See all

A Conversation with Steve Glickman and Nic Millikan on the Framework of the Qualified Opportunity Zone Program

About Steve Glickman:

Steve Glickman is the Founder and Chief Executive Officer of Develop LLC, an advisory firm dedicated to building and supporting Opportunity Zone Funds seeking to positively transform low-income communities across America, and he is one of the nation's top Opportunity Zones experts who is a sought after speaker in communities around the country.

Steve is the Co-Founder and former CEO of the Economic Innovation Group (EIG), a bipartisan research and policy organization in Washington, D.C. focused on addressing economic inequality through the creation of a new marketplace for private equity investments in distressed communities. Under Steve’s leadership, EIG was the architect of the $6 trillion Qualified Opportunity Zones program, the largest community investment incentive in U.S. history. EIG conceptualized the program and drafted the underlying legislation -- the “Investing in Opportunity Act” -- championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ), which received nearly 100 bipartisan congressional cosponsors before being passed into law in 2017.

Steve is also an Adjunct Professor at Georgetown University, where he teaches on economic diplomacy and international trade in the School of Foreign Service. He sits on Georgetown's Board of Governors and the Board of The NewDEAL.

Steve previously served in the Obama Administration from 2008-2013 – as a senior economic advisor at the White House, where he managed trade and investment issues, manufacturing, and small business issues for the National Security Council and the National Economic Council. Steve also held the position of Deputy Associate Counsel at the White House, as well Chief of Staff for the U.S. and Foreign Commercial Service at the U.S. Department of Commerce.

Prior to his service in the Administration, Steve worked on Capitol Hill as Counsel to Chairman Henry Waxman on the U.S. House Committee on Oversight and Government Reform and as a legislative aide to then-Congressman Ed Markey. He began his legal career as a Federal criminal prosecutor for the U.S. Department of Justice in Washington, DC and as an Investigative Counsel at the Democratic National Committee.

Steve received his B.A. and M.A. from Georgetown University, J.D. from Columbia Law School, and LL.M. from the London School of Economics and Political Science.

Steve’s work has been featured in the AP, Atlantic, Axios, Barron’s, Bisnow, Bloomberg, Chicago Tribune, CNN, Crain’s, Fast Company, Forbes, Fortune, Impact Alpha, Inc., The Los Angeles Times, Marketplace, The New York Times, NPR, PBS, Politico, San Francisco Chronicle, TechCrunch, VentureBeat, Vox, Washington Post, and The Wall Street Journal.

Steve lives with his wife and two sons in Washington, DC.

Moderator: Thank you for joining the CAIS Opportunity Zone Webinar with Steve Glickman. Prior to beginning, we would like to read a brief disclaimer. The views expressed on this update solely reflect the views of Mr. Glickman and may not reflect the views of CAIS or the broader financial industry. This overview is for informational and discussion purposes only and should not be relied upon in connection with an investment decision or any other purpose whatsoever.
Nic Millikan: 00:08 - Hi everybody. Thank you for joining the CAIS Opportunities Zone Network update. My name is Nicholas Millikan. I am the Director of Investment Strategy here at CAIS and I'm joined today by a very special guest, Steve Glickman. Steve's the Founder and CEO of develop, which is an advisory firm dedicated to building and supporting Opportunity Zone funds in the broader initiative. He was actually one of the architects of the opportunities zone programs and someone who is intimately familiar with all of the details of the program. He was the Co-Founder and Former CEO of the Economic Innovation Group, which was a bipartisan public policy group that developed the conflict concept and legislation that launched opportunity zones. Prior to that, he was a senior economic advisor to the Obama administration. He's on the board of the new deal. He's an adjunct professor at Georgetown, where he actually went to school, has JD from Columbia, Master of Law from the London school of economics. As someone who is an absolute expert on this and someone that's no better to talk us through this.
Nic Millikan: 01:05 - Steve, welcome. We appreciate your time. Why don't we jump right in and see, get a little bit more information here about opportunity zones. So why don't we start at the top. So you obviously helped create the framework for the opportunity zones program. Can you give us an overview of the tax benefits of the program and anything else that pertinent to it?
Steve Glickman: 01:25 - Sure. Well first, thanks for inviting me to join this conversation. You've obviously got an important network of stakeholders for this program who are really the core of it. This is, you know, a program that's designed to bring private capital off of the sidelines and put it into the marketplace. And increasingly there are questions and excitement as this marketplace is being formed. What I think has gotten investors', at least, initial attention is the unique structure of the way the tax benefits works. So it is designed to be a community development program that's set up much differently than previous attempts at driving community investment dollars by creating a tax incentive that's really aligned to long term private equity investors in loan countries around the country. And the draw for those investors is this two sided coin that relates to favorable tax treatment of capital gains.
