Jason Hartman brings on real estate attorney Bob to the show to discuss the importance of taxes and their impact to your investing. In the second segment he has a chat with Steve Glickman, Senior Economic Advisor to President Barack Obama and chief architect of the Opportunity Zone project, about the Opportunity Zone system and how it works.
When we found you and your podcast was like, Okay, this is what we should have done the first time. It’s like the properties make sense the day you buy them.
Welcome to the creating wealth show with Jason Hartman. You’re about to learn a new slant on investing some exciting techniques and fresh new approaches to the world’s most historically proven asset class that will enable you to create more wealth and freedom than you ever thought possible. Jason is a genuine self made multi millionaire who’s actually been there and done it. He’s a successful investor, lender, developer and entrepreneur who’s owned properties in 11 states had hundreds of tenants and been involved in thousands of real estate transactions. This program will help you follow in Jason’s footsteps on the road to your financial independence day. You really can do it. And now here’s your host, Jason Hartman with the complete solution for real estate investors. Welcome to Episode 13 27 1327 thanks for joining us today and I am coming to you from beautiful Dorado beach, Puerto Rico, here masterminding this week with a few friends got to hang out on the beach last night and have beer football and fiscal policy with none other than one of our early famous guests on the show. Peter Schiff. Yes, Peter chef saw him in his element, and he has very loudly and famously moved to Puerto Rico to save on taxes. Now, you know, on past episodes, I’ve talked about this Puerto Rico tax deal, thought of moving here myself, many, many times over the years, but can’t quite bring myself to do it. Every time I come here and visit some friends that you know, look at, here’s the old saying, folks, money always goes where it’s treated best. Money always goes where it’s treated best. I have a friend here who is a very Successful New York real estate attorney who has moved his family to Puerto Rico for the tax incentive. And it is quite a significant incentive, especially when you’re coming from a place like the Socialist Republic of New York, or the Socialist Republic of California, the two highest tax states in the union. I haven’t quite been able to talk myself into this Puerto Rico thing, but at the very least, get yourself living in a no income tax state, because that’ll be you have a huge head start. I mean, I just want you to think about this for a minute. And I know I’ve harped on it many times over the years. But you know, if you’re in business, so you have your own business, and many of you do, I know. And you are in the competitive marketplace, and you’re competing with people and companies that are based in a high tax jurisdiction. And you decide to move from like I did, California to Florida, and say you’re successful as, hey, if you’re listening to the show, I know you’re successful and say you are That really oppressive 13.3% state income tax rate for California, you know, many businesses will talk about how can we grow our business by 13.3% this year? Right? That’ll be a plan. They’ll have meetings about it. They will agonize about it. What do we do? Do we do more marketing? Do we recruit better people? Do we cut paid we do layoffs? Do we come up with a new innovation that really is successful in the market? Should we go out and work on getting more publicity more attention, increase our market share? Do affiliate deals, maybe open a new distribution channel, maybe sell our widgets on Amazon or Etsy or eBay? You know, what do we do to increase business by 13.3%? Well, I’ve got an easy way for you to do it. simply move, vote with your feet more. What if you don’t own your own business and you are simply Living in the rat race, as many of our clients are, I’d say two thirds of you are probably in the rat race, so to speak. And you want to build a real estate investment portfolio on the side so you can exit the rat race. What if, I mean, what if you could increase your investment each year by 13.3%? What if you could do that? Think about it, if you earn $300,000 per year, and well, to get that 13.3%, you’d have to earn more than that, to be in that oppressive tax rate. Say you’re in that tax, right. So you’re paying 10% extra state income taxes. This is we’re not talking about federal taxes here. But say, you could increase your net by $30,000 per year 10% of $300,000. That’s one extra property you could buy every year and still have maybe $5,000 in change left over. Think about the multiplier effect on your wealth. That over the course of three years, that’s three extra properties over the course of five years, it’s five extra properties over the course of 10 years, it’s 10 extra properties. Think about how much faster that moves you toward your goals. This is not a small thing, this tax thing. Okay, so at least the state income taxes take care of that. I took care of that by moving to Florida. But you could do even better by moving to a place like Puerto Rico. And that’s if you’re an American, and I understand we have listeners in 189 countries worldwide. So different things apply to all of you in different jurisdictions. But that’s pretty amazing. Well, I’m here with one of my friends, and Bob is a successful real estate attorney, and you’re going to hear from him on future episodes as we talked about something really unique that he’s doing, but we’re going to save that one for the future. But today, I just want to have him talk a little bit about the things he has learned as a real estate attorney. Working with big hedge funds and all kinds of high flyers in New York. And then now moving to Puerto Rico, just a little over well, less than a year ago, actually just talk about some of those differences. I thought you’d be intrigued by it. And our guest today will be the senior architect for the Obama administration of none other than the, I think falsely named opportunity zones. Okay. Yeah. I’m a bit of a cynic about the opportunity zones. But you’re going to hear the main architect of that whole plan for the Obama administration on the show, after we do the intro portion here today. And I think you’ll find that to be fascinating. It was an absolutely fascinating discussion about how they do this community engineering, what it means for gentrification, just a super fascinating interview that I did just over a week ago with him. So we’ll play that for you after this but let me first welcome my friend, Bob diamond, who is Here to just share a little of the stuff he’s learned in. I think over 30 years being a real estate attorney, right, licensed as
an attorney since 1995. Wow, it’s been all real estate. I was a real estate investor from 1989. So before I was a real estate attorney, and I’ve continued investing the whole time, so I do both. And I’ve certainly seen it all that to say when you get into the larger commercial deals, the level of scrutiny and detail you have to go into is multiplied.
