Don't BS Yourself; Don't BS Other People

Anthony Nanula

The Opportunity Zone Expo Podcast
Don't BS Yourself; Don't BS Other People


Jack: Welcome back everybody to the OZExpo Podcast. I'm your host Jack Heald and I am here today with Anthony Nanula of R3 Catalyst Partners. Anthony, welcome.

Anthony: Pleasure to be here, Jack.

Jack: It's good to have you on the show. Tell us a little bit about yourself. Who are you and how did you get started?

Anthony: Well, I'm originally from the Buffalo, New York-area and my family has deep roots there. My father was a co-founder of what became a very successful regional supermarket chain called Tops Friendly Markets. And I've got three older brothers, we've been in business together for the past 30 years, which is kind of amazing to say. But, we’re largely involved in operating led ventures. My role, throughout that course, has been more on been more on the financial engineering side of things, kind of a financier. A family financier.

So, I went to Syracuse University, graduated in 1988, I came back to Buffalo and originally started in the real estate business there. And today, we are owners of one of the largest industrial parks in the upstate New York area. I founded a company with my brother's home building business called Essex Homes of Western New York Inc., which today is one of the leading regional home builders in western New York. And, somehow the political bug found me and bit me and before too long, I was elected to the New York State Senate at the ripe old age of 28 in 1994.

Jack: Wow.

Anthony: ...and I spent 10 years in government.

Jack: A 28-year-old Senator.

Anthony: And I often say, I've lived a crazy Forrest Gump life. All these things kind of come my way or happened to me. But, my real desire, which has relevance to the QOZ program is to serve Niagara Falls and Buffalo, New York, which were two great iconic industrial cities during the better part of my life, had fallen on hard times with the Rust Belt Era, jobs moving out of the Great Lake States and challenges of doing business in New York and whatnot. It really had become a challenged economy.

And you know, it frustrated me as a boy and a young man, and then as an adult and aspiring businessman and real estate developer. I saw firsthand the challenges of doing business in New York state. And next thing you know, I was elected to represent Buffalo and Niagara Falls in the Senate. I later became the city controller of the City of Buffalo, then I was a Deputy New York State Controller. So I spent 10 years in government in New York and have a lot of experience, in public/private partnerships, which I see this program really being, in many respects. And at that time, Buffalo was really struggling to find its footing and programs that we were able to put in place back then during my tenure as a senator, really helped pave the way for the economic renaissance that Buffalo is having today.

So, that said, I left my government life in 2004 and we actually ended up forming our own registered broker/dealer in order for me to organize capital for our own family-led projects and for others. And a company called Niagara International Capital Limited was born. And that company merged into another business a couple of years ago.

But, I'm still registered in the securities industry and in terms of what I'm going to be doing now with R3 Catalyst Partners, my partner and I, a gentleman named John Harr, who is a veteran real estate investment banker. We'll be using our broker/dealer to organize capital for Qualified Opportunities Zone projects and then we're going to also act as a fund manager for those. So, during those years, Jack, when I was active as a financier, post my public service career, I worked out a lot of real estate projects, including family-led projects. And I also moved from Buffalo to Southern California. I somehow in the family order, I got the short stick and got deployed to San Diego, California.

Jack: Oh, the humanity. However, are you surviving? All that sunshine you have to shovel day after day, week after week.

Anthony: I will say though that, California has its own challenges. In fact, the state has not approved the QOZ Program, which you may be aware of. I mean, it's a very difficult place to do business, but nonetheless, we've enjoyed living here and we developed quite a bit of real estate here over the past years. Took an institutional partner.

So, anyway, here I am in 2019 and, when this program was announced in the tax bill in 2017, I immediately became interested. For me it's kind of a convergence of my public sector background and my private sector background. And, beneath all of that my desire to want to help impact communities and I hope that I'm very confident this program is going to help achieve that.

I'm going to say that is the single most exciting thing to me is it's great. It's still obviously more promise than reality but, driving capital into the places where it is needed the most and has the most opportunity to do the most good. I think most of us involved in this market, think that's one of the very best features of it.

