Knows at least 8 Ways to Build a Capital Stack with Government Programs

Brett Siglin

The Opportunity Zone Expo Podcast
Knows at least 8 Ways to Build a Capital Stack with Government Programs


Jack: Welcome back everyone to the OZExpo Podcast. I'm your host Jack Heald and I am joined today by Brett Siglin, who is a partner at the law firm of –  help me out here, Brett – Jennings Strouss, and I have no idea.

Brett: Salmon.

Jack: Jennings, Strouss and Salmon. Welcome Brett, it's good to have you.

Brett: Jack. Thank you so much for having me on your show.

Jack: You're a partner at Jennings, Strouss and Salmon. Your expertise is in real estate law. Let's find out just a little bit about you. I did a little bit of research before the interview and saw that you come from the University of Illinois. A Chicago boy, I guess?

Brett: Correct. I grew up just outside the city in Du Page County and went to U of I and spent the first part of my career in Chicago.

Jack: Some of the more interesting people I've interviewed have actually come from the University of Illinois. Now you've got a BA in what?

Brett: Political science and international studies.

Jack: I'm guessing that that law was always part of the plan with a political science degree.

Brett: I would say so. I mean, I always wanted to get into business, but I saw studying law as a way to open doors and to get connected with really interesting people that were doing exciting things. And I guess I started on that path while I was at the U of I Champagne and got exposure to new ideas, exciting and interesting people. Ultimately led me to go to law school and spent about a decade in D.C.

Jack: And I want to talk about that. You interned, I see, at the FCC. Now that had to be a little bit different. What was that all about?

Brett: When I was in law school it was early 2000s. I was really excited with this concept of international telecom and just being involved in international business transactions. And I didn't have a background in science or engineering, but I thought, well, if I specialized in telecommunications law that I'd have some kind of edge. Like so many other things in life, you find out bigger things are happening. The telecom markets crashed in 2002 after I'd done a few internships with the FCC. And as it were, I ended up engaging in a community and economic development law clinic, my third year in law school, which really opened the door to real estate and housing. And I sort of shifted gears there. My third year in school.

Jack:Well, I was going to ask why real estate law. It was a combination of the class and the experience, is that right?

Brett: I would say so. Yeah. It really kind of fell into my lap third year and I did that clinic and the sponsor of my clinic was the former General Council at HUD. And I got really interested in affordable housing development and it ultimately led to an opportunity at the Department of Housing & Urban Development where I spent four years getting involved with both policy and on the transactional side. I was fortunate to work in the Baltimore field office which was at the time that was one of the most active FHA lending teams in the country. And we did a lot of affordable housing deals involving four percent on bonds through the Maryland state agency. And I cut my teeth on a bunch of those. It opened the door to the low-income tax credit world and the whole concept of utilizing public resources and combining that with private equity to generate new development.

Jack: You've been doing this type of work then for what, 15, 16 years?

Brett: I would say. So, yeah, it's been about 16 years since I really started closing deals in Maryland. And then a few years after that I went into the private sector and really started working with developers and syndicators and also a lot with lenders. And you're doing a combination of market rate, multifamily and affordable deals.

Jack: You worked in policy, but also in transactions with HUD. I've always perceived the government side as maybe not being transactional. What is that all about? I'm just not clear on what that work would be.

Brett: Absolutely. So yeah, out in the field at the time, I think there still are at least 50 field offices. They don't all do FHA loan transactions per se. And it's actually been consolidated a great deal since then into regions. But a big part of what HUD does is the FHA. FHA is part of HUD and that that's multifamily and single-family insured loans.

The government is essentially backing up lenders. So that's a revenue raiser for the fed. And there's fees associated with those deals and there's pipelines and each of the field offices at the time was expected to close these deals. They come from the private sector and there are partnerships with different lenders and there were some very active players in Baltimore. Some of those lenders were active throughout the country. But it's really a private sector kind of operation. And I was proud to be a part of that. We closed 30 or 40 deals a year in that field office and there were others that were just as active or more active. Some not as much. But it's a big part of what FHA and HUD do.

Jack: Something that I found interesting in your bio was that you did some work restructuring some Puerto Rican debt. I've spent a good deal of time talking with folks in the Puerto Rican government and the private sector as well with Opportunity Zone stuff. And obviously one of the huge hurdles that the folks in Puerto Rico had to get over is their debt. Talk about your work restructuring that Puerto Rican debt specifically. And then I want to ask you some follow-up questions about that.

