40: Opportunity Zones with David Coelho

Welcome. This is Real Estate Investing Live from New York with James Nelson, the principal and head of Avis and Young's Tri State Investment Sales Group. In this program, you'll learn about the world of commercial real estate and find out why it is one of the largest investment opportunities in New York and around the world. Now here is your host, James Nelson.

Welcome to show number 40 of real.

Estate Investing Live from New York. This is your host, James Nelson, principal and head of Tri State Investment Sales at Davis and Young. For today's show, we have with us my friend David Coelho, who is the CIO of Bridge Investment Group's Opportunity Zone funds. So this is definitely something that you're going to want to learn about. If you haven't been already following these opportunity zones, there's 8,700 of them across the country. This came out of the Tax Cut and Jobs act back in 2017, but they've really been picking up some steam and definitely some good information that you're going to want to hear about this, especially about the differences between 1031 exchanges and opportunity Fund investments and also some of the new guidelines and deadlines that you're not going to want to miss. And then after that, we have back with us Josh Simon from EBI and Jeff Carlton from his Energy Consulting group talking about due diligence and things that you need to familiarize yourself before acquiring property. So with that, I want to thank you all again for listening. Please continue to share with your friends. Please keep the comments and the ratings coming. I really, really appreciate it. It helps spread the word on the show and we're going to have a brief word from our sponsor and then we'll be right back with that interview with David. Thank you again.

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And now it's time for our Investor Spotlight. And with us today is my good friend Dave Coelho, and he is the partner and the Chief Strategy Officer of Bridge and the CIO of the Bridge Opportunity Zone. David is a member of their Executive Administration group and is also on their investment committee. He has over 20 years of experience in real estate and finance. He's completed over 3 billion of investment transactions and has advised on over 20 billion of public and private market mergers and capital market transactions. He joined Bridge from Northstar Asset Management Group, where he was an MD of Equity Investments. And prior he was partner and head of North America for Grove International Partners and also worked in the investment banking groups of Morgan Stanley and Merrill Lynch. And he was at Syracuse University for his BA and then went to Wharton for his master's. And on a personal note, he's also a fantastic golfer and more importantly, he's very patient of how bad and awful a golfer I am. So thank you for joining and thank you for all your patience.

It's always a pleasure. It's always a pleasure to play with you. You're not practice, but you're a great athlete. So every now and then you pull something out.

Well, you're probably safer being on the same fairway as me than on the other fairways because when I'm driving, you want to be very careful. When you're going the other way, you.

Hit the ball hard. There's no doubt about that. So you don't want to be in the way of one of your swings.

Perfect. So thanks again for joining and we're gonna have a great conversation today about what you guys have been doing and the opportunity Zone space. But want to start off by talking a little bit about how you got into the business. Our listeners, a lot of them are aspiring investors thinking about how to get into the business. So maybe talk a little bit about your journey. So you start off in the investment banking side. Was that before or after business school? Kind of.

How did that all that was after business school. I kind of described myself going into undergrad as just frankly, really clueless about the world. And even coming out of undergrad, pretty clueless about the financial world. I'd always kind of had it in my mind that I wanted to work in finance, but I frankly didn't even really know what that meant. So I actually ended up gravitating to accounting as an undergrad simply because when I was at Syracuse, it would seem like the best path to a good job. You know, investment banking wasn't even on the radar screen. And that wasn't at the time, you know, none of the banks were recruiting at Syracuse for investment banking analysts. So I ended up going the accounting route and, you know, got a job at Pricewaterhouse and very quickly realized that I didn't really enjoy it much. And you know, I had always, like a lot of people had always been interested in real estate, but I kicked around a little bit. My parents had been involved in owning some rental properties here and there. So real estate was always kind of somewhat interesting to me. But you know, I hadn't, I just hadn't really felt, you know, I hadn't really spent that much time thinking about it. But then I got on, on actually an audit engagement for Matt Cali. So this is probably like 1997, something like that. And, and you know, kind of caught the real estate bug a little bit. Ended up actually taking, you know, leaving Pricewaterhouse to go work at Starwood Financial Trust, which is now Istar working for Spencer Haver. And that was a really fascinating environment that the business was just starting up. And so did that for a little while. And I think having now having kind of this experience working with kind of these high powered folks who came from investment banking backgrounds, business school, MBAs, and that kind of really got me thinking that I should go back and get my mba. And that's what I did. So a little while later I went back to business school. And I remember when I was leaving, I star. I'm not going to say who, one of the senior executives there said, do yourself a favor, don't come back into real estate. And.

I'm laughing. I was on mute, but I was laughing. That's Great.

This was 1999, right? Early 2000. Market's riding high.

Right. So he must have been like getting out at the top of the mark, you know, what is he thinking?