Jack:  Now that leads me to this question, in regards to R3 Catalyst Partner, who is your ideal customer?

Anthony: It is a developer who is pedigreed, that has track record, that has qualified Opportunity Zone eligible projects, and is seeking a capital partner that can turn key, provide financing for the equity portion of that project. So we’re now with John Harvard's involvement, kind of reaching out around the country, talking to developers about their pipelines and their desire to want to operate in this space. As well, we as a family, we ironically own Opportunity Zone properties. And I think this is a case with a host of developers and real estate owners that are in Opportunity Zones. Of course, didn't buy them for that purpose. We've owned for nearly 30 years, actually. It's one of the first projects I ever purchased, in downtown Buffalo. It's in an area of the city that's experiencing major renaissance and it just happens to be in a QOZ.

So, you know, part of what we're looking to do with R3 is to help educate developers about the program and the features of the program and why capital could really be a more favorable option for them. And ideally we'd love to find developers are customers as you put them, that are both qualified and competent but have a desire to want to forge impact. So that's kind of a high level relative to R3.

Jack: So, are there specific structures that R3 is putting together that is going to make this particularly attractive to the developers and I'm assuming follow on investors?

Anthony: Great question. An interesting thing about my perspective is we're also developers, right? So, we've had others entering this space, kind of pitching us on using their capital. It's funny, I went to a conference recently and it was stated that if anyone tells you they're an expert in this program run for the hills, right? It's so early stage and the regs still aren't even finalized. That said, there are talented, intelligent people who are advancing structures. For us we've kind of honed in on it as a structure where we're able to provide turnkey capital to the developer. So, we're a single LP and a GP LP fund structure. Where they don't have to worry about going out and finding the investors or managing investor relations during the course of the ownership period.

And we really on the frontend we do that in a very cost effective manner because we planned to kind of take our fees and whatnot from the other side, so to speak. So, we're not an investment banker. We are a fund manager in this regard. Secondly, the return hurdles for the developer given the tax benefits of the program, are much more favorable, than they typically are with a capital partner. Meaning the IRR return hurdles and the equity share, etc. For the developer, it's arguably, and we see this ourselves as well, it's a more efficient mode of capital than a traditional LP structure. Then as well, going back to the hurdle, we're now looking to take in our structure of money out of their pocket on the backend.

Once they have achieved the IRR hurdle and the return hurdle, that's going to be their money. That said, on the back end of the deal or during the life of the deal, we're charging a nominal management fee to the deal. So, we think we'll be probably be at or below where the industry will kind of level out. So, there again, it's very efficient for that developer. And you know, we're going to be bringing in structures where, as you know, the maximum benefit today of the program is for that investor to be in the deal for 10 years. We’re going to be looking for developers that have an eye toward holding property. When oftentimes ground up developers, aren't. They're in the business of entitling and developing and flipping properties.

We think there's an opportunity for longer-term gain for these developers using less of their own capital. Right? So, in our cases they won't have to deploy their capital on the frontend. They can go deploy it into other non-opportunities owned projects. By the way, they're able to earn their developer fees and the property management leasing fees, and in some cases if they built value in the property, they can actually take money out when the property is put into the Opportunity Zone specific fund for that project. We think our structure is very advantageous to the developer. And then on the other side, my personal view of this space is that it is not a traditional institutional capital marketplace.
Meaning, you know, those who are saying they're going to organize multibillion dollar funds in this space I think are wrong, for lack of a better term. because the source of capital, in my view is going to be people like our family, wealthy families, individuals, family offices, corporate trusts, endowments areplan sponsors. They're not typically as tax focused as individuals and families are, and I think developers themselves will generate their own gains over time that will be deployed into these. But, so we given my background in the securities industry, we have reach into REAs and, accounting firms and law firms and others who manage or advise on the management of financial assets for wealthy individuals and families. And, those same clients, and we understand that client because we're, one of them, is a family and we will be investing our own money in these funds.

