Fund Manager Believes OZ Program is “the Opportunity of a Lifetime”

Craig Bernstein

The Opportunity Zone Expo Podcast
Fund Manager Believes OZ Program is “the Opportunity of a Lifetime”


Jack: Welcome back everyone to the OZExpo Podcast. I am your host Jack Heald broadcasting sort of live from the 17th floor of the Mandalay Bay hotel in beautiful Las Vegas. Got the sunshine in the mountains right outside the hotel window. And I have Craig Bernstein with us. Oh good Lord. Craig, I didn't ask you if I pronounced your name right. Is it Bernstein of Bernstein?

Craig: You did pronounce it right. And I appreciate the invitation. Pleasure to be here today with you.

Jack: Well, Craig, it's good to have you. So, tell us a little bit about yourself. First of all, who are you, where'd you come from and how'd you end up where you're at right now?

Craig: Absolutely. Well, my name's Craig Bernstein. I am a Washington, DC based. We run a real estate private equity fund to OPZ Bernstein exclusively focused on making Opportunity Zone fund investments, have 20 years of real estate experience. Started the first chapter of my career in real estate brokerage. I was at Cushman and Wakefield and then for the past 11 years, was the director of real estate and chief investment officer of a single-family office based in Washington.

Jack: So what, what led you into real estate to begin with? You went to school doing what? Is this where you planned to go?

Craig: That's a great question. And I actually fell into real estate. I wasn't positive what I wanted to do when I graduated from college and my uncle at the time said, I know someone that's in real estate brokerage and said he's looking for young guys that are, you know, aggressive salespeople and said this could be a great fit for you. Why don't you go and chat with him? And the rest is history, so to say.

Jack: So, he recognized some innate sales ability to begin with, is that what you're telling me?

Craig: Yeah, I’m definitely a people person it’s how people know me. So not, not shy at talking and, you know, this is something that for me was really the perfect mix in terms of the Opportunity Zone program, in terms of combining some of my historical background and experience. And a conflux of the different initial chapters in my career.

Jack: Now, the financial investing side, that's a completely different skillset. Talk about to the transition from real estate brokerage to a CIO.

Craig: Absolutely. So, I started out as the family's director real estate and we built out a direct real estate portfolio on behalf of the family. They were looking to gain exposure. They've had several liquidity events and we're looking to gain exposure into the real estate space in terms of asset allocation. The prior CIO actually ended up leaving the family and I assumed an interim role and I was always fascinated with the markets. Even since I was a little kid was always fascinated with how they work.

Jack: You strike me as the kind of guy who, as as a kid, was interested in the market.

Craig: So, I had a strong desire in the markets. I spent about when once I was the CIO, I was, I'm the family CIO for approximately eight years and spend about 60% of my time on real estate, still building out the, the real estate portfolio.

We did ground up renovation, direct acquisition stuff, value add type of assets. And then the balance of my time was spent on the balance of the portfolio. So equities, fixed income, private equity, alternative investments. So, it really was run as a fully diversified portfolio and you know, provided me with a great background for the next step in my career.

Jack: All right, so before the show started, we started talking about the Opportunity Zone and you had a location advantage when the Opportunity Zone program was being floated in Congress. Pick that story up where we were, because that sounded really interesting.

Craig: Yeah. I'm based in Washington and I'm a native Washingtonian. And it's funny because most of the people in DC aren't in politics. You think of the Washington and think of it as a political town, but a lot of the local people and everyone always jokes and says, well everyone in Washington's and attorney, and for me that actually is true.

My wife, my father, my brother. So I'm like Kinda the black sheep going.

Jack: You’re the black sheep.

Craig: I'm the black sheep going into to the real estate finance space. One of my friends that's in Washington that's actively involved in politics brought the legislation to my attention in the late fall of 2017 prior to the legislation being passed at the time is everyone knows in Washington everything changes on a day-to-day basis, especially when it comes to legislation.

Jack: Everybody doesn't know that, Craig. That's obvious to you. But those of us in fly over country.