Steve Glickman: 02:42 - At the front end, and just to take a really simple example, let's say you've got 1,000 dollars in gains in the stock that you sell. This program is designed so you can roll over just those gains. You take back the basis into an opportunity zone fund, and by doing so, you don't have to pay taxes on that 1,000 dollars until 2027. So the first piece of this is the deferral that investors get. If you hold your stake in the fund long enough, you can get up to a 15% deduction on that deferral. But at the end of the day, investors are going to pay 85% of that original tax bill and that 1,000 dollars when they file their taxes in 2027, if not before. But the big incentive is on the backend. So you take that 1,000 dollars that came out of the sale of that stock and you invested in a fund that, you know, puts it in a piece of real estate that at the end of 10 years is now worth not 1,000 dollars but 5,000 dollars, which would be a pretty solid returning real estate project.
Steve Glickman: 03:57 - Normally you pay taxes on that 4,000 dollars of new gains and in this program that 4,000 dollars is now tax-free as long as you've held your stake in that investment for 10 years or more. And, to give you a sense of context, that makes this the most powerful tax incentive in the code for capital gains. It's the only way to get that full forgiveness on the capital gains tax without having to, to die, which is really the only other way you get that full step up and basis. And so it becomes a very powerful increase on the returns of any fund you're investing in that's dedicated to these communities.
Nic Millikan: 04:39 - What kinds of investments can you actually make within an opportunity zone? Is there specific investment types that are eligible or is it anything and everything?
Steve Glickman: 04:51 - Well, it's almost anything and everything. There are some exceptions, which I'll describe quickly, but fundamentally it's anything you can make an equity investment in. And so the real broad categories are businesses that you can buy stock in, partnership interests, or property, which typically means real estate. What that means practically is you can invest in everything from, really any asset class of commercial real estate, a multifamily office, industrial retail, and beyond. And you can invest in sort of real estate adjacent industries. Think of it as like renewable energy infrastructure, telecommunications equipment, and you can invest in just about any type of a business. Entertainment companies, technology companies, franchises, grocery stores. There's no significant legal limitations.
Steve Glickman: 05:55 - There's some practical limitations. That's your business, to qualify, has to have a nexus to those communities, both the physical nexus where it's got its property in those communities and that operational nexus where the management or the operations or the employees of that company are predominantly located in these zones. The law lays out a few exceptions to ensure that these are the sort of investments that have real economic benefit to the communities. The one big category of exceptions is you can't invest in, essentially financial services companies. So, companies that are, you know, primarily making their own investments or making loans. So that's a prohibited class of investments. And the other one are called sin businesses. And this is kind of delineated in the law. Yes. Specific types of businesses that Congress for a long time hasn't wanted to see in low income places. That's things like golf courses and country clubs and massage parlors and liquor stores and other businesses. And there is, you know, a handful of them, it'll list in the code. But other than that you can invest in just about anything.
Nic Millikan: 07:07 - That's great. Before we move on, what kinds of gains are eligible? Is it a gain from any asset or is it specific assets that you need to sell in order to realize again, that would qualify?
Steve Glickman: 07:21 - So, any type of capital gain. So, you know, typically that you're talking about a stock in the market, private companies, real estate, art, but any asset that generates a capital gain, the capital gain can be short term or long term. Not that many people realize that the statute and the regulations allow for short term capital gains. So that could come from a, let's say, all of cryptocurrency or from a trade that generate capital gains and that would be the capital to reinvest into this program, but it's designed pretty broadly. Now, you can't just bring cash in and get any ... that won't give you any of the incentives. It's got to come from the sale of an asset and the movement of those dollars within 180 days into a fund that's investing in these opportunities zones.
Nic Millikan: 08:18 - Right. So, I guess the purpose here is to really highlight those gains rather than like a 1031 exchange where you have to reinvest the principle. This is principally focused on the gain only, which is a differentiating feature. That's a really good background on the program. Thanks Steve. Obviously when you were at the Economic Innovation Group, you were a big part of pushing the program forward. Can you talk a little bit more about what your motivations were for the program and what you actually set out to achieve? Cause you've mentioned before, in other appearances, that capital gains is one of the greatest resources that we have here in the US and the estimate is there's 6 trillion dollars of capital gains out there. So, what were you really trying to achieve through the opportunity zones program.
Steve Glickman: 09:03 - Well, just to provide some context, I mean, opportunity zones are really a response to, in part, my experience in the Obama administration, you know, focused on work around the revitalization of manufacturing communities. And Sean Parker, who is my co founder, when we launched the Economic Innovation Group, his experience as a philanthropist, providing, you know, charitable contributions in communities. And, you know, both feeling that from the government lens and from the philanthropic lens, there were real limitations around the impact and the capacity of those types of investments to really move the needle for distressed areas. And, to make a long story short, you know, when the Economic Innovation Group first started, we did a lot of research in what was happening in communities around the country and a big source of the economic disparity we see within and among cities is related to access to capital and creation of business activity.