Jason Hartman 7:27
100 fold. I mean, just, you know, I’ve told the listeners that over the course of my career for my companies, I’ve leased and built out seven office spaces, just as a tenant, not an owner. Okay. And those office leases are anywhere between 70 and 130 pages long. Yes. I mean, just the lease itself, and that’s just being a tenant, not an owner. I can imagine the cost of paying attorneys to draft those leases when you’re the owner is absolutely insane. I mean, I’m sure they’ve spent 50 $80,000 just on least drafting fees
when I did a lot of the leases in New York for a famous drugstore chain, every lease negotiations like six, eight months ago. 15 $80,000.
Jason Hartman 8:12
Yeah, just and that’s the negotiation after the document exists.
Yeah. Well, I mean, to be fair, we had their base document, and a lot of the arguments wherever whether we’re going to use the landlord space document our own and when you get into a big portfolio, you’ve got to have consistency with the way the leases are. Because otherwise they can’t be administered. You know, if you’re trying to administer a portfolio of 400. drugstores you can’t have your leasing staff deal with 400 different forms of leases. It’s impossible. They can’t actually do it. So we would spend the first two months bickering over who’s for lease who would start with Yeah, because we had to, and you know, there’s millions of dollars involved. There’s there’s a lot at stake. There’s a lot at stake. And the reason leases get so long, by the way, is something happens. Someone slips and falls, someone sees a mouse, someone you know gets food poisoning. All right, and the landlord ends up with a problem. And they said we better dress at least. But
Jason Hartman 9:04
let me let me say something that’s always struck me as is kind of odd. I guess it has to be that way. This way. When you’re dealing with, you know, landlords always hear the horror stories about the slip and fall, quote unquote, right? It’s sort of odd to me and I did a show recently on civil forfeiture where, you know, thing, yeah, it’s terrible. It’s absolutely an abuse of government power, for sure. But what’s kind of interesting is, why is it that the property owner is responsible for everything that happens on the property? Some of this stuff is so completely unrelated to them? I could, you know, of course they’re responsible for if there’s criminal activity on the property. They’re probably becoming responsible for like microwave radiation from cell towers soon. Here’s a prediction. Here’s a Jason Hartman prediction, you ready for this one? You know, the law is something that always gets extended and expanded, right. They take one more In the like, expand on it, expand on it expand on it, Bob, I predict that soon, landlords and you know, I’m talking about a commercial setting could actually become responsible for what is said on a property words.
Yes, I could see it expanding that one, you know, like, just person on the property
Jason Hartman 10:22
into the predicted that they would say something that would hurt somebody rape somebody would offend somebody, right. If someone is like we’ve all heard about these things where you know, a speaker is invited to speak on a college campus right a speaker with conservative viewpoints. And then of course, the wacky left will shut them down, right? Yes.
Because any means
Jason Hartman 10:42
they don’t want to have a dialogue. They just want to have a monologue. Right? And so, you know, soon I bet you know if Mark Stein or pick your name, you know, comes and speaks on a property. If someone in the audience is offended by their words, they will sue the owner. ampitheatre
you know, I bet I could absolutely see it. And the problem is, is essentially, lawyers looking for people with deep pockets that they can recover from. So you want to drag in an insurance company if you can, landlord if you can, because you stand a better chance of uncollectable judgment. Right. And, you know, the law has it keeps expanding responsible parties. Yeah. It’s really reflective of the tenor of a lot of the conversation in the country, which is its rich people’s fault, whatever it is, right? And people who are not successful, nothing’s their fault, their victim. What are the intersectionalities means you have? You’re a minority and you’re gay, and you’re short.