They're looking for what we can deliver. They want suitable projects with pedigree developers that are going to hit the return objectives. And, our stock and trade will be that we will go and do the work to find those developers, underwrite those projects, ensure that the organization of the capital works and meets the standards of the program so the tax benefits are earned. And frankly, if we're wrong, and a developer doesn't operate properly, we'll have within the mechanisms of our fund, the ability to remove them. So that management function will be a valuable one. Now we, like most fund managers, we hope that will never be the case because of the pedigree of who will be working with. But in the event that does happen, it's good to have a fund manager who's also a developer and has deep roots in the real estate business who can handle the management of an asset if something goes wrong with the manager.

Jack:  I have some questions, I want to kind of redirect your thinking now to the Opportunity Zone programs, the entire program itself. Just think about it in general and as it applies to your niche in that industry. What part of the program are you most confident about?

Anthony: I'm most confident that for ground up real estate development, there is an arbitrage between a meaningful enough arbitrage, meaning spread, between what a post-tax investment yields in a ground up project versus its treatment within the Opportunity Zone tax benefit over a 10-year period. And, it's in that spread that the developer is going to be able to get more favorable return terms and the investor is going to do better than they would do in a traditional investment. And that has to be the case, right? Because, otherwise an investor will choose to go and do a non-Qualified Opportunity Zone investment.

And I think that's part of the brilliance of what the administration advanced here. I mean, you know, in the end you have a real estate developer who is the president of United States and you have a treasury secretary and the commerce secretary who are multi-billion dollar fund managers. Right? So in my view at least, it isn't by accident, that's the structure. And it makes sense. I mean, in the end, people invest for the motive of making a return. And, I dealt with the president when he was a real estate developer and I was young senator. So, I think that this could well be one of the greatest impact of the under-served communities that the administration's advanced since, you know, maybe the 30s, right?

Jack: Well, you are not the first person to say that.

Anthony: It's a missing piece of the puzzle. Meaning, the projects, even that we have as a family in Buffalo or a prominent developer there. A gentleman, young man named Nick Sinatra and his company, Sinatra & Company Real Estate, that I'm working with, our families partner with. There's public money going into these projects, there's either grant monies or there's low interest loans that are subordinate to equity, that will be QOZ-eligible equity. And that's where the public/private partnership comes. Right? But oftentimes it's been that equity portion of the capital stack that goes missing. And, the investor doesn't necessarily have the confidence to want to invest in an emerging community projects or transitional community projects, because there's not enough juice in it, right? There's not enough return. So you know, this is where that arbitrage is really powerful.

And then the fact that it has to be, it has to be invested in development, right? It can't be simply a, financial engineering play where I'm going to go buy an apartment complex and paint, patch and carpet, and you all of a sudden it's a QOZ right? Because it's in a zone. No. It has to be meaningful development. Ground up development. I'm less focused today on the jobs element of the investing of business there than I am in the real estate side. But, I'm sure I have confidence that the regs will kind of underscore that same theme, meaning, how does this incentivize businesses to locate operations in places where they might not otherwise consider doing so. But for me, at least today, it is about ground up development that's suitable and that works.

These projects aren’t a handout or a giveaway. The QOZ program is a capital deployment program and the project has to work. The project has to be feasible and, over its lifespan be able to generate and again, I think these will mainly be income producing projects, revenue producing projects. And even if the value of the property doesn't go up substantially, it has to be able to be a viable project in and of itself.

Now, the tax benefits will enhance the return coming to the investor. That's what will motivate that investor to want to invest. That said, I think there's a lot of great projects out there today, Jack, that were underwritten before this program and have outstanding returns before the program. And frankly, I think in the early stage of this program, there's going to be some investors who are going to get some spectacular returns because they're investing into projects that were underwritten before the program existed. I don't know if others have talked to you about this, but, in our own underwriting we're doing for our own projects and one's we're now looking at for R3, as much as a 300 to 400 basis point spread annually in return, in additional return that can come out of the project, which is enormous.

Jack: Annually?

Anthony: Annually.

