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9 Things We Learned at the Stanford Opportunity Zone Investment Summit

On March 18, 2019 we had occasion to attend the Opportunity Zone Investor Summit sponsored by Accelerator for America and Mastercard Center for Inclusive Growth; hosted by the Stanford Global Project Center.

Here’s what we learned.

1// More deals than capital attended Monday.
When one of the speakers did a “raise your hands” poll, only about 15% of the people in the room represented capital. Shamina Singh from the Mastercard Center for Inclusive Development (who underwrite the conference) expressed similar conversations to me: they had hoped for more money, funds to show up. A lot of the funds we spoke with were still getting organized or were family offices figuring out what to do. Very few traditional Silicon Valley types attending; a notable exception was Patrick McKenna of High Ridge Capital that has successfully invested in tech companies based in less expensive cities for years.

2// The cities that presented had well thought out, mostly shovel ready plans.
Deal flow will be happening through a prospectus process – at least initially. Both Bruce Katz (Drexel University) and Mayor Eric Garcetti (Accelerator for America) have been coaching cities on how to be more proactive and showcase “shovel” ready programs. Katz published their “early observations and next steps” from having developed plans with the first 27 cities. Strong insights you can read here.

The cities went to great effort to showcase what they’ll be doing to make a particular opportunity zone successful (“We’ll bring you renters, work to move business there, structure investment according to OZ timing …”) Norfolk really played with the spirit of things: “we want your capital to redevelop these buildings. We will bring you the renters. And we will arrange for the property to be purchased from you in 10 years. There is no reason not to do this. We hope to wrap up the $30mm this week…”

3// City Pitches!
The day concluded with Mayor Garcetti hosting 2-minute elevator pitches from about 20 cities. All seem eager to meet with investors and have pitches with top-line numbers. Prospectuses are available here on the Accelerator for America site.

Peter spoke with Mayor Garcetti about the process and what its been like for cities to learn real estate thinking and investors to understand cities’ social benefit requirements. See our 3-minute video.

Insight from one mayor: The Mayor of Dayton and her economic development told us that the first couple of projects have deals in progress, not yet signed, but expect to sign soon. Her next tranche of projects are looking for funds focused on projects that sit between the hospital and university and she’ll be working to make it a valuable innovation district. She said she really isn’t looking for a lot of value add from capital because “we’re taking the planning and community development pretty seriously.”

4// OZ deals mostly don’t happen without city involvement
Even shovel ready programs may require much community engagement to get the community aligned around the project and to build the vibrant ecosystem around the real estate project that the community wants. The capital stack includes not just equity but debt and funding from community-based foundations (CBIF) to fill the financing gap as otherwise the projects would not “pencil out” to provide a market rate return even with the OZ tax-benefits.

The Kresge Foundation has been looking for a way to invest in cities for years; they’ve stepped up with a $22M fund to underwrite early movers in the market committed to transparency; there is also talk they will step up to provide debt financing against OZ investments in selective markets.

5// Both city- and thought-leaders acknowledge that real estate alone will not lift up cities that have traditionally been subject to deinvestment.
There is strong support for our thesis that it will take investment in more than just real estate to make city and regions thrive. Kansas City, a city we work with thanks to our relationship with the KC Star and the Maker Community there, pitched a company that greatly reduced home construction costs together with a mechanism that created connected communities to move into the homes. San Jose pitched a culinary district. There were several financial innovation companies pitched by cities.

6// These approaches /proposals are resolving into a set of formats, templates for community development that are likely repeatable
Ross Baird at Blueprint Ventures presented what could be a repeatable process for investing in street-corner OZ projects. The California Clean Energy Fund presented a whitepaper describing repeatable community-owned local power generation as OZ projects. $200K investment, 100KW solar generation, 50KW storage, connected to traditional off-takers. This very much resonates with another project we are involved in called Swytch.

7// Better data to drive OZ decisions was a key point of discussion
There is a strong desire for data to de-risk projects and communities. Mastercard Center for Inclusive Development, which sponsored the conference led this conversation.

Their key point is this: cities need much more granular information, down to the block level to understand what’s going on.

Here is a recording of their presentation on the subject.

The public sector (foundations) and private sector (Citi Ventures, MasterCard Center for Inclusive Growth) are committed to providing data and insight to Opportunity Zones. Some players are actively considering open sourcing their data/analytics; others will probably make a business around the data they can provide.

8// Most cities and some states are interested in a path to local ownership for some of the businesses and/or real estate projects that get invested in.
Some cities are experimenting with the idea of local ownership of assets but this thinking has not yet risen to the central discussion in the presenting cities; one sees it in smaller experimental projects.

One company in the middle of this: was there in force with SEC permission to go ahead with tokenized municipal bond mechanisms.

9// Titles of who is in charge of OZ bidding inside a city vary
It is sometimes an economic development officer, sometimes the head of a nonprofit set up for economic development purposes, sometimes the City Manager, not usually the Mayor