Craig: Under the Trump administration.

Jack: Okay.

Craig: And especially surrounding that tax cutting jobs act, I think there was a great deal on tremendous amount of focus on what are the ordinary income tax rates going to be. What are the capital gain, tax rates going to be, what is carried interest going to be. And when my friend first told me about the legislation, I said, yeah, sounds great. Let me know when it's real.

So, we ran into each other at a holiday party, a couple of days actually before the bill was passed on December 22, 2017 and she said to me: “you're not going to believe it. Do you remember that legislation I told you about? It's going to be law.” So I went back to the office, I started entering the numbers into Excel. I think I called her three times and I said: “There's no way. I must be making a mistake in my IRR calculation.” I called in my analyst, I called in my CFO. I said: “Can you look at these numbers?” I called my friend, I said: “Are you sure? An eight-year deferral, the 15% step up in basis?” And I literally fell out of my chair. I said: “This is too good to be true.”

Jack: And I had another guest say they really thought it was an April fools’ joke when they first saw it.

Craig: Yeah, it, it really was quite dramatic. When you looked at the IRR returns in the multiple turns, it's almost a 50% increase. So, when you really sat back and take a look at it -- and again, this is on an apples-to-apples comparison. So if I were to sell, no pun intended, my Apple stock and do the same exact apartment building in Long Island city or Oakland or you know, anywhere any town USA, it's a 50% increase in the returns, same exact transaction.

And the first thing I did being in Washington, I started speaking with some other colleagues and friends that were in the single-family office space. And I said: “Have you heard about this yet?” And everyone had the same response. “Craig, we have no idea what you're talking about.”

So, I said, all right, I'm going to go downtown Washington. I was living and still do in Montgomery County, right outside the city. And I said, I'm going to go downtown and start asking around about it. So made my way down to Capitol Hill and I said, I realized right away after reading the legislation how many nuances there were with the program. So the first thing I did, as I said, I've got to become the real estate will take care of itself.

Got 20 years of real estate experience. You know, I understand the real estate continuum, but the real key factor of the program is the nuances to make sure that we're setting up the structure appropriately and at the end of the day, not screwing anyone's taxes up or structure or selling someone, you know, a bag of goods that really isn't what, and it might be an unintended consequence, but putting someone into a transaction that isn't what was promised or the intent of the legislation.

Jack: What has changed over the last 18 months, both positive and negative for you?

Craig: I truly believe that this is a once in a lifetime opportunity. By utilizing the provision of the Opportunity Zone legislation, we're going to be able to not only provide our investors with compelling risk adjusted returns in a tax efficient manner, but also positively impact thousands of lives across America. The legislation, and it really has gone from zero to a hundred. I mean we are sitting here today at the Opportunity Zone Expo, the first event that Ali put together, Jesse, Leo put together in December, had well over 1,000 people.

The excitement and enthusiasm surrounding the program has been unbelievable. The reception that we've been receiving from high net worth individuals from wire house banks, from RIAs, from insurance companies, there's a tremendous amount of interest on the capital side of the equation. My biggest concern right now is finding quality deals. There are a lot of deals that are coming out of the woodwork that people are either saying, “Hey, there's this new cheap form of capital” or “You know what, the deal didn't make sense before. I was unable to secure the adequate financing, both equity and/or debt.” Maybe, you know what? Brush that investment sales package off, the memo dusted off, let's shoot it back out on the street and see if we can get any easier, you know, hot money, so to speak. So that's been one of the big changes.

Jack: I've wondered, you know, almost everybody says this is not going to turn a bad deal into a good deal. And I don't think there's anybody who's going to argue with that. But reality is it's almost guaranteed that there's going to be bad deals that get funded just simply because of what you said. Hot money. Talk about that.

Craig: Yeah, I think you really hit the nail on the head and it's true and we're now hearing the statement over and over again. The program has the ability to make a good deal, great, but will not make a bad deal good. You know, and under no circumstances can you allow the tail to wag the dog or skew the prism or the lens that you're looking through when you're evaluating these deals.