Jack: If I'm doing my, if I'm doing my calculations right, that's literally a double return over a 10-year lifetime.

Anthony: Correct. So if you were at a 2X, you could be at a 3X over that period, through the program benefits. And that's the arbitrage I'm referring to. And what's exciting is that also allows the developer in the projects we're looking at, actually in others who have approached us to fund our projects. Typically developers that really start to earn until they IRR exceeds 10% to 12%, usually as high as 12%. Right? And we're underwriting this for our own funds. We can offer the developer an 8% IRR yield in a substantial portion of everything above that they get to earn in from.

So if you're the developer and I can turnkey provide you your equity, and it doesn't cost you anything in the frontend, we're going to get that out of our investors in the fund and then your IRR hurdle is 40% lower than it typically is, and you get to eat a lot more of what's on the backend. Who's going to say no, frankly? And in most GP LP structures, the fund manager does have to have governance inside, from the guidance we're getting from council, inside that single purpose LLC. That said most GP LP structures, the LP has that same ability, right? So, most sophisticated developers are used to that. I mean, there are developers out there that are used to doing things off their own balance sheet and they may have some stress from that. But those who take in third party capital, they invariably have governance conditions where there basically accountable to the LP.

Jack:   So, I should back up and say, I can talk about this for a long time, but I want to make sure we don't bore people silly who aren't interested in the financing structures. 

Anthony: Right.

Jack: We’ve talked about what you're most confident of with the Opportunity Zone program as it is currently structured. What's your biggest concern and how are you managing that?

Anthony: That's an excellent question, Jack. And I think that thought leaders and others I have dialogued with really are and should be getting out ahead of this today, the program does not have a job creation or economic impact element to it, right? If you're in a qualified Opportunity Zone, really the only condition is as the money's invested for the suitable amount of time, and there's enough development impact from the project. Meaning it can't be just a cosmetic paint and patch. Those are really the only conditions around the program today. And at a minimum, the old thought leaders -- more specifically those who are active in this space -- should be arming policy makers with the stats, with job creation stats and, and economic impact stats.

So, the policymakers moving forward at the federal level can defend the program because the program will invariably be challenged. And I'm certain if there's ever a period where the opposite party is in power, unfortunately given how partisan politics are today and the fact that this current president has his stamp on this program, there are going to be challenges of the program. And I wouldn't be surprised if future iterations of the program require job creation and economic impact similar to the EB5 space, which I think you have some familiarity with. You know, that program was created to generate job creation.

It was conceived for that, but it's still a whole substantial another realm of regulation was put around it as the program evolved. Right? And I think a focus on that upfront is going to be really valuable to ensuring that the program lives on and that it isn't abolished by some future Congress or some future president for the wrong reasons.

Jack: Right. I want to spotlight what I think I heard you say because I think it's very important. But I also want to make sure I got it right that I heard what you said. When I asked how you're managing your biggest concern, your response was get out in front of policymakers, show them what the program is doing, how it is doing it and arm them for the future challenges that are coming in order to protect this program as it currently exists. We want to make sure that the assumptions that we're operating from today are still valid in the future. Am I hearing you right?

Anthony: Largely, the first 90% of what you said was far better stated than I said. So, I think the last we want, and unfortunately this will negatively effect the EB5 program.

Jack: Oh, Really?

Anthony: I think the EB5 program is a great program for America, aside from the fact that we are bringing in people that we want in this country. But if people who have financial means participate in this country and they're willing to invest in job creating projects in order to get a Green Card, that seems to make a lot of sense. Well, tragically there were abuses. There were bad deals and charlatans who were Ponzi schemers and the rest who took advantage of these folks. But largely the program has had a tremendous positive impact on job creation and the economy in this country. And this program should too. Especially where it's needed most, which is in transformational or transitioning communities. I think the industry itself feeling a sense of obligation to do good projects, projects that make money, but projects that are also forging impact and not abusing it. That's a critical piece. Having been in the financial services industry the past 20 years, being around both the institutional and retail side, it's kind of a same thing. You don't want the bad actors who are robbing their clients. You know, spoiling it for all the good people who are working to provide service and value. So that's one element of it. The other side of it is I think we as an industry need to be out ahead. Even though it's not required, we should be building metrics and key performing indexes, right?