Steve Glickman: 10:13 - And there's a real concentration happening around those tech enabled hubs around the country, much less happening in small towns and manufacturing cities and rural communities and, you know, agricultural economies and this is the problem the U.S shares with lots of other countries in the world and with the UK and with Europe and Korea and Japan and so on. And so the insight behind opportunity zones was let's mobilize the market. Let's take some of this passive capital off the sidelines that had done really well over the course of the recovery since the recession in 2008, 2009 and let's give it a reason to engage in these places that we were desperate to see more equity investment and let's build a marketplace. Let's see if we can create an incentive powerful enough that it builds up local marketplaces in all of these communities and make up to be a big national marketplace of tens of billions of dollars a year.
Steve Glickman: 11:16 - And this is, in some ways, a big experiment and whether, you know, the tax code, which is the most powerful tool Congress has to incentivize economic activity, whether, you know, we could create a program that was powerful enough and also focused enough to create real business activity in these what are now 8,766 opportunities in communities around America.
Nic Millikan: 11:44 - Let's talk about that. So, how were the places selected and where are they geographically concentrated, if they are, or of that nature. How did they get into the program?
Steve Glickman: 11:56 - This his was another unique feature of the opportunity zones Program. Typically in community development programs in the US the federal government is making the decision of were those, you know, tax credits typically are allocated. In this program it's set up much differently. The federal government set a baseline economic criteria of what are called low income community census tracks. Those are places, pretty small places of two to 8,000 people that have high poverty rates and or low incomes. And of the, you know, map of the country, they make up in total about 40% of the country. And so governors were told they could pick one out of every four of these census tracks in their state to be opportunity zones.
Steve Glickman: 12:44 - So, the governor's really made the determination here and as a result you've got, you know, depending on how you calculate it, somewhere between 10 and 12% of the country, which is now an opportunity zone and it's about 75% urban, 25% rural. There are opportunity zones in all 50 States in five US territories, including all of Puerto Rico, or almost all of Puerto Rico and DC. And, you know, they, depending on what governors selected and the economic kind of map of those States, in some places these are big rural tracks. That's particularly true in the West and the South and in the Midwest these are the opportunity zones in the downtowns of entire cities. And, you know, you see, I think, a fairly good coverage of opportunities in places that have needed capital for a long time and may be on the cusp of something interesting but just can't get private markets to pay attention.
Nic Millikan: 13:46 - That's a good point. So the low income census tracks are really selected from data from back in 2010, I believe, and obviously since then the recovery out of the global financial crisis has been very much uneven. So, does that mean that there's opportunity around those centers like New York, the Bay area, say, Los Angeles, those that have actually recovered quite strongly. Is there an evenness to that? A focus towards those areas or how are people looking at all of these opportunity zones across the country. Do you have a sense of that?
Steve Glickman: 14:22 - Well, first, just on the data piece, so there's definitely a lag to the data, but it's not as long as 2010. So, governors could pick places that comes from data between 2012 and 2016. So, every five years the census does a survey of communities and that data comes from the most recent person of that analysis. But it's still dated a few years and. You know, it does, I mean, it captures some places that may be, you know, farther along than the data reflects. Governors, I think, made different decisions in their States. So, overall, opportunity zones were actually poorer and had higher poverty rates than they were even required to be, on average. They have an average poverty rate of about 30% and an average median income that's about 60% of their area, which, you know, makes these pretty hard hit places, but they're a range. I mean, some places are meant to be gateways to those cities, maybe right in the middle of their downtown. Some places are very rural and very poor for a while.
Steve Glickman: 15:33 - The reality is you need a balance because you obviously want to pick places that need this investment, but they have to practically be able to attract it from the private sector. There is no kind of guaranteed government money up front. The private sector has to want to take a bet and a risk there. And that's a fairly hard thing to get, you know, perfectly right. And I think, you know, Nathan did this well, picked the mix of it.
LSteve Glickman: 15:59 - I also think investors have different perspectives on places they want to invest in. Some are looking for the most risk averse and lowest return type investments they can make. And, you know, that may mean they want to invest closer to a New York city or a San Francisco. Some are looking for places they think are, you know, and we're talking about a 10 year horizon, which is a fairly long horizon for communities to develop. I've been looking for places that they can buy assets pretty cheap, where the basis is low, where they expect to see a lot of growth over the next 10 years and, you know, higher return, higher risk in those sort of places that, you know, you see substantial growth there over the next 10 years. And some investors are doing this for more philanthropic impact, community-oriented reasons where they're picking places that are high on need or where they grew up or that have a kind of a unique strategy driven by the city or community groups or philanthropy. And they're making their bets along those ways. And you see that happening with, you know, some banks and some insurance-
Steve Glickman: 17:03 - ... along those ways. And you see that happening with some banks and some insurance companies and some large families that have a philanthropic investing mindset. So I do think... Because this is just a map and you can lay on top of this blank canvas, whatever strategy you want, you see lots of different types of strategies in the marketplace across the country.