And part of the frustrating part for us now is, you know, I received an email earlier from one of my colleagues who runs our acquisitions for us, and he goes, “This is crazy. These guys want to a fore breadth to start on the deal. You know, we can't do this.” Now that being said, I think as time progresses, the market and the supply demand dynamics as it relates from capital inflows coming into the program will dictate where is that market.

Is it a four pref? Is it a six pref? Is it an eight? It's a market fundamental. While you and I might not think it makes sense at the end of the day, you've got to evaluate this investment. And as that, when I was previously the CIO, every morning when I got up and came into the office, I had to sit in front of my Bloomberg terminal and decide what is the best way to prudently allocate and build an asset allocation model for the family based on several different parameters. What is the risk tolerance? What are they trying to accomplish in the portfolio?

Are they trying to generate reoccurring stable income? Does the individual want to retire from Johnson and Johnson and just play golf? Or are they in a situation to say, hey, I might be worth $10, $15 $20 million. I want to take a shot on something like a Tesla or a Netflix that might be different than going into a JP Morgan Coca-Cola or Disney as an example.

So, I think a lot of it, and we look at the capital flow that will dictate what is that risk-reward. When we talk about the quality of deals that are being executed and I believe will be executed as time progresses.

As an example, we've looked at over 350 deals to date, totaling about $8 billion in total market value. We've only found four or five deals of the 350 that when I stick them in the funnel. And, and our business model is to fund best in class operators across the country and create a diversified portfolio, diversified both by geography and by product type. So we're trying to mitigate and take out some of that volatility and the real ups and downs in terms of like a standard deviation. And again it comes back to delivering at the end of the day, what is my risk adjusted return.

Jack: Talk about your fund. What kinds of, what are the limitations of the fund? What are the target assets? Is it strictly, are you evaluating strictly on, on IRR or the particular specialty? Is it, you know, real estate? Is it operating businesses? Is it a mix? What are you guys looking at?

Craig: Yeah, great question. We are 100% focused on real estate. That is our business and we always believe there have been a lot of different players that have gotten into this market. Some people that come from the wealth management space, come from the private equity space. If you had an issue and were having a heart attack, are you going to go to a dermatologist or a cardiologist?

We laugh but it's true. At the end of the day we're dealing with millions of dollars and people today. You've got to have a very specialized niche. What do you focus on even in the real estate spectrum? We see it now with rates. Are you in a retail office, hotel, self storage, hospitality? What are you? So, the Bernstein company is an 85-year-old real estate, fully vertically integrated, real estate management company based in Washington, DC.

We're heavily involved on the market side of the equation. Over the past 85 years we've owned, managed and developed about 5 million square feet of commercial space, 4,000 apartments and 20 hotels. Right now, on the market side of the equation we are currently developing the new Marriott International Headquarters. It’s a mixed-use project; it'll include 750,000 feet of office space for Marriott as well as a 270 Key JW Marriott hotel in Bethesda, Maryland.

What made us really interested in -- which really also piqued our interest in terms of the opportunities zone program -- is we have a very large structured finance division within the company and we've been heavily involved in the New Market Tax Credit space within that space. Over the past 15 years we have transacted on just under 150 deals, totalling just under $2 billion worth of transactions. Over 80 of those deals in the new market tax credit space are located within currently designated Opportunity Zones.

Jack: Wow, I want to follow up on the 85-year history of the Bernstein companies. Talk about the history there a little bit. You caught me completely by surprise. I hadn't found that in my research.

Craig: I am a Bernstein, but I am not related to Adam and Stuart. So, Adam Bernstein, the company was founded by Leo Bernstein. Stuart Bernstein then grew the company, throughout the 1970s and ‘80s. Really accelerated it and Adam Bernstein took over in the mid-90s. They are Washington based, but the ironic part is as a native Washingtonian being in real estate, I get that question literally once a week. And Adam and I still to this day joke about it. And, when I started out the program initially as OPZ Capitol last year. So, it was ironic then when, you know, Adam said, “all right, well we'll change the name to OPZ Bernstein. Does that work?”

