpo Podcast. We will see the next time.

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