(EDITOR’S NOTE: We continue our annual “Investor Outlook” series with another important question for our panelists.)
When we asked your thoughts a year ago about the federal Opportunity Zone (OZ) program, final regulations had not been issued. Now, they have. Are you involved in the OZ program? How are you seeing it playout in this region?
- John Morris and Geoff Robson, Fund Managers, The Lighthouse Fund. The OZ program creates a nice tax “wrapper” on a deal which could enhance the overall return for the right project, and that is creating a good deal of investor interest. The OZ label is really “sexy” right now and is generating investor interest. The biggest problem we see is that the tax “tail” is starting to wag the underlying investment “dog.” In other words, there are lots of OZ funds chasing deals, and this may equate to good economic investments. The program is generating interest in the marketplace and will drive more dollars into qualifying investments (whether they are good or bad).
- John Bruck, Knoxville-based Member, and Scott Jacobs, Executive Director, Queen City Angels (QCA). We have several angels who are individually involved in OZ projects, but we are not as a group or fund. In short, we’ve seen it play out very slowly and are focused mostly on large real estate projects. The benefits of the program should, over the next few years, stimulate investments both in real estate and operational companies in economically challenged areas.
- Grady Vanderhoofven, Founder, President and Chief Executive Officer, Three Roots Capital. We remain believers in the possibilities of the OZ Program. To date, the program has not lived-up to its potential, but people are still trying to really understand the program. The regs actually are not entirely finalized yet, and that is part of the problem. From where we sit, we see lots of opportunity in this region, and we are bullish on the OZ program overall. We did one deal in an OZ this year, but that deal did not involve an Opportunity Fund (it could have). We are working on several deals right now that are located in OZs. It’s unclear at this moment if any of them will use an Opportunity Fund as a source of equity.
- Eric Dobson, Chief Executive Officer, Angel Capital Group. We are not but may be engaging soon in the OZone program. There are a number of challenges that the OZone regulations face for investing in companies. Whereas it is easy for several individuals to engage in the process, organized angel and VC capital simply does not make economic sense without some significant and complex structures to facilitate the investment and tax treatment. I continue to believe it will be primarily real estate-based. I continue to believe it will be the realm of the small tight-knit group of investors or the very, very large venture fund investors ($100 million plus). The regulations seem to box-out the angel investor market, which is a shame given organized angel investors are the catalyst that creates start-up ecosystems in my opinion. In my mind, the big question is how is the real estate being created going to prosper unless companies and tax-paying employees take up the obvious slack that is being created? It is a staggering opportunity for investors, but, as far as I can tell, only the big money coastal investors are going to make money from this program. Whether that is by design or accident I hazard to guess.
- Tony Lettich, Managing Director, The Angel Roundtable (ART). ART is not involved in the OZ program. Based on our objectives and focus areas, we have concluded others are better suited to pursue OZs and related programs. However, we see significant interest and traction developing throughout the region. We are optimistic that the program will facilitate opportunities and investment in East Tennessee.
- Partner Courtney Watson responded for the Chattanooga Renaissance Fund (CRF). I have been following the Opportunity Zone program since summer of 2018 to understand how CRF portfolio companies could leverage this new tool to help grow their businesses. Furthermore, Opportunity Zones caught my attention as I saw its intersection with impact investing as very exciting. By the end of 2018, the regulations were more actionable for real estate rather than for operating businesses. At the beginning of 2019, I decided to work more intentionally in the Opportunity Zone space and to also focus on community-based consulting projects. I am now part of a team that has launched Chestnut Opportunity Zone Fund, an impact-focused Qualified Opportunity Fund that seeks both financial and social returns by investing in transformative real estate projects that align with community need. Chestnut Opportunity Zone Fund is one of five funds managed by Chestnut Funds. As we are investing not only in the Southeast but also in the mid-Atlantic, Northeast, and Rocky Mountain regions, we have seen how various communities and states are approaching Opportunity Zones. In Tennessee, the Department of Economic and Community Development is helping draw attention to our state and support communities by hosting regional events. We see various service providers, such as law firms and accounting firms, and local economic development organizations host OZ information sessions. While these are helpful events to increase foundational knowledge of the incentive, there remains great opportunity in our region to expand the conversation, increase the capacity of smaller communities, articulate key community-focused priorities, and coordinate efforts from a public-private perspective. The intention of Opportunity Zones is to mobilize private capital to invest in some of the highest-need areas in the U.S. This is one additional tool in our community and economic development toolbox. With thoughtful collaboration, prioritization of key community goals, and aligned local and regional incentives, communities can be better positioned to use the Opportunity Zone tool well for maximum community impact.
- Brandon Bruce, Entrepreneur-in-Residence with Greater Sum Ventures. The recent Opportunity Zone Workshop hosted by the Knoxville Chamber, Knoxville Entrepreneur Center, and Tennessee Department of Economic and Community Development shows that the program is gaining momentum here. The new Tennessee state directory of OZone projects and funds is a great resource for connecting local opportunities with capital.
- Ken Woody, President and Partner, Innova Memphis. Still a challenge for a fund with a seven- to 10-year life cycle to invest in a program that mainly pays out after 10 years. It’s not a great fit for us.
- Kristina Montague, Managing Partner, The JumpFund. I have seen several local groups considering OZ funds or investments, but limited usage given that the regulations are extremely constricting for investors. The short term liquidation horizon limits long-term capital investment, which generally includes real estate. I have yet to see the business development side take-off here as well, though I know there are folks considering how to best leverage the OZ opportunities for small business.
NEXT: Our panelists look into their crystal balls.