Right? Yeah, but it's, you know, it's like go do tech or something cool and interesting. But, you know, so in going to business school, I said, well, you know, I want to go be an investment banker. Because it really felt like that's what I needed to do, you know, to really enter the next leg of my career. At that point I decided that I wanted to be an investor. Really? I guess, I guess I really decided that when I was at business school that I wanted to be an investor. But, you know, I didn't. I thought. I don't think I stood much of a chance because, you know, back in, I was coming out of 2002 out of business school and you know, private equity firms didn't really recruit much out of business schools. And the people that did recruit were all ex investment banking analysts or you know, guys who were analysts at PE shops. And then you know, the old days of you do your two years of banking, your two years of pen, then you go to business school and then you come back in a pe. So you know, I felt like I needed to go the banking route to, you know, kind of get that ground level of expertise. So I did that and you know, ended up actually briefly did a stint at Merrill lynch and then, you know, had the opportunity to go to Morgan Stanley and jumped to Morgan Stanley and spent, you know, four years of Morgan Stanley real estate and just had a fantastic experience. Really enjoyed my time there, really enjoyed working with the people there and the team there. But I'd always had it kind of itching in the back of my mind that I wanted to get to the other side of the business. I wanted to be an investor, I wanted to be a principal. So when I became kind of a first year vice president, I was kind of at the crux of it's now or never because it's going to be very difficult to leave if I stick around for a year or two. So I left, I took the plunge into investing 2007. Just great, great timing to jump into private equity investing role. And you know, it was not an easy path to say the least at that point in time. But you know, I learned a hell of a lot. Sorry, I don't know if I can say that. Learned a heck of a lot.

Regulated by the fcc, whatever the airwaves is, this is Internet radio so you.

Can say anything you want. Perfect. So you know, I learned a lot and you know, really, you know, kind of laid the frown, laid the groundwork for my, you know, for my investment experience at Grove International Partners, working for Richard Georgian team there and you know, ultimately, you know, left there, went to Northstar for a little while and then was able to find a home at Bridge and you know, back to, you know, working at a real partnership and you know, a firm that's just got a lot of momentum and you know, ultimately the real estate alternative space is a great space to be in. And you know, it hasn't always been easy, especially for the last 10 or 11 years or at least, you know, 10 or 11 years ago. But I think we're just, we're all lucky to be in a, you know, in a resilient business that even in, you know, crazy times Such as this, you know, is definitely not easy but nonetheless is critical and important and a key piece of investors portfolios.

Maybe talk a little bit more about Bridge Investment Group because I know now with a lot of these new shops launching these qualified opportunity zones, I don't want to make generalization that many of them don't have maybe long term real estate experience. But clearly Bridge is an established investment group, decades of experience, thousands of units. Maybe just tell our listenership because the Opportunity Fund is just one piece. Right. So maybe talk about everything else that Bridge does.

Sure. So you know, I'll try and give a brief history lesson of how we got to where we are and I'll talk a little more about where we are now. But Bridge was really started about 30 years ago and you know, it was really just a multifamily investment shop. Then we merged with a property management business. So you know, our DNA is just hardcore multifamily real estate operating soup to nuts. We did some development as well, but we were kind of all over mountain region and west coast, based in Salt Lake City, but so a lot of California stuff, all west coast stuff, Salt Lake City, Denver. But our DNA was always hardcore multifamily. And then over the years we decided to, and I say we, this predates my time there, but the business really was growing. The multifamily business was doing great. And we decided to begin to branch out into other aspects of real estate. And we decided to do that via what was probably the kind of the path of least resistance, but I ultimately think was a brilliant path. And we decided to go the route of specialized funds. So we raised a debt fund that was the first part of the business. Starting in 2013, we started raising a debt fund. Then we started a senior living business, we started an office business, we started a workforce housing business which is obviously just a splinter off of our multifamily. We started our opportunity zone business last year and we also now have a agency, mortgage backed security, so traded business or an open ended fund investing in traded securities. So we went from this just hardcore multifamily team to expanding into these other, what we call verticals but with operating teams. So we've got these dedicated investment teams that focus on the multifamily funds, the office funds, the senior living funds, that opportunity zones, vice versa. So each of our seven investment verticals has its own dedicated team. You know, we have gosh, you know, over 3,000 employees nationwide because we, you know, we have a multifamily operating business. We've got office Operating. We've also got senior living. We operate about 20 or 25 senior living facilities. So you know, that's where operate and manage.

I mean it's really vertically integrated. So you're doing everything.

We are vertically integrated in everything that we do now. We do, you know, a significant component of our senior living business is third party managed, which is the nature of the beast there. But we do manage about, I think 20% of our portfolio is self managed through our own subsidiary Bridge Senior Living. But everything else that we do is vertically integrated. We're somewhere north of 20 billion of AUM now. It's a monthly count. I can't keep track of where we are, but that's spread across our really six investment strategies. Our new AMDS investment strategies strategy has just started. It's really spread across our six investment strategies. And you know, we are, you know, we're, we're really hardcore real estate people at our core and I think that's been critical to our success. That, you know, that kind of dirt under the fingernails, operating expertise, you know, being able to walk onto a property site and if you see something you don't like, change it in 30 minutes versus having to call a third party manager and deal with sponsor partner. That's just how we operate and that's our DNA. So we are kind of hardcore real estate people that got into the fund management business versus the other way around.