Nic Millikan: 17:25 - That's a really good point. More than a year in now, into the program, you know feel it's going? Is it headed in the right direction and having the intended consequences that you guys had all set out for the program?
Steve Glickman: 17:38 - So the short answer is yes, but we're still very early. Building a national marketplace that's totally decentralized is very complicated, and there's no central kind of entity that's got control over how capital flows are working, or where they're going, or what kind of assets they're going into. But what you're seeing is interesting. So, one, just in terms of the aggregate size of the market, it's hard to put your finger on exactly how much money has been deployed. But there's some early work that's been done by a few places, including an accounting firm called Novogradac, and basically based on their analysis they're showing about $10 billion in equity spread throughout between 250 and 300 Opportunity Zone funds that are investing in multiple assets around the country. So that's one chunk of the market, $10 billion of equity. And that's just in the real estate side. That doesn't also include debt. So $10 billion in equity, there. You've got some amount of additional equity in what's maybe the most common structure, which are single asset vehicles that are better investing in a company or a real estate project. And that market's somewhere in the billions. And then you've got a market in company investments, investments in businesses.
Steve Glickman: 18:58 - So let's say conservatively, you're talking about $ 15 billion of equity. The biggest economic development program in the country that exists now is called the New Markets Tax Credit. And that program deploys a maximum amount of three and a half billion dollars a year. So this program is at least four times bigger than the biggest economic development program we have on the books. So it's the biggest community development program in the country, which is a huge nod to how quickly this has been adopted by different stakeholders.
Steve Glickman: 19:27 - Then there's a question what's it going into, and where? We know it's predominantly going into commercial real estate, which is sort of the Marines in terms of the asset classes of what investors are going to be first in. According to CBRE, about half of that money in commercial real estate and multifamily housing, so think apartment buildings... Which is good for these communities. The housing shortage is a huge need across almost every community in the U.S. And then there's a question of what kind of communities. In terms of sheer dollars, there's a lot of sheer dollars going to New York and L.A. But in terms of growth, the growth markets would probably surprise people. The highest growing market is Baltimore with about 900% growth in their opportunities Zones, compared to the 18 months before this program started.
Steve Glickman: 20:19 - Birmingham is number two, Birmingham, Alabama. It's somewhere around 700% growth. And then you see other cities up there like Philadelphia, 450%, Detroit, 200%. A lot of this... The other cities people have focused on, like Portland, Miami, which have very attractive Opportunity Zones, actually have seen a drop in investment in their Opportunity Zone, around the country. So clearly there's some pent up investor interest and developer interest in places that had been cut off from capital markets. And it also means it's marketed as really spread out thinly around the country, which is a good thing. It means there's lots of players and cities that are participating in building this thing up.
Nic Millikan: 21:07 - That's really interesting. I didn't know the geographical focus. And what do you attribute that to? To going back to Birmingham and Baltimore, well what is it about those areas that is attractive to the capital? Is it just because the program stimulated capital off the sidelines? Or is there an underlying reason, be it economic or otherwise, that's concentrating the capital there? Or attracting it there?
Steve Glickman: 21:34 - Yeah. I think the answer is a little different in every place. I think the thing to know about this program is it's heavily localized in terms of how well it's working. So different factors like a really good mayor, local economic growth, you know, a large company that's expanded, can make a big impact. But I think fundamentally what it boils down to is the efficiency of investment markets in different sub markets around the country. So New York, for example is... In Portland and Seattle, these are pretty efficient markets. Right? You've got really sophisticated, experienced developers. You've got lots of capital projects that are worth developing are already in the queue to some extent in those type of markets.
Steve Glickman: 22:16 - Baltimore and Detroit and Birmingham, these aren't very efficient markets. These aren't places that have large institutional or individual investors, or nearly as much wealth. Just to compare it to the venture capital industry, which I think it will be a similarly sized market, 75% of venture capital dollars are invested in only three states, California, New York, and Massachusetts. So there's a big divide and it's not because of the quality of the entrepreneurs or the cities, it's just because of the way our cities have developed over the last few decades.
Steve Glickman: 22:49 - And so I think this is beginning to sort out some of those inefficiencies? There are very cheap, interesting assets in the downtowns of a lot of these industrial places, which are just at the verge catching up to the trends on the coast where you see people moving from the suburbs into the city, both in terms of their businesses and where they want to live. And they're 30 years behind where San Francisco or L.A. or New York or Washington, D.C. are, and that momentum is starting to align pretty well with this program.
Nic Millikan: 23:22 - And is that your demographic shift, as well? Obviously, there's a big trend towards millennials and baby boomers as they retire congregating more into cities, as well. Is that something that's being reflected in the program in the areas that are getting interest? Or is that too soon to tell?
