Jack: Welcome back everyone to the OZExpo Podcast. I am your host Jack Heald and I am joined today by Peter Valleau, who is the vice president at SVN, an asset advisory group out of San Diego, California. Peter, welcome to the show.
Peter: Thank you Jack. I'm happy to be here.
Jack: Give us the 30,000 foot, 500 mile-an-hour view of who you are and what SVN is all about.
Peter: Well, SVN is a national commercial real estate brokerage firm – actually international; we're in multiple countries. We have over 1,200 advisors in the U.S. I have been personally involved in commercial real estate for 28 years now and I’ve specialized primarily in investment and development transactions.
Jack: Okay. Investment in development? Gee, that kind of dovetails very nicely with the whole Opportunity Zone thing, doesn't it?
Peter: Well, it does, doesn’t it? I'm sure your listeners are fairly familiar with the whole Opportunity Zone concept. It's actually quite new to the brokerage community. And I am involved in a small group within our firm that is specializing in Opportunity Zones nationwide.
Jack: I wanted to ask this question because I've seen it come up on a number of occasions. A broker is probably a good guy to answer a question like this. What kind of properties qualify to be properties for an OZ fund?
Peter: Okay. Well, it's actually very interesting. I mean, I know an OZ fund can be as simple as essentially two people. It could be a husband and wife who create a fund, which is a legal entity such as an LLC or a Subchapter S Corporation that goes out and purchases real estate, or then does improvements to it and holds it for 10 years.
Now there's a few caveats to that. One is that you have to improve the property to a level equal to the value of the structures that are currently on the property. So obviously if you deal with raw land, it's a very easy thing to accomplish. If you're buying something like an apartment building, it might be much more difficult to accomplish. Adding units certainly helps and makes this transition a lot easier. And you know, the thing is that you can buy Opportunity Zone properties anywhere from a few hundred thousand dollars up to the millions upon millions of dollars.
Jack: In other words, if I understand the standard right, almost any kind of property can qualify if it's in an Opportunity Zone.
Peter: Yes. It doesn't have to be any particular product type. The requirements are that it has to be located in a qualified Opportunity Zone. It's amazing what some of those zones are. You have to spend money improving the property with the hope of either providing housing, creating additional jobs in construction, in the workforce, whatever.
Jack: Right. You know, it hadn't occurred to me until you said it, but I guess that's true. Providing jobs is a form of improvement.
Peter: If you have an obsolete warehouse for example, and you go in and you were to say, reposition that into a food hall, you have now eight or nine food vendors in this old warehouse and formerly derelict area. Well, all of those new little food vendors are going to be employing a lot of people. And that's one of the reasons why they put the Opportunity Zones together.
Jack: If someone wants do their own Opportunity Zone investment, how do they go about doing that? And just as importantly, what's probably the minimum they need to think about spending?
Peter: Well, obviously the minimum that they need to be to be spending depends on the location where the property is. It's going to be more in coastal areas, for example, than other parts of the country. For example, in San Diego, I have a client looking at a property purchase below $500,000. And we'll be spending $300,000 improving it, adding a couple of units to it. That is how simple it could be. On the other hand, there are huge Opportunity Zone funds that are purchasing properties in the hundreds of millions of dollars. Those are certainly not available for an individual investor to do, but you can invest in one of those funds if you so choose.
Jack: But if I wanted to do my own investment, how do I go about doing that?
Peter: Well, you first start out with finding out where the Opportunity Zones are near where you are located or where you want to invest. You would probably find an appropriate property, but before you close on it, you would set up an Opportunity Zone fund – a qualified Opportunity Zone fund with a CPA or tax attorney.
Jack: The owner of the property is the fund, not the individual investors?
Peter: Correct. The owner of the property is a legal entity that would be determined by your CPA or tax attorney. And it's probably going to be an LLC or Subchapter S Corporation.
Jack: Gotcha. Alright. Another question that I think is very important. When can a person take advantage of this? What's the best time to take advantage of, for example, purchasing or owning a commercial property?