Jack: And you said, “Oh yeah.”

Craig: I think that'll work. But I was aware of the work that they have completed in the new market tax credit space. And at the end of the day, as we said three minutes ago, as large investors, the first question people ask is: “Well, what's your track record?” The areas that we're going to, some of them, yes, are 24/7 cities, but these aren't deals where we're doing it on Madison Avenue or Wilshire.

Don't get me wrong, everyone says, well there's zones there. I agree. But there's a very stark contrast of doing core plus real estate versus working in kind of a second tier, you know, lower level, affordable housing in a different product type and sector.

Also, these markets that we're going to, and that's part of our model. It's very difficult. Yes, we're an expert and I've lived in Washington my entire life, but it's very hard if you're going to create a diversified portfolio for me to parachute into in Charleston, Savannah, Austin, Texas, Colorado Springs, Portland, Oregon. So, our business model really is to do joint ventures.

We've done deals before in 38 states, so we've got a very large footprint and team up with operating partners. We believe that these families that are similar to an Adam and Stuart Bernstein are the families that control the best sites. These locations in these areas controlled by the Brookfield Starwood's of the world that are the larger TIA craft, CalPERS, the large institutional owners that are now the behemoths of real estate. They are for the most part, still controlled by older second- and third-generation families.

And today we've gained a tremendous amount of traction by targeting these families. And again, it all comes back to when we formulated this, we weren't pigeonholed into one box saying, well this is how we've done it before. This is the way it's gotta be. Because that's the way we've raised all of our other funds. So, I think a big part of what differentiates us is creating kind of a structure that allows us, again, to deliver compelling risk adjusted returns by teaming up with these families that we believe have the strongest sites.

We're going to trade some of that upside. But again, the capital that we're seeking is looking for a very stable return with consistent annual yield. And first and foremost, our primary focus is on capital preservation. Every day when I come in the office and I look at the deal, I say, what can go wrong? Not what's my upside? Is it going to be an 18 or 20 what is my downside? What can go wrong? What happens if the rents for the apartment aren't $3,000 they end up being $2,300 a month. What does that do to my returns? Because at the end of the day, we're stewards of capital.

Jack: I love that you talk about the risk side of it because you know it is opportunity and optimism that drives all of this stuff forward. But reality is sometimes things don't work out the way we want. Talk about, and I'm just asking you to go back in your 20-year history here, talk about one of the most memorable, it may be negative events that you experienced.

Craig: Yeah, I've been fortunate that I've have a solid track record. Some of that was, some of it did. Let's call luck. You know, also, I've been very fortunate in terms of truly allocating capital over the past 12 years since I was a really went from brokerage then into the family office space where was, I've had some good...

Jack: I'm calculating here. It was around 2008ish that you made the change. So, you had to either have been involved in or at least been very intimately familiar with some sort of meltdown disaster.

Craig: The timing when I started with the family, I guess in 2007 was really as the market was, the deterioration was accelerating.

Jack: Killer in the stock market was October 2007 I remember correct. And the lows and the lows of March.

Craig: March 2009. Yup.

Jack: So, I was short the market in March 2009 by the way.

Craig: You know it, it's tough in the markets. Even when we'll get to that, because even looking at it now, I said to people when we had the 20% pullback in December say, well, I don't want to do it now. I want to wait for the market to return to the highest. I'm not going to sell my Apple or Amazon. Now. We went from whatever it was, two 20 I think two one 50 Amazon came down, a couple more dollars. I said last week I joked with a couple of family office.

I said, well market the S&P just printed a new all time intraday high, are you ready to sell now? So, no one is a market timer and now I think there might be one more last gasp year. But I've been very fortunate and call it blessed really with timing of just with some of the dumb luck with timing of we were lucky to be acquiring assets in 2009, ‘10 ‘11. And then I really have had the wind at my back. So now that's not to say is trust me.