That's great to give us the background. And now I want to jump into the Opportunity Zones and talk specifically about your funds there. But let's first, just for our audience, talk a little bit about what the opportunity, the Qualified Opportunity Zone Program is. So this came out of the Tax Cut and Jobs act that was passed in 2017. I know there were several revisions. Part of the tax code was only seven or eight pages and by the time they were done with the third revision, it was probably 700 as a lot of these things work. But 2018 there was 8,700 zones that were designated across the US so that was kind of the scope and the idea was really to encourage investment in these neighborhoods. Why don't you tell us a little bit about the Opportunity Zone program, maybe talk about when it was established and basically what it encompasses.

Sure. So the Opportunity Zone program came out of the 2017 Tax Cuts and Jobs act and really it was meant to provide an incentive to invest in under invested communities. So every state was allowed to pick their own Opportunity Zones. They selected about 8,700 in total. And the zones had to meet certain requirements about Average incomes based off the 2010 census, and they were submitted through Treasury. Every state's timing was a little bit different, but those Opportunity Zones themselves began being identified in 2018. And it was really over the course of 2018 that every state came out with their Opportunity Zone list and the incentive provided to investors. And really the concept behind it was this number. I don't know if this number is true or not, but the number that was quoted was that there were $6 trillion of unrealized capital gains in the United States. And the idea was, well, if we could free up some of that capital and then bring in those tax revenues into treasury and incentivize that capital to invest in under invested communities, that's kind of a win win all around. So in order to do that, you had to provide incentive again. So what was created was really a three pronged structure for tax relief. So if you realize the capital gain, your capital gains tax was deferred until 2026. This presumes that you're holding the investment. If you sold the investment, you'd have to pay the tax on the original gain. But if you invest in opportunities on fund and you continue to hold the investment, your original capital gains tax was deferred until 2026. Your capital gain tax due was cut by originally 15% for the first year of the program, now 10%. So that was the second prong reduction in your tax tip. And then the final prong, and far away the most important is that the capital that you invested in the Opportunity Zone, if you held onto that investment for 10 years, you paid no tax on the appreciation. So if you think about it from a classic real estate standpoint, you have $100 capital gain, you realize your capital gain, you don't pay the taxes. Let's just say it's a 20% tax, just to keep it simple. So you're going to owe, if you're doing this now, a 10% reduction. You're going to owe $18 in 2026, but you're going to take that $100 now. You're going to invest in an Opportunity Zone fund. And what's going to happen, you're going to develop an asset. And by the way, you really had to either develop or substantially improve. So everything that we do is development. You could do kind of substantial redevelopment as well, but it's principally development. So you invested the money in a development deal. You know, you took on a construction loan, you put in the equity, then you stabilize the project. Now you refinanced your Construction loan. Now you're pulling back some equity dollars in your pocket. No taxes on that. Then you begin, then you begin operating the asset. You're generating operating cash flow, as all real estate owners know, shielded by amortization, no tax on that cash flow. Then ultimately you own it for 10 years. No capital gains tax, no depreciation recapture on all the amortization that you took over the year. So now you've had all those streams of cash that have been tax free, and all you had to do was pay the $18 in capital gains tax in 2026.

Yeah, I mean, I've been doing this for over 20 years. And I mean, the only other time I've seen in real estate where you can take profit tax free is for your own personal residence, and that's even cap at $500,000 for a married couple. So, you know, I've been told that this is an incredible opportunity for those who want to transfer wealth over generations where you get that stepped up basis. So there is a lot of conversation about how is a qualified Opportunity Zone investment different from a 1031? So how would you kind of talk about the pros and cons between the two?

Yeah, well, the key difference is you actually have to pay the tax, right? You're paying a reduced tax and you're paying it out in the future, but you do have to pay the capital gains tax, and you're only eligible. You can only invest your actual capital gain in those E funds. I mean, you can invest more, but you only get the treatment for the gain itself. The flip side of it is you get off that, you know, you get off the 1031 train. Right. 1031s are a great tool as long as you can keep finding good assets to get 1031 into. And I think that's been a problem this year with folks who ultimately weren't able to find assets because there's just not a lot of transactions happening. But 1031 is a different tool and a powerful tool in and of itself. But the Opportunity Zone allows you to kind of get off the wagon, so to speak. You do ultimately pay your gain. You pay it at a reduced rate, but then you get that juice of investing that gain and paying no taxes on that into the future.

Right. And that's really for the real estate investors. And I've heard that $6 trillion stat also, as far as the amount of capital gains that are out there, and I'm sure after this pandemic when a lot of people pulled out money as well, I'm sure there's some gains embedded there as well. And for a lot of people, these are non real estate capital gains. So for those who sold their Facebook stock or these entrepreneurs who sold their companies, who they're used to paying their capital gains on the spot, they don't have, you know, the 10:1 option that the real estate professionals do. So it can also force a capital for developers, right?

Yeah, no, for sure. And that's what we've seen. We've seen a lot of that. You know, we've seen a lot of folks who've sold businesses, you know, and they're not, they're not taking their, you know, they sold business for $100 million, not putting $100 million into a Z fund, but they might put, you know, $5 million into an Oz fund. You know, we see a lot of that and I think now especially 2020 has been a strange year. But I think as, as there has been more certainty and understanding on the program and as folks have seen the track records of firms like ourselves that are deployed capital in space and understand a little bit better, I think a lot of that interest is out there. And to your point, I mean, a lot of people stole into the downturn. Some folks bought in, bought the dip and are sitting on big cap gains now as well. The capital gains are out there. There's a lot of realized capital gains on the sidelines this year and I think that a lot of those dollars will ultimately flow into OZ funds.