Steve Glickman: 23:40 - No. Listened. Opportunity Zones are just a layer on top of what's already happening in the market. So I think for sure those demographic trends are one of the big drivers and we're just at a place now where these other, that markets are are catching up. But it's also because the the cities like L.A. and New York and D.C. that are doing well economically are also getting very crowded and very expensive. They have huge affordable housing constraints. And I mean that broadly in terms of workforce housing or just being able to have a good job and buy a house, which in markets now costs $1 million or more.
Steve Glickman: 24:20 - And that's become, I think, a real squeeze on this next generation that's... Millennials and better living in there. They're getting married later. They're not buying houses at all. And fundamentally, there's a natural reason people would want to go back to less expensive communities if there was real signs of economic life, there. So the idea behind this program is that it's not meant to be a silver bullet. But it's meant to be a catalyst for places to start to capture some of the vitality that they've lost. And I think that that's happening. The most interesting thing happening across the country in Opportunity Zones is not the investment. It's these huge gathering of stakeholders you see happening around the country of hundreds of people coming together to solve for what their community will look like 10 years from now.
Nic Millikan: 25:14 - Yeah, it's really interesting. So you mentioned briefly, Steve, the New Market Tax Credits. So there's another program out there, the EB-5 visa program. Can you talk a little bit about what characteristics are different about Opportunity Zones versus those? And why... They haven't been as successful, from where I sit, as the Opportunity Zone program has the potential to be. Is there a reason for that? And can you compare and contrast the programs?
Steve Glickman: 25:43 - Yeah. Really, the first thing we did before we created Opportunity Zones at all was do an analysis and put out a white paper of all the existing prior community development programs, a lot of which sounded like Opportunity Zones in terms of their name. Enterprise Zones, Empowerment Zones, Renewal Communities, the New Markets Tax Credit, and others. And most of them haven't been very successful. The New Markets Tax Credit, probably the most successful of those programs. And it's for all sorts of reasons.
Steve Glickman: 26:15 - I'd say there's a few big differences in Opportunity Zones that I think will make it more successful. And this was our theory at the time. One is that previous zone programs just hadn't been powerful enough to really move the needle. And they were super complicated to take advantage of. Because the government was providing access to the tax benefits, you had to go through a pretty rigorous process in order to take advantage of it. And you also, in many cases, had to be profitable for it to make sense at all. And that's hard. That's a hard thing to demand up front for the kind of small businesses and local developers in these communities who have a hard enough job just getting revenue in the door and making their business model work.
Steve Glickman: 27:03 - So they weren't very flexible and they also weren't very scalable. You couldn't move a lot of capital. And a lot of the reasons they're not scalable is because most of these programs are set up to provide government tax credits up front. So there's a limited amount of money the government can put it in, because every dollar out is a dollar that's coming out of the Treasury. And this program is set up much differently. The reason it can scale so much capital and be so flexible is because private investors are really the ones who are taking on the risk. This program, it will only generate a big incentive for investors if they invest for a long period of time doing what are pretty substantial projects, development deals or investing in growth companies in these low income areas. And there's certainly, I think, big profits to be made, which means you're creating a successful company that's creating jobs or creating housing, generating taxes into the property tax space, and so on. But it requires a long term commitment to those places.
Steve Glickman: 28:02 - And so that's the deal. And the result of that deal is you can raise a lot more money a lot less expensively to the government because it's not the government taking the risk. It's your private market.
Nic Millikan: 28:15 - Yeah. It's interesting, because it certainly seems like removing the role of government from this and really letting it out to the capital markets to direct their capital has been been one of the really successful features, there. On that though, people had expected a lot of money very quickly to come into the market. And as we approach the end of 2019 here, the ability to get the maximum step up in basis obviously expires on December 31st. So we would expect a wave of people to be rushing in to maximize the benefit of the program. But we really haven't seen that. Is there a reason for that? Is there a link that we can make between the continued equity bull market where those gains are actually being generated or compounded and the fact that people aren't taking money off the sidelines? Is that what it is? Or is it around people waiting for more clarity around the program? Or different types of investments to be made? Do you have a sense of what could really move the needle on moving more capital in flows into the program?
Steve Glickman: 29:24 - I think most of the factors you described relate to one core thing, which is just newness. There are a lot of parts of this program that are new for both investors and fund managers that are... It will take time for the market to develop and for investors to get comfortable with. I think the investors in this program are pretty sophisticated. You're talking about the relatively small percentage of people in the U.S. that have meaningfully taxable capital gains that putting into the market. And they've got advisors around them and they're sophisticated in their own right. For investors, I think they have to get comfortable with the underlying investment strategy, the fund manager, and the asset class they're being asked to invest here now. And there's a lot to sort through. There's hundreds of fund managers, none of which who totally have a track record in this space, because if they did, you wouldn't need the subsidy.