Brett: Absolutely. It was in 2007 and 2008 when I came across an opportunity to work with a consultant based out of New York that had been engaged by, at the time, the third largest Puerto Rican bank. And what had happened is that bank and other banks in Puerto Rico had become quite aggressive, you could say in the 90s and early 2000s with originating loans, especially development loans, construction loans throughout the island.

And there were a lot of bad debts on their books. I was part of the team. I was brought in to help work with these developers and their affiliates and find ways to restructure the debt. And then in some cases, if it couldn't be worked out, there was a takeover. And then there was a long foreclosure process in Puerto Rico. And we also helped the lawyers, the local law firms in Puerto Rico that were handling hundreds of foreclosures at a time.

Jack: Now were you working on behalf of the debtors or on behalf of the note holders?

Brett: I was working on behalf of the bank. So, the bank had hired this consulting firm to work out this pool and there were probably 250 construction loans in the portfolio. My primary duty was to help manage that pool and to just stay on top of that and then to keep things moving with the debtors and hopefully work out terms.

We spent a lot of time negotiating workout agreements, modifying loan documents and that sort of thing. Really trying to buy time as much as possible to avoid foreclosure because the foreclosure process is always long and slow. And I learned a lot from being inside that bank, just how much they want to avoid that. But at some point, they have to ultimately take that path. But in Puerto Rico it takes two or three times longer than it does in most other places.

Jack: Okay. Well it sounds to me like that was a little bit of a baptism by fire in terms of both negotiation and exposure to these low-income housing developments.

Brett: Absolutely. Yeah. I got to know some interesting people there. It ultimately led to an opportunity to work at DLA Piper and I got exposed to capital markets and working on REITs and then continuing the work in low income housing. And over the last few years, it's blossomed into this great opportunity we have now with this new incentive.

Jack: Let's just take it from there. We're now in the Opportunity Zone world. And that's specifically what we want to talk about here on the show. As a real estate attorney. just talk us through some of the creative ways that a developer who - as you said, most of them don't know about fundraising - what's a creative way the developer can stack his financing for an Opportunity Zone deal?

Brett: Sure. So, one of the misnomers is that I was actually just listening to an older podcasts and this is somewhat dated, but there's still folks out there that don't realize you can leverage with an Opportunity Fund and you can leverage as much as is you feasibly can. I've talked a lot of clients that maybe don't want to leverage as much, maybe only half of their money is coming from a bank and half might be coming from equity that they're raising, ultimately from an investor with capital gains. But I encourage clients to borrow as much as possible and ultimately use that capital gain equity for more deals.

There's a lot of banks out there that want to make loans into Opportunity Fund projects and in a lot of ways they should be safer because you've got this investor equity that committed and in a lot of ways that equity has to be utilized upfront.

Because of the way the rules work, that equity has to be put to work during the 31-month safe harbor. And there might be ways to bring in the debt too, but it's always good know from a lender's perspective when a developer has pre-development equity and other sources that they can put to work and put into the deal and have a stake in the deal. We're seeing lots of creative ways to stack the equity as well. It depends in part on whether there's a single asset fund or whether it's a portfolio.

There’re folks out there that are raising money in blind pools. We're also seeing potential for sponsors to raise non-Opportunity Zone, non-capital gain equity and maybe having parallel funds set up or others are focused entirely on bringing in the capital gain equity.

Some of the challenges though of course, are just the timing because of the 180-day rule. You've got to get that money committed and if you don't have some control over when that sale is going to rise. On the investor side you might be caught between a rock and a hard place. And there there's been instances where there were investors that missed the 180-day deadline. And then there's also been the opposite problem of course, where there's a lot of money being brought into a fund and then the deal isn't ready. Or some, some funds don't even have deals yet.

Jack: With your experience working in government and with government, and specifically because you're a real estate attorney now, with the Opportunity Zone what are the kinds of tax credits and government programs can be stacked when folks are putting together the financing for their deals? What are some of the more creative things? I'd also like to know some of some of the more common ways that these deals can be stacked.

Brett: Okay, sure. Yeah. I wouldn't say there's common ways yet. I mean, just because it's slow to ripen and the incentive has only been around for just over a year. But we're definitely hearing more about combining New Market Tax Credits with the Opportunity Zone incentive. It certainly in theory should blend well. The Opportunity Zone regulations have largely been borrowed or written in the same framework as the New Markets rules.