I went through two downturns in ‘99 and you know, during boom bust and also in 2008 but in terms of acquiring real estate. But the biggest mistake was -- and it's always hard in hindsight -- then we could say the same thing about, well God, I knew about Amazon or I knew about Apple and it was awesome when the first iPod, came out or watch or phone. It's always hard.

And you can't look in the rear view and say, well God, why didn't I buy Bitcoin? I remember someone talking about 2018 well, it's back to 5. Are you buying now? Is it going to 35? I don't know. And if I did, we probably wouldn't be talking here today and you probably wouldn't be talking to me.

Jack: No, I wouldn't.

Craig: I think the one thing that real estate always seems expensive if you live in a major urban area: San Francisco, Seattle, New York, Washington. Yes, they do have pullbacks but they're not, when the rest of the country gets a flu, these major cities get a cold. And yes, there are blips in the road, but at the end of the day, real estate really is if you buy it right, okay. On a pullback. And the old saying is true: “location, location, location.” It always comes back. New York City isn't going anywhere.

Yes, you might have ups and downs as it relates to finance and it's dictated. Or in Washington when it changes from, from a Republican-led Congress and administration where maybe there'd be some contraction in the government contracting space and you might see things shift from maybe the technology side of the equation to more the defense contractors. But at the end of the day, it's cyclical and with real estate, the old adage is true. You buy good quality real estate. Yeah, you might get hurt depending on the sickle of timing, but it always comes back.

Jack: Well then, we're not likely to see anything like 2008 in our lifetime. You know, it was 70 years between the last massive adjustment and I'm betting that it will be another 70 before we have another nasty one like we had in 2008. Good stuff. One more question about your fund or funds. Are you building a single fund or you're building a family of funds?

Craig: Yup. Great question. We've spent a tremendous amount of time around structure and really what we found is it is difficult to do kind of a larger blind pool. The second set of regulations provided some flexibility with disposing of assets. And when we solve one problem, it creates other problems. As an example, now you are now able to sell in a two-tier structure, sell individual assets from the fund. So now we're in and say, all right, well I solved my problem. When you're looking at it from a bank's perspective, a JP Morgan, Bank of America, UBS, Deutsche Bank, whoever it is, they need to kill three birds. The initial is the PPM.

Jack: Okay?

Craig: Second is capital call notices, and third is K. Once part of the problem we had with multiple funds is you would have multiple K1s, right? And that becomes very tedious.

If you're a regular investor, everyone's always waiting April 15th where's my K1, where's my K1? We now have the ability to create and dispose of these assets, but people aren't talking about it yet. You will lose the benefits of the depreciation recapture. A part of the law implies in the way the laws are, there is no depreciation recapture on these transactions. So what does that mean? You have to sell in order to kind of qualify and reap those benefits, you still have to sell your partnership interest.

Jack: Okay.

Craig: So, these assets now you can't sell. If I had three assets sell one out, you have to still effectuate a sale of the entire partnership interest of the fund. So the question is now as we talk to investors, it's an A or B, would you rather have the one K1 or would you rather have no depreciation recapture, which means your ordinary income rate on those annual yields in distributions will be significantly reduced.

And when we've asked that question, I think they think about it for about two seconds. Yeah, I think I'd rather have them multiple K1s.

Jack: Yeah.

Craig: But to answer your question, we're doing right now single asset funds in a two-tier structure with the ultimate goal, we are going to be raising a larger commingled type of vehicle. But I mostly think it will be a multiple series of what's called mini funds, single asset, two-tier structure with an overriding management agreement that will clean up some issues with that structure. We'd have one PPM have the ability to do one capital call notice and then be at a distribute capital vertically essentially down through to the individual QOFs and QOZBs.

Jack: Gotcha.

Craig: But the one downside to that structure would be multiple K1s.

Jack: Right

Craig: But from a practical perspective, again, yes there are some headaches, but I think when investors realize what the trade off is, I think it's a pretty straight forward answer.

Jack: Yeah. Okay. Very good. Well, let's take this conversation in a slightly more personal direction. Your expertise on the ins and outs of Opportunity Zone are obvious to me. You've also brought some things to mind that - in the 35 or 40 interviews I've done over the last month - I haven't heard anywhere else. Kudos for that.