So I know I get a lot of questions on this program and just to answer if some of our audience is thinking, because I get these questions, can you move the zones? The answer I've heard is no. I know you do new development which is that first use. But for those who are thinking about a substantial rehab, my understanding the way that works is you have to spend as much renovating the property and on its improvements as you did purchasing the property. I believe that happens over a 30 month period. It has to happen within a 30 month period after you acquire the property. But I also know there's been a couple changes to the program. We were talking earlier saying that the initial provision from the Tax Cut and Jobs act was like seven or eight pages and they've been through two rounds of clarification. So anything new that's happened that our investors should be aware of in these latest clarifications?

Well, there's a lot, I mean there's a lot new that's happened and a lot of changes. And one thing I'd say about Your example is that the one part of that you're missing is you exclude land from that calculation. So it's the basis allocated to the property. So that actually makes it a little more achievable, frankly, to do these heavy redevelopments. You know, we've stayed away from them mostly because, you know, I've done a lot of redevelopment in my career, and redevelopment is inherently more uncertain than development. You know, you're buying a building, you know, you don't really know what you're buying until you start tearing it down or so, you know, you start ripping walls off. Figuring out your cap stack is, in my experience, always more complicated in redevelopment than it is in development. So we've tended to stay away from those. But that was, you know, that was an important change. A lot of the changes that came out were really refining a good idea that was poorly drafted. For example, initially, the way the law read is that you had to sell the equity in the QoZF, the Cooperative Opportunities On Fund. So what that meant is if I bought five or if I developed 10 assets in a fund, I couldn't sell individual assets. I'd have to sell the whole fund. As a seasoned real estate executive like yourself, you know that you always want to have the option of selling assets individually. Sometimes you got a portfolio premium, sometimes you don't. You want different buyers for different assets. So that was a critical component.

Right, Because I know there was some questions on whether or not you could finance. And so I think whether you could.

Finance what you could do with the distribution of refinancing proceeds. There are a lot of open questions initially. And, you know, I think that, you know, we and others went into this a little bit blind based on our dialogue. You know, we've been really active, actively involved with the Economic Innovation Group, which sponsored the legislation originally, talking to a lot of different government groups, treasury and the irs. And we really got a strong sense from the federal government that we're going to make this work. This is the priority for us. We're going to make it work. Tell us what you need and we'll make it work. So we really started our business on the hope that it was going to work. And we structured our business originally around the regs as they existed at the time. And now there's a lot more flexibility, especially around my point, around owning, selling individual assets out of the fund. So we were certainly careful with how we structured it, but we were operating on the assumption that it was going to get fixed. And it did get fixed. And it's Imperfect, but it's pretty good. I mean, what you said remains true. We've got 31 months really to deploy the equity capital into the opportunity zone. You know, there is relief for existing investments now from COVID on federally declared emergency areas. So, you know, no real concern about delays that may or may not have happened over the past four or five months. So, you know, that's still. That all remains true. But, you know, I think the legislation itself now is in a pretty good spot, relatively easy for us to manage. I think there are still some tweaks that are out there that potentially will come out. One important one I think is that we're really excited about, and hopefully it happens, is as of today, you're an investor who realizes the capital gain is taking the risk on the capital gains rate. In 2026, it could go up. Right. What legislation that's out there now, that's being drafted now is going to pin that to the current capital gains tax rate, which we think would be another great advantage and frankly, probably one of the only arguments against making their counterarguments to that. But it's one of the main arguments against making opportunities on investment is that you take that risk on the cap gains rate in the future.

Perfect. So I read in Bloomberg, so I know you've had two successful funds that you've deployed 950 million across 21 properties, predominantly multifamily. And I know I read that you were in fundraising for Fund three. But why don't we talk about, about the first two funds? What do they have in common? I know there are timing requirements as far as when someone has the gain and making sure that you can deploy it on time. So how do you manage all that to make sure that you have a portfolio teed up for your investors?

Yeah, that was always the trick of the business when we decided to get into this is it was never going to be easy because you're kind of in a position where you've got to tee up assets and investors want to deploy their, want to invest their capital, but you can't raise blind pool dollars because you've got a limited window. Once they've realized your gain, they only have so much time to deploy the capital. So we were really in a position where we had to go out and convince joint venture partners, frankly, that we could pull that something we could pull together. And I think we were, you know, we had worked within the structure of the existing regulations, which were more complicated last year than this year, and that forced us, you know, into a, you Know, a structure that was, you know, probably not ideal at the outset, but actually probably worked out well because, you know, we were able to deploy that capital early in the year. We identified a number of deals, deploy the capital into those deals, and that allowed us to build a lot of credibility in the overall universe with investors, with sponsors. And then we went out and did it again and now we're going out and doing it once more. I mean, we did deploy, as you said, $950 million last year. We anticipate deploying a similar amount this year. You know, the momentum in the business has really picked up over the past couple months as the markets rebounded as investors have somewhat recovered from the shocks of the pandemic. Obviously, there's incredible uncertainty in the world today and that remains. But I think that there is kind of more interest out there in doing something like this and investing capital in qozs.