The safe harbors that came out were largely borrowed from the Treasury regs. There's also a lot of overlap in the census tracts because if I'm in a low-income community in the New Market Tax Credit arena, then yeah, there's a good chance that I'll be in an Opportunity Zone or maybe a one-in-four chance.

And if I'm in an Opportunity Zone, then it's almost always a low-income community. So yes, just by the nature of the location of a project hypothetically it should qualify for both, for the OZone incentive. There are also hypothetically ways to combine the low-income housing tax credit, especially if it's in a qualified census tract. It might be harder to bring in low income tax start investors that are also interested in the qualified Opportunity Zone incentive. There aren't too many examples of that yet, but hypothetically that could work, especially if there was a bank or an insurance company or a corporation that could utilize the tax credit as well as put some gains to work. And then there's ways for the developer maybe to raise money on their own through a fund.

It's less likely in the low-income tax credit context, but more likely in the new market tax credit context, you could also utilize this storage tax credits. In Arizona there's giplets. There's ways to take advantage of 'em.

Jack: I'm sorry, there's what?

Brett: They call them giplets.

Jack: That's what I thought you said.

Brett: Yeah, they're there. They're quite common in Tucson. You don't see them as much in the valley, but it's a way to take advantage of local tax exemption. There are ways to take advantage of taxes, and bond financing. And then there is this other property tax abatement programs throughout the country. There's financing in the Midwest. All these tools can be combined. In the affordable housing arena, you could take advantage of home or community development block grant money hypothetically or even they have loans from the federal home loan bank. All these resources could be combined. I know clients in rural areas that are looking to take advantage of a USDA loans, which is also kind of similar. There's a rural development program very similar to FHA.

And then of course you can utilize FHA loans and certainly in the multifamily setting. There are quite a few potential ways to utilize other resources. You certainly don't have to… I mean, that's one of the beauties of this incentive is that there's no one telling you that you have to score points or that you have to go in and compete with 10 other developers to get the incentive. If you're in a zone and you've got a plan and you've got gains you can put it to work and your investors can reap the benefits. That's really what I see as one of the greatest aspects of this program. There's no limit to it really.

Jack: I'm trying to think from the developer’s side, the guys who are actually putting the deals together. And you've listed here probably eight different government programs over and above the Opportunity Zone stuff that are available either in combination or singly depending on where you are in the country. OK. So, tax credits, loans, I'm guessing possibly additional tax deferrals, possibly even grants. Right? And we haven't even gotten to raising private money yet. So, there are lots and lots and lots of different opportunities if you're a developer to stack these things to get your deals done.

Brett: Absolutely.

Jack: OK. You sent me a pdf of Opportunity Zone funds that you guys have experience with and it's structured - the pdf itself - just breaks down these different funds into categories that I just like seeing. There's a multifamily funds, a student housing fund, which apparently is a big deal in the Opportunity Zone. And I keep running into these office, retail funds, hotel development funds. And the one that I really kind of got a little jazzed about was a retail restaurant fund.

Brett: You're right. Right. And that's actually here in downtown Phoenix. So, we have a client that it's going to be hopefully developing a parcel downtown and there's going to be a restaurant on the ground floor and then our retail component as well. And they're looking to do the same thing up in Denver.

Jack: So much of this stuff is primarily real estate deals and I'm just dying to see the operating business kind of stuff be established in Opportunity Zones to create these long-term wins for the people who live and work there. Not just for the investors.

Brett: Absolutely. Yeah. It's supposed to be a job creation program and that sort of thing. I was encouraged by the second tranche of Treasury regulations that really focused on the ability to make it possible to invest in businesses. And yeah, there were a few things that a lot of very taxpayer favorable provisions that will hopefully encourage more startups, especially in the Phoenix Valley. You've got a lot of manufacturing companies coming out here. I've seen some that are utilizing New Markets Tax Credits. There's no reason why they couldn't do the same thing and take advantage of the Opportunity Zone if they're in the right census tracts.

And there's opportunities for venture capital for startups, for business expansion. We're seeing 'em a lot of businesses doing R&D where they can actually take advantage of gains and invest in their businesses. And it doesn't necessarily have to be a real estate component. I mean, I think what we're finding in the studies that I've seen so far that there typically is a real estate component combined with the business. And there might be a leasing aspect to it and that was another win for the industry, so to speak, the treasury came out and made it really clear that if you've got a leasing structure that it can still work. And so yeah, that was good news for retail folks as well. And the other thing right now I think is that interest rates are so low and we're at that point here where we've got a lot of guidance from Treasury.