Craig: I appreciate that. I spend a lot of time working on this and we're excited about our prospects moving forward. I mean, I truly believe it's a once in a lifetime opportunity.

Jack: Yeah. Well, I agree. It wasn't me who said this was one of my guests brought this up, but I think they're right. I think we're going to look back on this a generation from now and say this was the single most, significant piece of legislation since the New Deal. I really do think that, seems to be, you know, it's moving in the right direction and the excitement and the energy and enthusiasm is there. And the intent is, yeah, it's good. All right, so enough of that. I want to find out a little bit more about Craig Bernstein, the person as opposed to Craig Bernstein, the fund manager. So, when you are not walking out on the tax code and real estate stuff, what do you do for fun? How do you keep yourself occupied on those rare moments when you're not sitting behind a Bloomberg terminal?

Craig: Yeah, I'm very fortunate. I have a wonderful wife and two beautiful children, six and four years old. And, this is a once in a lifetime opportunity and we've obviously been dedicating a lot of space and time to focusing on this. We think that the runway is short. So I have been extensively working in the past year. But on my free time I love to spend time with my family and with two little kids. They keep, my wife and I both very, very busy on the weekends. They're wonderful, happy, healthy and my wife and I both love spending time with them and you know, have a lot to look forward to.

Jack: This is the point of the interview where I get to ask what is my favorite question and see if I can find somebody who can come up with a brilliant answer. I'm to give you my favorite answer so far before I asked you the question. So, the, the kind of a jeopardy approach here, the answer that I've gotten so far that I really liked the most was ban robo calls. Okay. That was the best answer. Here's the question. Imagine you're king of the world for a day, one day on one day only and you can solve one problem and one problem only. How are you going to use your powers?

Craig: For me, I think that's an easy one. I mean, we're very fortunate being here in the U.S. and what's afforded to us when you look around the world today, even with the amount of wealth. And I know some people would say it's cliché or that's a cop out with the Robo calls. There's no reason in today's day and age that every single person in the world doesn't have clean water. Playing it plain and simple. I mean, we have the technology now, we have the resources. If we can interview him and he says, well who pays for it? But it is, I mean it's sad. When you look around and in some of these countries and that people don't have clean drinking water, from a bathing health, a septical perspective, sanitary. I mean that would be, that would be the one thing and I think that would be the most dramatic change to affect mankind.

Jack: Any last words for us before we sign off for the day?

Craig: Yeah, no, I, thank you so much for having me. I appreciate your, your time and consideration. And, the one last thing I would say, and people that are listening to it or using it as an educational tool is don't try this at home. You know, I mean there's so many nuances to the program and the last thing you want, if you're a developer or an investor, you build up early. If it's your own money, hey, you've worked hard to do it. You're taking a gain, whether it comes from a business sale of Apple stock, whatever it is, talk to an expert. And I'm not saying talk to me, talk to a good accountant, talk to a good attorney.

And the problem is that a lot of people they read at one time, but they're really not. While I read the rags, I get it. There are so many nuances and triangulating the information, spend the dollars, don't cut corners, it's not worth it. And then also, if people would like to get in touch with us, please feel free, love to answer any questions. And a big part of the work that we've been completing really is around educating people. So, I'm on LinkedIn. Just look me up Craig Bernstein. The easiest way to get ahold of me and my email address is

Jack: Thank you again for your time and hope to speak with you soon. Very good. And I'll remind our listeners that this contact information will be available on the website for the podcast. On behalf of Craig Bernstein, I am Jack Heald for the OZExpo Podcast. Thanks for listening. Be sure to subscribe so you're always updated when we release a new episode and we will talk to you next time.

Announcer: This podcast is for informational purposes only and does not constitute legal tax or investment advice. For specific recommendations, please consult with your financial, legal, or tax professional.

Powered by Froala Editor

Powered by Froala Editor

Powered by Froala Editor