Jack: Indices. Key Performing Indices.

Anthony: Indicators around these key elements, you know, job creation and economic impact. And even though it's not a requirement, I think we should take it upon ourselves to do that and we should be arming policy makers as the project unfolds to say, listen, look, this $30 million ground up mixed use project in the city of Tulsa that maybe wouldn't have been built and developed without this program. It created this many construction jobs. It created this many permanent jobs, these four other projects that help transform that neighborhood, right? Though I think those KPIs are going to be very important. They're not required today. That's kind of the point I'm making. So, and I'm not the only person saying that, I've listened to others in the industry saying the same thing, which is good. That makes me happy.

Jack: To me, what gives it a little extra power here, Anthony, is the fact that you've sat on the other side of the desk, you've actually been in government and understand the specific types of actions that do make a difference. So, this is not just some guy...

Anthony: I have, yeah, yeah. Sorry. I know you're right. And I can speak from that perch, probably unlike many. I've also had to argue amongst my peers and my constituencies, why we should be providing benefits to wealthy developers. You know, and if you look at what's going on in upstate New York right now, which has largely been extraordinarily positive. It's been through government providing very tactically, beneficial programs to spur private sector investment. That's what this is all about. This is a tax program to spur private investment in areas where it's not going to historically.

Jack: Yeah, where it wouldn't ordinarily go, sure.

Anthony: But there's the opposition and, it's interesting cause it, believe it or not, it oftentimes comes from the same communities you're trying to serve. And they're saying, wait a minute, "Why provide provided tax breaks for the rich people versus some other program that is directly coming into the community?" And it's fair for those leaders to say that because there had been a lot of abuses. To your point and having represented the entire African American community as an example of Buffalo, 150,000 people is half my district. I'm incredibly sensitive to that and respectful of that. So, being able to arm policymakers with data, and you know what, and I can't see there being as long as the project isn’t abused. Going back to my other concern, there is no way that that this program won't be spurring development in communities that are in desperate need of it and haven't had it, and that development will spur other development

Jack: A positive cascading effect isn't it?

Anthony: I would, I would suggest for listeners to just Google Buffalo, New York.

Jack: Yeah.

Anthony: And start to really tune into what's happening there. I mean, in the last 10 years, there's been several billion dollars of development now. Parts of the city of Buffalo were neglected for decades. Now it’s really starting to spread into some of the poorest parts of the city. I mean there's $50 million of development going on Jefferson Avenue, which is in the east side of Buffalo, which is prominently African American and there’s probably more development that's occurred east of Main Street than the last 50 years. And it's happening now. And by the way, those projects are in Opportunity Zones. They were already underwritten and they were underway and they're going to be escalated now.

So that's what the framers of this had that if you listen to Steve Mnuchin speaking to the council of mayors, that's what he's talking about. That's the vision they have. We've got to execute as people in this space. It’s our obligation now to execute on that. I'm probably sounding more like the politician now than the financier. Part of it is the core of that.

Jack: But that's, that's the exciting thing about that. This is not just a way to make money. This is not just a way to save on taxes. This is a way, and I this you're going to hear my passion now. This is a way to make our world a better place to live. It really is. It's not hot air. It's real impact on real communities and real people that need it the most. That's why I got excited about it. 

Anthony: Amen.

Jack: I want to ask you another question. Similar, but not the same. What questions should a developer ask before getting involved with somebody like R3 Catalyst Partners about Opportunity Zone development?

Anthony: Well, I think first of all, they have to be comfortable being in business with the fund for upwards of 10 years. That's my perspective at least because this is a longer term program. Right?