Jason Hartman 11:38
Uh huh. So intersectionality means multiple immutable characteristics, right?
Well, it’s a little bit disadvantage, discrimination loss. It’s like if you’re, if you’re bald, maybe less attracted some with hair. So then that’s one thing. And if you’re also a minority, and then you got two counts against you, and then you’re a woman so you’ve got three counts against you. So all the sudden everybody asks us to pay you a game. Keep basic minimum income. The point is you have this
Jason Hartman 12:02
like expansion of ideas, right? And one of the things we were talking about last night, I said, You know, I used to sit on a lot of boards for charities and do that for years, I get it. And I just kind of got frustrated with it after a while, because what I realized is that the mission, and I’m not saying this of every charity, of course, there are very good charitable organizations out there. So I’m not faulting it, I’m just saying this is human nature. The mission of any organization is to expand its size and power and ensure its longevity, which is that’s people which is self. It’s a self preservation instinct that applies to people. It applies to organizations to which are made up of people even when the organization is no longer needed. So if you cure cancer, do you need cancer charities anymore? Well, no, right? So what’s the incentive? right is the incentive to actually find a cure or to just nibble around the edges right? You know, that That becomes the thing, you know, things expand. I guess that’s the point
that the government expands, keeps expanding.
Jason Hartman 13:06
It always gets every every small strives
to expand and grow. You’re right.
Jason Hartman 13:11
But what you said last night in your answer to that is interesting when we’re talking about government versus the private sector, you said something that was really, really critical. In the private sector. There’s two ways you can get ahead.
Right? So you can cheat, which gets you in trouble. Eventually, it gets you really rough, or
Jason Hartman 13:29
hopefully it gets you in trouble.
I mean, you don’t sleep well at night anyway. Right? If you get caught, you’re really sunk. Or you can do what most companies try to do, which is provide a desirable, even great service or great product. And then you make a lot of money. And I would say that that would be an example that would be Google, an example that would be apple. I mean, why do I have an Apple phone or an apple computer because they work great when they update that continue to but but these companies are not without their abuses, especially Google Apple as much but Also Google, why do so many people use Gmail? Because it works really well and it’s consistent. Are they perfect? No, they they’re bad actors and in some respects Of course they are. That’s the way that they’ve expanded.
Jason Hartman 14:08
So the difference though, with the private sector versus government expanding, how do you get ahead that’s how you get ahead in the private sector either cheat, and hopefully you’ll get caught. Okay, or you produce something of great value.
Yeah. Okay. That’s the way to get it right. Listen, secondly, earn it right by being desirable.
Jason Hartman 14:26
So how do you get ahead and government
and the government you your promise to give a money for a problem from the sedates you promise to give the poor and needy and helpless money from the rich
Jason Hartman 14:39
leader in a ball? Yeah,
right. And, and they can do it legally. They say give me the money. They promise that and whether they deliver or not, they don’t really care. Because if they don’t deliver it, then they blame some third party, right? It’s the bad people. It’s the big government. It’s something else other than them, basically buying votes to the people’s money. Of course they are and they brought
Jason Hartman 14:58
the you know, the like Margaret Thatcher. said the problem with socialism is eventually you run out of other people’s money. But the difference is with government, there’s no free market, because you don’t really get to very easily at least shop around for government. If you don’t like you get, if you don’t like an Android phone, you can buy an iPhone, you get a choice there, there’s a choice in the marketplace, or you could buy the new Motorola razor, right? You have choices. But with government, you don’t have choice. you’re
limited to buy by time of choice. Like, I could throw my way my phone today and go by Samsung, right, same day. I get to participate in the election occasionally. Right, right. Yeah. No, I can’t just say I don’t like what that guy did. Let’s fire him. And you can take radical purchase strategy that but basically, it’s not doable.
Jason Hartman 15:42
Yeah, absolutely. Okay. So tell us a little couple more pointers on, you know, just what you learned as being a real estate. So a couple of things. So
the good, really talented commercial investors that I worked with. One thing that they all did to a person is is they followed Warren Buffett’s advice that in Fasting is the one thing where you can stand there at the plate, the pitcher throws, throws balls over your plate, these are potential deals, you can stand there all day, there’s no three strikes, you’re out, you can watch 100 balls come by, and decide on this one swing at the hundred and first and you’re still on the bait on that.