Peter: Well, there's a few things to consider. One is that you really need to have capital gain money to go into this, to take full advantage of it. And the very best time to start it is when you realize the capital gain from anything. It doesn't have to be real estate. It could be from the sale of stock or cryptocurrencies or a company. Then you want to take your capital gain from that event and invest it in a real estate in a qualified Opportunity Zone. Then within three years you have to improve it to bring it up to the qualified Opportunity Zone standards. At the end of the a 10-year holding period, your capital gains on the ten-year period that you've held this property are tax free and the initial capital gains that you had put into this property are reduced by 15 percent…
Jack:,,, Which is obviously one of the biggest attractors. I want to drill down to get a little more detailed here because there's a whole lot of moving parts to these programs and a whole lot of different stakeholders in the Opportunity Zone program. I sense that folks like you sit right smack at the center of all these moving parts. Let's talk about the municipalities themselves, where the governmental entities that are actually responsible for these individual Opportunity Zones there that are designated by census tract in their experience. I realized that because you're a real estate broker, you have very local experience and that's what I want to hear. In your experience, what is the local government doing to make this program work and what can they do to best take advantage of the Opportunity Zone program?
Peter: Well, the Opportunity Zones were identified based on the 2010 census and some of them are actually quite surprising you know – where these census tracks are located. We have an area in San Diego that is absolutely becoming the hippest, trendiest neighborhood to buy and has been for quite a number of years. Well, it was based on, based on the 2010 census. Parts of it were designated as an Opportunity Zone.
Well, that's just a slam dunk in terms of being a great place to buy and invest in and improve because the neighborhood's already on the upswing. I think in terms of what can governments do and local municipalities, I think they can do things like reduce the roadblocks to development along the lines of making it easier to get building permits, reducing fees, streamlining the process, that sort of thing.
For example, in California we have a very severe housing shortage. The state government has implemented a procedure to add accessory dwelling units onto single family properties by right. And this is a statewide initiative. And local communities have been directed and required to accept this and make the building an accessory dwelling unit on a property, a simplified process and less expensive process than it might've been. I think this is a great thing that local municipalities can do to enhance the Opportunity Zone development.
Jack: Is this a state program that municipalities can opt into? I'm not clear on how it works.
Peter: No. This is a state program that municipalities are required to participate in, and one of the things that it does is that it is designed to reduce some of the NIMBY opposition to development and densification.
Jack: Right. If somebody died and left you in charge today, what changes would you make from the governmental side, if any? What have you seen that could be improved?
Peter: I would reduce many of the restrictions that are in place in the building code. Things like requirements to add sprinklers to new units that are being built. Reduce, for example in commercial construction, sizes of some of the restrooms. Things like that. Generally speaking, I believe we are overburdened by government regulations on construction and development.
Jack: All of these are just things that slowed down the completion of a project…
Peter: Slow the completion in development. Time is money.
Jack: Yeah, I wanted to talk about the initiation of a project because with the OZ program, when you get your money into the property and start developing is so important. Are there things that you can see that the government can do to streamline the “getting started” process as opposed to the “getting connected” process?
Peter: Well, the problem is that you have to spend much of your money on your Opportunity Zone projects in the first 30 months, two-and-a-half-years. In some cases, say for example you wanted to build a new build multifamily project in California, you could not get that out of the ground in most communities in California in 30 months. It would be physically impossible to do that. And that is because there are hearings involved and community input and layer upon layer of regulations affecting new development. So that is very much a consideration. There are ways around it and that is one of the things that developer Opportunity Zone investor would have to look at.
Jack: Because California's is the biggest state and also the coastal state and a million other reasons, probably the majority of people that I talk to regardless of their profession who are involved with the Opportunity Zone, are either working in California or their business is in California. I heard this complaint a number of times, you mentioned the hearings and apparently there's something about California that a single complaint can bring a development to a complete standstill. You know, “I don't like this, therefore we're going to stop it until we do…” whatever. Is that a statewide issue? Is that a locality issue?