Steve Glickman: 30:20 - So it's everyone from real estate developers to private equity funds to venture capitalist to hedge funds to impact groups, and beyond. So you've got to sort through a lot of that. There are hundreds of pages of regulations. We talked about how government isn't a gatekeeper, which they're not. Anyone can really create a fund and put capital into it. But that doesn't mean the government hasn't created a regime to ensure that investors are complying with the spirit of the program. And while at the end of the day that enables lots of different models, it still requires getting comfortable with a bunch of new regulations that have been put out over the last a year plus.
Steve Glickman: 31:02 - And then it's these communities. These are communities where investors don't have a lot of muscle memory. And the pipelines are all being developed in real time. Governments, I think, are stepping up. Investors are trying to understand those markets. But because of where we are in the cycle, I think there's a lot of reasons to be attracted to this investment class. Everyone believes one way or another we're at the end of a cycle, both real estate and the stock market. This is aligning patient capital. So 10 years would presumably get you through whenever that cycle ends and ramps up again.
Steve Glickman: 31:41 - And for a lot of investments it's in a new asset class. For investors in the market who have invested entirely in private companies, this offers a way to diversify by just putting your money in a fund where you're not on the hook for the complications that exist in, like, a 1031 Exchange program. And and even if you use that program, you'd have to have a real estate investment first. So this is really the only way in a tax incentivized way to take your money from the stock market and put it in an incentivized way in a piece of real estate at the time when values are high, and that's usually a good time to start to diversify.
Nic Millikan: 32:19 - Yeah. Buy low, sell high. Right? And you mentioned this is a new asset class. So how should advisers think about this? I've heard some people describe Opportunity Zones as the domestic [emerging 00:32:30] market. I've heard other people say it was private venture capital for public impact. How should we be thinking about this as an asset clause?
Steve Glickman: 32:39 - I think there are a lot of different strategies that can work out here in lots of different asset classes. It's probably hard for an investment advisor to analyze the full scale of all of that. I think at the end of the day, they're really looking at a couple core things. One, does this fit into the existing diversification strategy for their clients? Are they looking to invest in alternatives? Are they looking to invest in real estate? If so, and they've got existing capital gains, this is a really tax advantaged way to do that. Okay. So where do we put that money? Well, then you're really evaluating the fund managers or the developers or the project, whatever is within the year range of sophistication and within the strategy. Do you want to be invested in one project? is it a real estate project or a company? Do you want to be invested in a multi-asset fund? That's a different strategy altogether. Then you're really evaluating what kind of track record does that fund manager have? If it's real estate, have they done development deals? Do they have asset management experience? Have they operated in these markets?
Steve Glickman: 33:41 - And I think when you talk to... And I've spent a lot of time talking with the big wire house platforms like Morgan Stanley and UBS and Merrill Lynch and JPMorgan and others, who active are in this space, have products. That's really what they're looking for. They're looking to understand the underlying track record of those fund managers and the sort of investments they're looking-
Steve Glickman: 34:03 - Track record of those fund managers in the sort of investments they're looking to make a and then relying on those fund managers to be the the fiduciaries. And then the third big piece I think is how well do you understand the way this program works? Because there's a lot of misinformation market. I mean this is true of any new government program and knowing what you can do and what you can't do and how that timing works for both an investor in a fund perspective is really important.
Steve Glickman: 34:29 - At the end of the day that that information is all knowable, but ensuring that you've got the right group of lawyers and accountants and others around you who can ensure you're getting good, updated information in a program where the regulations are changing a bit and being finalized in real-time. I think it's incredibly important and it's all balanced against the fact of the enormity of the tax incentive.
Steve Glickman: 34:55 - I mean this is going to increase returns for investors, 40, 50 60% and the type of asset class they may have already been attracted to and in higher yield assets. So when you get from real estate to high growth companies where you're not talking about it two, three, four times return, but you're talking about at 10, 20, 50 times return that the return on investment is 100% or more because of this tax thing set up. So you're talking about something that it makes sense to spend a little time and money understanding and surrounding yourself with a few experts because it really can affect the bottom line pretty dramatically.
Nic Millikan: 35:36 - Yeah, absolutely. So changing tact a little bit. Obviously the bill got broad bipartisan support as it went through, but we're as I say a year or so in. There's been talk about you're increasing transparency in the reporting around opportunity zones and you being in DC obviously a pretty well place to hear what's going on top of Capitol Hill. So do you have any sense of how people or the Democrats or Republicans that have viewing the bill and what the, what the general assessments so far has been?
Steve Glickman: 36:14 - Good question. So I think the first thing that I understand is there's really two conversations happening in this country in a political lens. You've got the conversation in DC, which is a bit of Kabuki theater where you've got Republicans and Democrats who are, I think using any excuse to saber rattle at anything that relates to the 2020 elections. And Donald Trump has I think utilized opportunity zones, marketing tool to support the other things he's done in the tax space.