Yeah, I mean, I've heard you speak on this a couple times. And I think what's amazing, what you've been able to do is to line up all these development opportunities to you get site control by tying up the properties and I don't know if you're trying to get them entitled before you actually go hard and close on them, but you, you know, having that flexibility up front so the clock doesn't start ticking until you need it to. So, I mean, you're investing all over the country. I see you've done a lot in Salt Lake City, Atlanta, Louisiana, Scottsdale. I mean, are you. So you're going to these landowners and you're saying, you know, look, here's our track record, we're established, you know, what's your proposal to them?

Do?

You say, look, you gotta wait because we've got our next fund and once we can deploy, you gotta give me time. How does that conversation go?

Well, so this is actually, this is a good segue. I mean, our Opportunity Zone business is a little bit different than our other businesses because we talked a lot about being vertically integrated and we are, and we've got a very capable development team in house at Bridge. But we can't deploy a billion dollars a year in equity development with our team and develop it ourselves. So our strategy in OZ has actually been to work principally with sponsors. So, you know, what we have done is we've gone and said to sponsors, you know, listen, you've got no Z site, you know, you need equity capital. We're raising OZ capital. You know, let's, let's work together on this. And that's really where we've been successful. So we've been able to, you know, we're not taking any entitlement risk in this fund. You know, we've been able to, you know, to source transactions where developers, you know, local developers, in some cases, national developers, in other cases have been working on these deals for, you know, six months to five years depending on the situation. You know, they've, they've, they've put in the entire, they put in the pre dev dollars, they've gotten it entitled, they've gotten it de risked and we're coming into that transaction on a de risk basis at their, at their cost basis by the way, not generally paying a markup. So you know, we've, you know, we did, there were a couple cases where we bought land or we'd rather invest in land that a sponsor owned. But most of our deals have been working with sponsors who have deals tied up but haven't taken down the land. So we're able to come in at time zero, take down the land with them and deploy our opportunities own capital right into the deal.

Great, that makes a lot of sense. So for our listeners and I know given the size and scale of what you're doing, I'm sure you're talking to best in class sponsors. But for our smaller investors who might have a site who might qualify for an opportunity zone, what would be your advice to them on how to go find the capital and execute on that?

Well, I mean the first thing is that you have to have your plan, right? And I think that's when this business started like late 2018. It was a little bit of the wild west. Everyone was coming up to you saying I've got the site in the oz. I said you great, what's your plan? Well, I don't know, but it's a great site. You know, to invest in Oz. I mean you really need a clear path to construction and development, right? So again, to my point about entitlement, it's not just entitlements, key component of it, but you know, somebody who's got a fully entitled piece of land but no plans, don't know what they're going to build, I don't know what it's going to cost. I can't spend any time on that. Right. I need a package that is as close to being ready as possible. Right. You need to have some certainty around what you're going to build. You know, you don't have to have 100% design drawings, but call it 50% design drawings. You've had to invest that couple hundred thousand dollars in pre development capital to get that work done. You know, even if you're not at gmp, although it's great if you are gmp, right. You've got to have real estimates from a real contractor based off 50% design drawings. You know, if it's a multifamily project, it's hopefully a multifamily project. It's not. It's going to be tough to do in this market. Right. You know, in a perfect world, you've talked to lenders and you've got lenders that are interested in it as well. Because that's really another key risk that's more prevalent today or more important today than it was five or six months ago is, you know, it is, it's just harder to find financing. Construction financing. Right. There's just less of it. And it's available for solid multifamily deals at reasonable loan to cost. But you know, for larger commercial deals and for larger deals in general, it's very hard to find. So, you know, we've got to have these deals that either have financing lined up or eminently financeable. But I mean, the biggest issue that we have is, you know, when somebody shows us the deal and it's just more a little pie in the sky, some conceptual designs and drawings. Well, that looks great. The location looks fine. But come back when you're serious. Right. So we need something that is actionable. Right. And I need to know that within, call it 12 months from today, we're going to be coming out of the ground, hopefully Sooner. But within 12 months from today, we're going to be coming out of the ground. Because if it's earlier than that, I might say this is interesting, but again, I can't really spend time on it. I need actual properties that are ready to go. And if you've got that, if you've got that kind of package, come talk to me. Family offices can be very interested in this type of product. There's only so many firms that are out there allocating dollars, but there are a handful and there are ways to raise the money. It's not easy to raise the money, especially as the dollars get bigger. So smaller deals are easier. But you know, if you have that, if you have that package in plan, you know, and you can really give your, your investors a path to execution here, you know, that's, that's really what's going to differentiate you because that's, you know, that's again, we see, you know, we're Looking at hundreds and hundreds of deals and the ones that we focus in on are the ones that, you know, even if it, maybe there's better deals out there, but if they're not at that stage where we can underwrite it and get comfort around it, it's just not worth our time.

Perfect. I want to talk about the cities that you invest in. What do they have in common and what do you look for in a site? How do you choose the cities where you want to invest in?