Jason Hartman 16:19
The only problem is if you don’t swing at good pitches, you miss deals. So you have a opportunity cost
potentially do but you have to watch your mindset because the good guys always at the mindset, they pursue the deals that really look good. Where I see people make the mistake and my smaller investor clients who sometimes struggle especially at the beginning, they don’t have the patience and they don’t have the deal sourcing because what you’ve got to do is you gotta source enough deals to look at a lot of deals and understand the market you’re working in understand what’s really out there and not swing it the first thing just because it it’s always understand that always be a new one coming in.
Jason Hartman 16:54
By the way, I don’t want to forget and one of our team members just reminded me You heard that you overheard that call. She said to remote Jason, you got to tell the listeners that we have some fantastic new home inventory, which is very hard to source. And we have been sourcing some good new home inventory lately. So check it out, talk to your investment counselor, go to Jason Hartman, calm several different markets. Be sure to connect with us. We covered earlier markets
and really good strong markets. Yeah, yeah. And I was just I was listening, but just I’m sitting next year so I can hear it. Right. And those are good strong markets. Yeah. And deal sourcing is difficult to find good deals and like when you do what you do, which is fine, good deals that people can look at and consider that is so much money, time and effort for people to source their own deals. It’s a big part of the work that’s
Jason Hartman 17:46
a huge part investors unless they’re really in this kind of full time. They need a team to aggregate Yes, and that and source those deals. And
that’s what we that’s the foundation to A good investment just to start with, if you have a bad property to start with, yeah, you just tried to build a pie out of rotten fruit, right? And it’s very difficult. It’s not impossible. And occasionally, actually one of the one of the times I see people make mistakes and market up quickly rising market. And what they do is they they think everything’s rise, it’s just like, I gotta get in, I gotta get in and they buy junk. Yeah. And then when the market corrects, they’re left with valueless things.
Jason Hartman 18:23
And that concept is most pronounced in the cyclical markets, where you have these incredible highs and these really ugly, large, California, yeah, California, New York, South Florida, you know, all those expensive Northeastern markets around the world. We’re talking about Dubai, Paris, London, Hong Kong, etc, etc. So those markets are where people get that mania. And remember my commandment number 21 of the 10 commandments. I know that math doesn’t work, but I keep adding more is Thou shalt not invest in manias, do not invest in a mania, okay? Unless you just want to
purely I think part of the key that I’ve seen consistently among successful investors is they have strong deal sourcing source looking at deals. And they do act when they see a good like they’re not they’re not inner objects, they do act, but they wait for good middle force to do, right. But they don’t say, I just got to do some me send me a sideline for you know, nine weeks and my plan says I’m gonna buy 18 houses this year. Yeah.
Jason Hartman 19:22
Just wait because the money is not burning a hole in their pocket, right? Yes, you’re
exactly. You can’t have that because when you get desperate like that you do a bad deal. And then you’re stuck with it. Yeah, yeah, yes. And you can’t really get
Jason Hartman 19:34
out of it unless you can find a bigger sucker than you and how do you know that’s the called the greater fool theory. I’ve talked about it very much. And how do you know you have a good deal you measure by the rent to value ratio, that’s the first most important metric. Okay, so anything else on the real estate thing I want to switch to Puerto Rico and we got to get to our guest
sure on the best thing so it’s it’s good strong deal sourcing and good, strong team members. I think that when you when you choose your team members Shoes people with track records of success, not just because they’re your cousin is unemployed, or someone else needs some work. I’ve had, in my experience with untangling partnership disputes, a lot of times it’s someone that comes in doesn’t know what they’re doing partners up with someone else and doesn’t know what they’re doing. And pretty soon they’re fighting with two people not knowing what they’re doing right. And you just have to educate yourself and stay in control of the deal with the educated person needs to be in control of the deal. needs to be
Jason Hartman 20:25
good point. And on the partnership note, you’ve heard me repeat my late grandmother saying many times. She said to me many years ago, Brogan wisdom, Jason the hardest ship to sail as a partnership
is another one too, you know, people only fight when there’s money. Yeah, when a deal goes down and goes bad nobody fights because nothing to fight over. When things are successful. No suddenly, like, you know, Jason, you really didn’t do that much. You just brought the money but
Jason Hartman 20:50
you take a smaller
negotiate and they can fight when there’s money. Yeah. Which is interesting. So if you’re successful, that’s the time we’re actually gonna need the partnership agreement.