Steve Glickman: 36:45 - Democrats have a number of different fronts, but through there 2020 candidates and through congressional investigations to to be critical of things Trump is doing okay. But that all being said, you've got still the vast majority of members of Congress from both sides of the aisle who are very supportive of the opportunity zone program. I mean at one point there were like 10 democratic presidential candidates who were supporters of this program.
Steve Glickman: 37:18 - Several congressional co-sponsors, people like mayor Pete Buttigieg and governor Hickenlooper who would use this as a big part of their economic development strategy. Of course, Cory Booker, one of the lead co-sponsors in it. But you're still going to have I think through the election, some messaging about anything that where Republicans, Democrats feel like they've got an edge going into 2020 and then I think you'll see that tail off.
Steve Glickman: 37:45 - When it comes to reporting and transparency, there's a huge bipartisan consensus that's needed for the program. And that was always the case. The opportunity zones legislation was built in with a pretty robust reporting regime that was taken out for really arcane procedural reasons when the bill is passed and they've been trying to add it in ever since.
Steve Glickman: 38:09 - And you're going to get some kind of agreement on it, whether it's through legislation or through regulations that create reporting for the program for funds as well as from the treasury department to Congress. And that's a good thing for everyone. So we can have a sense though from a market perspective of what markets are doing well and as well as from a policy perspective. And then you have this whole other conversation that's happening in communities. So you want me to mayor, and this obviously affects that national conversation at some point. You want me to mayor, who's not excited about this program, who's at organizing around it. I mean some of the most surprising markets are because they've got mayors like you've got in Birmingham, Alabama or Stockton, California or Erie, Pennsylvania or Detroit, Michigan or elsewhere that are using this as the centerpiece of their economic development strategy.
Steve Glickman: 38:59 - And on the state front, not only did every state pick zones, both Democrats and Republicans and they had to opt-in, they all did. But of the 50 States, only four have not conformed their state taxes to the opportunities on treatment. So in the other 46 States, they either have no income taxes, which is about 10 States or for the other 36 you get state capital gains benefits.
Steve Glickman: 39:24 - So their own skin in the game on top of the federal program. And then there's many States that have tax futility beyond that at both the state and local level. So I think the States and cities are really organized to make that work and as long as that is happening consistently and there's no reason why that shouldn't happen for the full length of this program. The political support for this program I think is going to remain very strong.
Nic Millikan: 39:51 - That's great. Because I think political risk is something that people always worry about when it comes to programs like this. I've heard more and one person questioned whether if there's a change in the administration in 2020 whether this is going to be at risk and so it's down suddenly that that bipartisan support should continue. Just on on the pulling the thread of risk, it's been argued that futility investment delivers what residents want and need is going to be successful and reduced risk of the overall program.
Nic Millikan: 40:23 - Do you have a sense of how investors should be thinking about risk and yeah, it doesn't present a bifurcation of the types of investors pursuing opportunities? You touched on it very briefly before that some people are reducing risk by investing in areas that have already strong signs of economic growth, be it New York or the Bay Area. But are there any other risks that have come into play that people should be aware of?
Steve Glickman: 40:51 - In general, I think the analysis of this program is pretty complex, but relates very much so to the underlying market and to anything else. I think in any community development program there's some degree of political risk in this program. I'd argue it's very small. There's some degree of misunderstanding the regulations, which the earlier in the program you are, the more complex it is to understand the right way to interpret how the regulations are impacting the marketplace and impact strategies.
Steve Glickman: 41:32 - I think the much more important risks to consider are the typical risks you would look at now. Risk of putting too much of your net worth into any one asset class, including opportunity zones, the risk of investing in a fund manager that doesn't bet out as being someone that is familiar and experience in this space. And the risks in the market and the market risk to me is the most interesting one. Because it's the most complex and where there's the more room I think to really get a home run here.
Steve Glickman: 42:07 - The whole concept around opportunity zones are that economic dynamics in markets are ever changing and this will accelerate positive things happening in certain places over the course of the next 10 years. So you may be thinking about downtown Detroit now and think, "Wow, that's a pretty risky area." That's a city that went bankrupt 10 years ago. What Detroit looks like now to compare to 10 years ago is dramatically different. You've got an enormous amount of investment in that downtown. The companies whose headquarters are now based there, housing that's been built there.
Steve Glickman: 42:40 - And so it's a much different analysis now than it was 10 years ago and it will be a much different analysis 10 years from now. So I think really looking at the places that build the strategies and the execution capacity to turn around what they look like 10 years from now is the right kind of analysis and risk for investors I think to be most interested in.
Steve Glickman: 43:05 - And that makes places like New York kind of mixed bagged. I mean are you going to see the same kind of growth in New York city over the next 10 years as you might see in a place like Birmingham or Baltimore or Detroit? I would argue no. I'd argue these are places that hit rock bottom in 2008 and this program coupled with other things happening there are going to enable there to be a much larger increase in return. And with taking that more risk. And it's really a question of how the market perceives it as whether there's actual risk there. With the expected returns, I think it's going to change the dynamic for a lot of people.