Yeah, so at Bridge we focus on about 40 markets or so nationwide and generally it is the high growth secondary markets as well as the high barrier primary markets. But really our bread and butter has been in the high growth secondary markets, right? The Atlanta's, the Dallas and Austin's, the Phoenix, Scottsdale, Salt Lake City, Denver, a lot of the Seattle's, Portlands. So we're focused on these markets that have strong fundamentals, strong demographic growth, housing deficits. Even though a lot of them have a lot of supply, multifamily supply coming online. If you look at the aggregate housing construction, single family and multifamily, generally speaking, it doesn't come anywhere near meeting the needs of these cities as they grow. So, you know, it's a lot of these, you know, in many cases lower cost cities. Not in every case, but you know, it's the cities that you think about that have been the winners for the last 10 years as folks have moved from the higher cost, you know, urban areas. Right. So again, I mean I mentioned a lot about the Florida markets, you know, the Carolina markets, you know, Nashville's of the world. You know, those are, those are really, you know, those, A lot of those southeastern Sunbelt and southwestern west coast markets, they have really been our bread and butter. And that's, that's really where we spend a lot of time. You know, we're looking at some stuff in New York City, but frankly that's, you know, that's, that's not, you know, bridges expertise and there are plenty of folks who can focus on New York City and markets like that. So we kind of tend to focus from, call it, you know, DC, MD on down and around, you know, up through the Pacific Northwest. And that's really served as well. And you know, when we got no Zs, you know, it was really an extension of what we were already doing. So the benefit of having this large national platform is, you know, if I want to go and look at an OZ site in Atlanta and I want to figure out what's going on with that particular Market from a multifamily standpoint. I go talk to our local VP of, you know, in our bridge property management group who runs Atlanta, and I figured I can know everything that's going on there. So it's been less about us looking for new markets than it is about mining the markets that we have. We've got a phenomenal research team internally that has, that can rank every OZ in the country. So, you know, one of our first passes is we, you know, we run the OZ through our research team through their proprietary model, we rank the oz. But, you know, it's really been about, you know, working in the neighborhoods and the towns and the cities that we already know we have experience with because every city has Oz, right? And they all have good Oz and most of them have really bad Ozs too. And it's just a question of finding the good ones and the right projects in the good markets. So it's really been a natural extension of our existing business.

So I think you just answered my next question, which I was going to say, you know, when the Opportunity Zone program came out, I think it was CoStar started tracking all the funds that were popping up. I think there was 118, 18 of them. @ one point they were going to go raise over $100 billion. Fast forward a year and a half, two later. I mean, I don't even know if there is a stat on it, but there has been some criticism over the program that it wasn't as big of a success as they hoped because a lot of these funds didn't end up raising money or was well below. But I mean, it's clear to me why you all have been successful because this isn't just something new that you see started doing. This was a business plan that you had already been working on for four decades.

Yeah, I think that's right. I mean, I think it was, you know, this was not a, you know, there were a lot of, you know, a lot of choose my words carefully here but you know, less experienced players that wanted to come into the space and they thought it would be easy to raise money, but it's not easy to raise money. And investors aren't dumb. Right? You know, they're. When you're asking them to give you their capital for 10 years, you know, they're going to do their work, they're going to do their diligence and they're going to figure out who knows what they're talking about and who doesn't. And it's just, it's very complicated. Right. If you take your typical, you know, real estate private equity firm. Well, we're all used to raising, you know, money from institutional investors at 50 to $500 million blocks. Right. Depending on, you know, if you're Blackstone, you're not getting out of bed for somebody less than $50 million. The investor base and QZs, these are taxable. So, yeah, we do have some big tickets, insurance companies and the like that are interested in the space. But a lot of our investors are just everyday ordinary people. So that bridge from, and pardon the pun, from these relatively small investors who want to invest with an opportunity zone strategy, you know, that's not simple, right? You got to find it. You got to find a way to get to them. You've got to find a way for them to know who you are, for them to get comfortable with you, for them to trust you. And they have to find a way to you because, you know, if I'm just sitting on the street and I say I want to invest in opportunities on, well, okay, there's probably a guy, your country club that you know, and you probably don't want to give him money, frankly. Right? But finding, you know, finding a good platform and a good manager, it's not easy, right? You can't just, you know, pick up the phone book or hop on the Internet and figure it out. You know, you generally have to go through it, a third party. You've got to go through your broker at Merrill lynch or Morgan Stanley or something along those lines. So it's, you know, it's challenging. And I think people really misunderstood the complicated nature of what this was and how it would happen. And people got blinded by a headline now that said, you know, we don't really know what the stats are because our reporting, but there was certainly somewhere north of $10 billion raised last year. And, you know, I'm not sure if more or less will be raised this year. But, you know, I think, I think the program will do some good, right? I mean, will it be $100 billion? Probably not, but you never know. I mean, this is, I think, a program that should last, frankly. I mean, I think that the benefits to an investor are very strong. Even after you get through this initial period where the step down in your taxes due 15% that went to 10% that goes to zero in 2022. Even after that, being able to invest in real estate and hold it for 10 years and pay no capital gains, well, that's a great, great opportunity, right? So I think that this strategy will persist and frankly, it's probably better that it doesn't have the headlines that it had a year ago. I think that takes away a lot of the players that should have been here in the first place. And I think that means that the only folks that are left are serious investors who know what they're doing and will create good projects and provide solid returns for their investors.