You know, we're in probably the best year to invest in a fund. If I'm an investor and I've got a gain this is the year when I can really take advantage the most. I'm certainly going to get the exclusion benefit no matter what if I stay in for 10 years. But I can also take advantage of that 15 percent basis this year and I'm going to be able to defer my tax hit for seven years. So, this is the year to do it. With the rates being so low, with the guidance that we now have, and before this gets this could get really competitive. It's gonna be harder potentially in a few years for funds to find deals. But right now, yeah, there's still a lot of good deals to be had, I think.

Jack: Do you have folks come to you on the investor side, on the money side who don't know about the Opportunity Zone? Or are folks aware of it by now?

Brett: I know a lot of people are not aware of it and that's what I think so brilliant about it is that it really opens the door to a whole new pool of investors that probably wouldn't otherwise invest in real estate. Because before when you had a 1031 exchange, you know, 1031 rules used to be broader. Now they only apply if I've got like-kind real property. And there's a narrower pool that can take advantage of that. If I sell stock or I sell my business or I sell some other non-Real estate asset, I'm going to have to pay capital gains and there's really no other alternative other than this. And I think a lot of people especially say in Silicon Valley that have millions of dollars of valuable stock that they're looking to sell, they may not know anything about this program. They may not know anything about investing in a real estate fund. So, I think there's potentially trillions of dollars of potential gain out there just sitting out there. People still don't really know. This is still in I think in the infancy stage. And I think there's been maybe a few hundred billion raised so far, but there's a lot more potential.

Jack: Alright. Well, I think we've plowed through the good stuff. Any last words for us before we call it a day?

Brett: Yeah. I would just say if you're if you're a fund manager out there and you need deals, don't hesitate to reach out. We love to introduce you to some of our developer clients. And if you're a developer and you're struggling to figure out how to make this work. And maybe if you've done some of your own deals, but you're intimidated by this incentive and setting up a fund. How all the rules work. We've worked with, a lot of groups are doing single asset funds. And there's also tremendous opportunity, now. We didn't talk about the related party rules that are quite draconian and really imposed a huge impediment to doing Opportunity Zone incentives. But the latest rules really opened the door, because several structures that can be utilized, even if there is a relationship between the folks that own the land or the property currently and those that will ultimately own or control the fund. So, we're really excited about that.

Jack: Let's talk more about that. We don't have to stop now. Talk about the related party rules and the opportunities there for your development.

Brett: So, the rule is essentially that if I own property then I can't have… If I sell that property to a fund or to whoever's going to develop the Opportunity Zone land, then I can't potentially own more than 20% in the capital and profit of that fund or that new ownership. And it's really hard if I'm somebody that owns hundreds of acres, say up in Prescott or, or Prescott valley or somewhere out in the state. And I'm looking for ways to encourage development and I want to take advantage of this incentive. I can't do that unless I potentially lease it. And they've set up a rule that make it possible to ground lease the land to the fund. And this is also a way to take advantage of the incentive in places like tribal land, east of the 101 where the tribe is not willing to sell it, they're going to ground lease it.

And that might be a 50, 60-year ground lease, but that works now. So there's some complications to that that I won't get into, but there's an avenue there and there's also ways potentially for contributions to be made into the fund that can enable the ultimate taxpayer currently owns the property to take advantage of the benefit on the funds that as well. It opens the door to folks who maybe don't want to fundraise and, or maybe they just have a few investors. And so, there's a lot of deals out there that can be made that way.

Jack: So how do folks get ahold of you if they want your guidance, they want your help, they just want to talk about this? What's the best way to get ahold of you?

Brett: Yeah, my phone is always open. My office number is (602) 262-5842 and my cell is (202) 302-7137. I'm also available by email anytime at my email is

Jack: Very good. And I'll remind our listeners that this information will be available on the podcast website so you can just go there, click it, and get what you need. Well, Brett, I appreciate your time today. This has been good stuff.

I'm stunned that I'm always able to find people who can tell me more. I've been working on this now for quite a while and as a non-expert, it's really, really good to be educated by you experts.

Brett: Thank you.

Jack: On behalf of Brett Siglin. I am Jack Heald for the OZExpo Podcast. Thanks for listening. Please go ahead and subscribe so that you are updated every time a new podcast is released. That happens a couple of times a week and we will talk to you next time.

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