Steve Glickman: 43:44 - And I think a lot of people have in the market have realized that, which is why I think you see such tremendous growth in those places that weren't attracting any capital 18 months ago. So the hard part is how do you extrapolate that out 10 years, there's no one who can do that well and that that's the most risk you're taking is what are those markets look like 10 years from now.
Nic Millikan: 44:07 - That's a really good overview of risk. I really liked the way that you framed that. So Steve, we're bumping up against our time here together, and this has been an incredible overview and I really thank you a lot for your time here today. Is there anything about the program that you want people to understand and consider or that we haven't touched on that you think people should know about?
Steve Glickman: 44:27 - Well, maybe I just frame this out from an investor and in terms of the timeframe and the risk-reward of being involved in the market now as opposed to a few years from now. Because we've talked about the changing nature of communities and regulations and politics, but maybe the most important dynamic is the changing nature of this marketplace. So now I think the deal that investors have in front of them are one in which their capital is worth a lot.
Steve Glickman: 44:57 - It's very expensive. Funds are competing hard for it. There's less capital I would argue, than there are deals. And at the same time, in many markets, assets are cheap and the tax incentive is at its maximum value. So you'll lose a little bit of this tax incentive every year as you lose the bit of the deferral, as you lose some of that discount you can get if you hold your investment for five or seven years before the end of 2026.
Steve Glickman: 45:25 - And so from an economic, purely economic perspective, this is the most attractive time to be in the market as an investor. Now that's balanced by some of the realities we've talked about. The buttons are new, the markets are new. The regulations are new. You have to be pretty sophisticated and I think invest time and energy into understanding those pieces. And if you can figure that out well and there are plenty of strong funds in the marketplace, I think your bucks going to go a lot farther now. What's the trade-off a few years from now?
Steve Glickman: 45:58 - In a few years from now, you going to see a much bigger marketplace where capital is worth less and assets are more expensive, and the tax incentive is worth less. But by the passage of time we've been able to see which ones are having success and which markets are getting investment. And like any other marketplace, you come in that B or C or D round or you come in that second or third wave of investment and that would be a good fit for different types of investors than those who were kind of more entrepreneurial and part of that initial round at the very beginning and I think that's how you should look at this now.
Steve Glickman: 46:30 - This is a 10-year program. Year one is going to be riskier and the more experimental, but they have a much higher bang for the buck. Every year, I think investment in this program is going to grow and the type of investors in this market is going to change. You're already seeing now the entry of corporate investors, of banks investing off their balance sheets, of insurance companies investing directly in that market in a very well...
Steve Glickman: 46:53 - I talked to the most wealthiest family in the country and they're looking at deploying hundreds of millions of dollars in this space single-handedly is the end of this year at the beginning of next year. And that's because compared to 18 months ago, they know a lot more and they feel a lot more comfortable with the marketplace and that's going to increase every year. So that's how I would think about this as an investor.
Steve Glickman: 47:14 - Are you willing to take the time and energy to pillage few funds now because you're willing to take that risk for that reward? Or do you want to wait to see how it develops? And the reality is for a lot of investors, this is just as much driven by when they're seeing capital gains as it's sort of a reallocation strategy. Sot his market's always going to be dominated by episodic capital gains events the sales investors can't control.
Steve Glickman: 47:39 - It's probably the strongest, one of the strongest tax advantage ways to invest capital that we have in this country. I think it's just the power of that incentive that's going to increase activity. One other thing I'd say, when you talked a lot about regulations. They're likely to be finalized this year at the end of 2019 and if not by early 2020. I think when that happens and there's less open questions about what does this mean or what does that mean? Or should we wait for treasury to define pieces of this or should we just go out there? It's going to close the openness of those questions and begin to I think formalize what people know they can and can't do in this marketplace.
Nic Millikan: 48:29 - That's an incredible overview there. I think you're absolutely spot on and right and I think that's exactly what we've seen prior on our network as well. So Steve, with that I'd really like to thank you once again for taking the time to talk with us today. This was a wealth of knowledge and and certainly very valuable to get a little bit more of your insights here. So I appreciate the time and all the best for the continued success in the overall program and congratulations on putting together something that's gained so much interest so quickly. Well done.
Steve Glickman: 49:01 - Thanks so much. Thanks for saying all that. And thanks for giving me the time to talk to your audience and your clients about something I'm very passionate about and maybe think too much time about. Opportunities zones I think are going to be more and more a part of everyone's lexicon. I hope.
Nic Millikan: 49:17 - I think you're absolutely right there. Well, thanks again, Steve, and we'll definitely speak soon.
Steve Glickman: 49:25 - Sounds good. Thanks.
Nic Millikan: 49:26 - Cheers. Appreciate it. Bye.