Well, this was fantastic. I really appreciate your taking the time and giving our audience perspective on this incredible opportunity. And no pun intended and just, I guess closing words on the way out again for our aspiring investors. And I think you already said it before, but my takeaways were being prepared, getting project teed up and ready to go. Anything else to get someone prepared to do business?

Yeah, I mean, I think that is the biggest. And you've seen a lot of these too. We see presentations all the time, right? We see pictures all the time. And it's not the shiny pictures, it's not the high level, it's the nitty gritty. This is how we're going to get from A to B. Here's my Gantt chart, here's how it's going to happen. You know, here's my diligence, here's a pretty package with my comps, my land comps, my sales comps, my rent comps, you know, give me all the information, right? The less work I have to do, the easier it's going to be for you to get this deal done with me. Because we got a lot to do and we're constantly looking for, you know, for low hanging fruit, right? So I mean, it really is about preparedness and I think that was, you know, it was something that, you know, we've always seen it all of us have always seen in our careers as real estate investors. And you know, it is a bit of a promoter business sometimes, but you know, in the early days of Qozs in late 18 and 19, man, the presentations I saw, you know, folks thought that they had a piece landed in Oz and that was all they needed. And that was never the case. That was never the case. But I think especially now, you know, it is all about preparation and planning. That timeline, that plan, that specificity is really, really critical to getting investor interest.

Perfect. Well, great advice. Thank you again for joining us. Really appreciate it.

My pleasure.

This is your host, James Nelson from Real Estate Investing live from New York. We're going to have a quick word from our sponsor and we'll be right back. Thank you. Welcome back everyone. This is James Nelson, your host of Real Estate Investing Live from New York and back with us on the show are Josh Simon, who's vice president of ebi, and also Jeffrey Carlton, who is founder of Heat Watch, as well as Carlton Consulting and, excuse me, Carlton Energy Consulting. So, gentlemen, thanks for coming back on the show today.

Anytime, James. Thank you for having us.

Perfect.

Thank you, James. Good to be here.

Yeah.

Last time you were on the show, we went through all the considerations up front and how you help buyers with their due diligence, thinking about what type of capital improvements might be needed, environmental considerations, and as far as what potential energy savings might be available. So I thought for this show it'd be great to kind of dig in a little bit more about how to improve the performance of the building. So, Jeff, why don't I start with you? Maybe you could talk about some of the things. And I know that this came out of your Heat Watch company that you started after being in the private sector where you were Saving energy costs 20, 25%. So what are some of the practical things that owners can do not only to make their buildings run more efficiently, be better for the environment, but also produce more of a savings?

Yeah, Typically the lion's share energy savings is in the central systems, whether that's a central heating system where you're providing heat to a complex, or a central cooling system where you're providing air conditioning, or some buildings have both. So really what you want to make sure is you have a handle on when do these central systems need to run and is there any feedback. So, for example, if you walk into a building and the heat is being controlled by just one single outdoor thermostat, 98% of the time that building is going to be overheated. So you want to make sure that your central heating system is tied to some sort of indoor temperature sensor network that shuts the boiler off based on indoor temperature targets, for example, 72 degrees and also schedules. So if you have a commercial building and you're not obligated to provide heat and hot water on Saturday and a Sunday, you can drop those settings. You could set an indoor target of, call it 55 degrees just by trimming excess heat. That's where you save significant money. A lot of energy is wasted because systems run when they don't need to run. Very similar with air conditioning, there have been buildings that we've taken on air conditioning that just by setting up a schedule on a weekend and off times and holidays, you can save 15 to 20% just by not wasting fuel. So your central system making sure it only Runs when it needs to run is a critical item to reduce your energy consumption.

Yeah.

And I know a lot of these go hand in hand with the LEED certifications as well. And I know having those control monitors, it also works for electricity. I know in New York, there's one Bryant park that's LEED platinum, and the lights have sensors and they switch on during different times of the day. The way power is sent throughout the building, water and sewer. But I would imagine that there's other things as well that could be better for the environment and also run a building more efficiently.

Yeah, lighting is a big one. Simply putting in motion sensors and stairwells. And again, it's a similar concept, having lights not on when they don't need to be on, when people are not in rooms. Occupancy sensors, they all seem very small, but over time, on a large scale can really reduce the energy consumption of a building. Lighting upgrades insulation, especially on pipes, if you have any pipes. Insulation is typically required in New York City. Those are really some of the very, very large items if you're looking for a more capital intensive upgrade. If a boiler is near its useful life or any sort of central system is near the end of its useful life, 95% of the time they're oversized. So potentially looking at putting in smaller, more efficient equipment as your boiler or cooling system gets toward the end of its useful life is also a big return on investment.

That's awesome. Thank you. Josh, you make recommendations with your property conditions reports. Do you also price out kind of what it would cost or how to improve?