And folks like us who are organizing capital are going to be looking for developers that have commitment. Now, not all of the projects will go that long, but they likely will and should, to maximize the tax benefits. You know, the developer has to be comfortable with it, which called the GP LP structure and sharing kind of governance with the fund. Again, you’ve got a lot of developers, folks who are very prominent, substantial developers that haven't had to operate that way, right? Because they've been able to build their own balance sheets and kind of manage their own projects and not have third- party capital influence over them, or at least the ability for it to put under the influence. I always say in the capital space, not all money is green. Right? I mean, who you partner with, understanding those two pieces, you're going to be in this for a long time, number one. And number two, you have a partner who has some governance ability if they choose to. You want to partner with smart, decent people who, as long as you're performing there, they're going to frankly stay out of your way. So I think who you partner with as a developer in this space is going to be important.

Jack: Well, let me ask you a couple of, a couple more questions as we finish up today. What are you best at? And it doesn't have to be in the context of Opportunity Zones.

Anthony: I think what I've kind of highlighted here at our call is, is my background really is been helping enable others to be successful. I'm not an operator. I'm not someone to go in and actually be the developer. I've actually done that, and I would say it wasn't my strength, nor was it my passion. I'm better at kind of seeing the opportunity, matching people with opportunity, and empowering them to be successful and helping them along the way. That's kind of been my forte throughout my career. So, so I'm sorry, Jack, your second question was?

Jack: Well, I haven't asked you yet the second question.

Anthony: Oh, sorry. No wonder why I didn't know what it was.

Jack: And this is my favorite question I ask in every interview. What drives you crazy?

Anthony: Dishonesty! You know, we have what we call the honest thinker rule in our family. My dad was a no education, seat-of-the-pants guy. He went to trade school, to be an electrician and chose to be a butcher. And he was instrumental with helping build a multibillion dollar supermarket empire. And he taught my brothers and I this honest thinker rule when we were kids. And I'll say it politely.

Jack: Yes please.

Anthony: And his own gruff way. He said, “You know, don't look at a pile of, you know what and call it a dozen roses. Don't B.S. yourself, don't B.S other people, always be an honest thinker.” And, I'll tell you there's such simplicity but so much wisdom in that statement. And in my career I've run into a lot of people who believe their own B.S, right?
And they're in my view, the most concerning. and there's others who just want what they want and they're willing to say and do whatever they choose to get it. And, I have really tragically experienced that in my political life and in my private sector life. And we're both as a family and the people we partner with, what you see is what you get. And, we may not tell you all the time what you want to hear, but you're always going to know where you stand with us. And we expect the same, we want to deal with ethical people that are honest. And, and by the way, people make mistakes, right?

There’s a huge difference in the top supermarket culture, the word mistake wasn't even able to be used. My father and the leadership of the company cut that term out. They called them opportunities because every mistake is an opportunity to improve, right? So if a mistake comes up, you present it, you assess it and you pivot and you, and you move forward. You don't name call, you don't finger point and you don't try and bury it, right? So, in development business, you're going to run into challenges. You're going to have assumptions that maybe don't hit your forecast. So, dishonesty is something that my brothers and I and the partners we have are, are highly intolerant of. And, we hold ourselves accountable, Jack to the same thing. We always look at ourselves and say, are we applying the honest thinker rule to ourselves?

Jack: Anthony, I can't think of a better way to end a conversation, than that. Thank you so much for taking time here with the OZExpo podcast. For folks who are listening and want to get ahold of you. What's the best way to get in contact with yourself and with R3 Catalyst Partners? 

Anthony: Well, today, the probably the best email to find me at, it's just my name, Anthony R3 is a literally a company as we're like most people in the space. We're putting it together as we go, right? So we'll have our, R3 Catalyst Partners emails soon enough. But today, My number is 716-818-4374. And, I think that's really the most efficient way to find me, Jack. and if you're a developer seeking capital or someone in this space, if you're somebody seeking to deploy capital in a project, I'd love to hear from you.

Jack: And I do want our listeners to know that contact information will be available right here on the podcast website. So, if you didn't write it down, just check the website links will be there. Well, Anthony, I appreciate your time today. It's been an extraordinary conversation and I look forward to meeting you. For the OZExpo Podcast. I'm Jack Heald. We will see you next time.

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