Peter: It tends to be a statewide issue. I think that like a single complaint would have to have some grounding. If it was an ungrounded complaint, say from a property owner who might end up losing some of their views which are not protected then you know, I think you could get over that in a relatively short period of time. But, if you were trying to do something that was quite out of the ordinary or beyond the scope of the existing development regulations and a density and that sort of thing, then it is going to be a much longer process. There's no two ways about it.
Jack: Almost by definition, any development in an Opportunity Zone should be fairly – well, it shouldn't be too far outside the normal. Just because we want them, we're going to have to hold this thing for 10 years. It needs to be something that is going to cash flow in relatively short order and that we can make a profit on in 10 years.
It seems to me as, as a rank outsider here, that's a place where some sort of streamlining could occur where there could be a little more limited on the public comment or the public complaint or just because the time of getting this thing started is so very, very important.
Peter: Correct. And the developers I'm working with are trying to do projects that are within the development regulations. They are as we would call them by-right projects so that you're not changing the land use for example. You're not overbuilding versus what the regulations of that particular parcel call for. And those are the types of things that can really slow down a process doing the opposite to that changing land uses or adding more density than is desired in are permitted in a particular location.
Jack: And now I want to turn the conversation just a little bit here. I hear what is clearly not a San Diego laid back surfer dude accent. Not a native of San Diego. Are you?
Peter: I grew up in Toronto, Canada, and I spent a number of years in the corporate world which brought me to the United States: Texas then Hawaii, then here to San Diego. And I chose to remain here rather than being moved around every couple of years.
Jack: I never have to ask anyone why they stayed in San Diego. I only have to ask them why they left.
Peter: Yeah. And once you leave, unfortunately, unless you do really well, it's very difficult to come back.
Jack: Difficult to come back. Right. I'm in Phoenix and you know, every now and then I'll run into somebody who moved from San Diego. “You left. Why?”
Well, Peter I appreciate your time today. This is some good stuff. Any last words for us before I let you go?
Peter: Well there are a number of online interactive maps where you can take a look to see where Opportunity Zones are located. I think you would be really shocked at some of the locations. For example, in Phoenix or in the Phoenix metropolitan area, Scottsdale and Tempe, both are Opportunity Zones. Here in California, you have coastal properties in Orange County. You have properties in the Napa Valley, and we talked about San Diego already.
Jack: Coastal properties in Orange County?
Peter: It's geography. And then on the other hand, if anybody wants to – anywhere in the country – because as I mentioned, our firm is national and we do have a group of brokers nationwide that are familiar with these Opportunity Zone projects. Feel free to reach out to me and I would be happy to direct an investor or a potential buyer to a broker that can help them out. I think it's important that somebody deal with a broker who understands what Opportunity Zones are. And I would say that the vast majority of brokers, unfortunately do not.
Jack: You know what? I said, “last words”, but because of what you said, I'm going to follow up with this question. What is the tip off for you, or I guess I would say it this way. What should be the tip off to a buyer that their broker doesn't understand it?
Peter: I see many properties listed in Opportunity Zones where there's absolutely no mention made of the development potential or the fact that they are located in an Opportunity Zone. The listing broker has clearly missed the mark in terms of realizing the full value and potential of their client's property. And then on a buyers’ brokers side, you can just ask them, flat out, “what do you think about Opportunity Zones,” and they will be able to tell you, they should know exactly where they are in their market and what the rules and regulations are because they are complex and they do take some study.
Jack: Yeah, sure. Do you know, your answers were a lot more direct than I was thinking. Sometimes I miss the really obvious stuff. Well, Peter, how do folks get ahold of you if they want more information?
Peter: My email address is probably the best way. It is my name, email@example.com. Or they can feel free to give me a call as well at (619) 347-0795.
Jack: Very good. Well I appreciate that, and I'll remind our listeners this information you just heard is also printed on the podcast website so you can go there to pick it up. If for some reason they didn't get it all.
On behalf of Peter Valleau of SVN, I am Jack Heald for the OZExpo Podcast. Thanks for joining us today. Be sure to hit that subscribe button to be updated the next time there's a new episode published. We're publishing more of them all the time.
We will talk to you next time.
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