Yeah, we put costs in on the property condition assessments. The PCAs all have costs attributed to, you know, any deficiencies. So we have immediate needs which generally are required. You know, anything from zero to one year, anything from zero to three years or one to three year is a short term replacement. And then we have the replacement reserves where we go out, you know, out to, you know, we could go out 20 years where, you know, you look to see, you know, when systems maybe come and do if they're at their end of their, you know, useful life, if they're out of warranty. And so, you know, we'll put a recommendation for potential reserves. It also depends on, you know, kind of the condition and the maintenance of some of those systems and components of the building.

Perfect. And Josh, do you do most of your work before the purchase or how involved are you or when would you get involved after the purchase?

I mean, a lot of work is on the front end. I'd say you Know, probably half our business is on front end acquisition where we're doing these assessments for the purchase. But many times we do come in, probably half the work is done, you know, over the life. But generally it's being driven by lenders. So we'll come in on behalf of refis where lenders would require a property condition assessment and environmental phase one on the refi. So depending on the loan term, you know, five, seven, 10 years, then we'll go out on the reserve schedule, the loan plus two generally. So if you have a five year loan, we'll do a reserve seven years and that's usually a lot of times either on acquisition financing or refis.

Perfect. I also want to talk a little bit about the environmental and I know last show when you joined us you talked a little bit about the phase one when you might need a phase two. I mean if you have an environmental issue where there needs to be remediation, so you bought a property, maybe it's a piece of land, you know, that the conditions need to be remedied or they need to be monitored. Do you get involved in that aspect as well?

Yeah, so I mean we do. EBI actually stands for Enviro Business Inc. As an acronym for, you know, the founding of the company. So our roots go back in the environmental space, you know, back to 1989. So we celebrate our 30 year anniversary. We are national and we are doing environmental work nationally. We started kind of doing phase one baseline reports and then a lot of times those would come back with kind of concerns or recommendations and then invariably clients were like well what do we do now? So over 30 years we sort of developed out other services which would include phase twos and site investigation, remediation, mold and indoor air quality testing, lead based paint, lead in water. So we do, we do a lot of surveys and testing, sampling, radon. It's been a big, big, you know, a big issue over the last couple of years it's become more pronounced, you know, in the tri state and around the country it's more stringent. So yes, we would do, you know, phase one generally may have a recommendation. You know, let's say there may or may not be an underground storage tank. Based on historical, based on what was seen at the site, maybe was used to be oil heating and it got converted to nat gas. And then you know, there's remnants of, you know, cut pipes or something of that nature where you know, the question comes up, you know, is there an underground storage tank or not? So generally we would do the next Steps to decipher if, you know, if there were other concerns that needed to be remedied.

Perfect.

So we only have a couple minutes left. But Jeff, you know, I know that you have specialization not only in retrofitting buildings, but why don't we talk about new developments where, you know, for those who might be looking to build ground up, you know, what type of technologies exist today? I hear a lot about passive houses today. You know, redundant systems. I mean, what, you know, what is the standard today? If you were building a new building from scratch, what are some of the new technologies that exist today that people might be thinking about again, not just for the good of the environment, but also because that they're going to be a lot more cost effective in the long run.

Yeah, that's a great question. So a passive house is a house that has such a high level essentially of insulation that it needs very little energy to operate. Whether you go for the actual passive house certification or if you come close to it for focus on your building envelope. You know, your windows, very high r value for your for your walls and your roof. Because the more work you do on the envelope, the tighter and better insulated the envelope, the less energy that's needed to heat inside. So a lot of these older buildings use a lot of energy because all the heat that you make just goes right through the bricks and right through the windows. So new construction is an opportunity to build a great envelope. It's a great opportunity for sub metering right from the very beginning. So put sub metering electric of potential commercial spaces and sub metering water of commercial spaces. It's a good opportunity to make incoming tenants responsible for those costs. So they're more likely to be cognizant of usage. So building a great envelope, considering heat pumps, electrification, air source heat pumps, individual heat pumps for spaces, that's what a lot of buildings would love to do, but they're stuck with older systems. And the retrofitting cost is so high. While you have open walls, you definitely want to consider heat pumps for heating and cooling for the building. Those are the main things that I would look at if I had the opportunity to build a building from scratch.

Great. And what about building materials? Any thoughts on that? I mean, are there any savings? Is there as far as whether you're doing a low rise, if it's stick construction or block and plank? I mean, any preferred building method where you might have some energy savings?

I don't have a particular building method that I would feel comfortable recommending. I would focus on your R value and I would focus on getting as close to or hitting the passive house requirements, you know, as possible. Thinking that every dollar you spend now to build a great building envelope is money that you save in the long run. Less energy needed to heat and cool the space.

Awesome guys. Well I really appreciate you coming back on the show. Really informative and appreciate it once again. So that's it for the show again. If you have not connected with us through our social media channel channels, please check out James Nelson NYC and make sure and tune in next week.

Thanks again.

Thank you for tuning in this week to Real Estate Investing live from New York. Please join your host James Nelson for another program next Tuesday at 7pm in New York, 4pm Pacific Time on the Voice America Business Channel. All shows are rebroadcast Wednesday mornings at 7am Eastern Eastern Time, 4pm Pacific Time as well as always on demand. We'll talk again next week.