Jason Hartman 20:58
Yeah, yeah. So On the partnership thing, just remember, it’s that old biblical concept of being equally yoked you need to be equally yoked with your partner now equal does not mean the same yoking. Someone might bring the money, someone might bring the deal, someone might bring the expertise, someone might bring the deal. You know, it doesn’t mean you’re putting in the same thing. But you’re both contributing something.
Yes. And a lot of people go into partnerships with a partner that they just kind of want some company in a way and that’s, that’s a problem. If they come in half, what they’ll do is a problem. They’ll make bad decisions. They’ll give bad advice, and they’re not productive partners. Yeah. And you don’t want that. The interesting dynamic is sometimes the guy or woman who brings the money, they want to then control the deal even though they don’t know real estate, like someone to say, you know, they’re a surgeon who’s a very brilliant surgeon, right? Brilliant medicine, but doesn’t mean they know anything about business. And you get the other person that’s a real estate person. The real estate person needs to make the decisions. At the end of the day, you can consult with your partner, but at the end of the day that the deal has to be in writing, that that real estate person makes the decisions otherwise you can end up with some bad things because people believe in the golden rule. I think he who has the gold rules, and they just left from the fight, right? Not good. That’s not productive. Yep. The other thing that I do that’s sitting in partnerships of my own and I advise clients, do a trial balloon, do a deal together, see how it goes? don’t dive in, you know, yeah,
Jason Hartman 22:26
right. Date, date before you’re married.
Yeah. And if it doesn’t, if it doesn’t work out, you know, with me personally, I’ve released problems like, you know, you take the property, you’re I put 10 grand and get my 10 grand back, you have the property. It’s great.
Jason Hartman 22:37
And I just take us learning. Let’s go run with it. Exactly. You gotta know when to cut your losses. That’s the other one. Okay. Hey, we got to get to our guests. But just you you wrote down a couple of figures here. Yes, you’re
talking about a $300,000 income. And so let’s say a $300,000 income and say Florida or Texas where there’s no state income taxes at a 34% federal tax rate, you can pay out 102,000 Taxes. In Puerto Rico, you pay 4% taxes. So you pay $12,000 instead of 102,000. So in a $300,000 income, you’d have $90,000 more every year.
Jason Hartman 23:11
Now, that means you could buy three or four properties every year extra,
in addition to what you’re already paying off your mortgage on your house, you don’t have mortgage. No, we don’t like mortgages, you could be like the debt, but okay, you could buy extra properties to all kinds of things. And the point is, it’s like reverse taxes or like reverse amortization. It’s just, it’s such a headwind on your investing. And, you know, even if we look at this, we gained about a third of the income, yeah,
Jason Hartman 23:36
cash in the pocket. But that’s not without some requirements, you need to say that so you’ve got to, I mean, it’s complicated, but you got to be in Puerto Rico a certain amount of the time I’ll give you the bare bones. So
you have to live here at least half the year. Okay. So hundred and 80 3d days and tropical paradise. We really do have to live here. They keep track of it, and you have to apply for the program. It’s going to cost realistically by time. redonk 15. Grand with lawyers and things like that and accountants and setting it up properly you do have to give $10,000 a year to the charity of your choice I’m sorry $5,000 a year to the charity or choice for next year they’re bumping that to 10,000 so you get to choose charity it’s wonderful
Jason Hartman 24:13
I didn’t know there was a charitable component yeah
so so I give to a bunch of charities because I have all this extra money left over so I I’ve really increased my charitable giving I’ve got an orphanage I’ve got a lost dog or like a no kill shelter. Boys and Girls Clubs, Boy Scouts everybody in there causing
Jason Hartman 24:30
my my dog just perked up when you said that and thought Oh,
that’s nice. Yeah. So it one of the guys for development heads. That’s good 200 dogs in there a lot of soft skills which are are loose dogs for now.
Jason Hartman 24:41
But anyway, I gotta share something that Peter Schiff said last night that I thought was really interesting. Okay. He was kind of ranting last night on the beach. You know where the sun is setting and we’re in this beautiful beach, you know, right by the Ritz Carlton here. You know, you guys had this all this catered food out there. And the dress And the football game we can tell getting right. Yeah, it was it was everybody was tailgating in their golf carts on the sand on the beach. And the the professional staff might Yeah, we’re always great. And my dog is running around the beach, no leash. I mean, she was just having a leash no problem. Yeah, no, it’s not, not the Gestapo like it is back in California. He said something really interesting. He said since he moved to Puerto Rico, he is filing the most honest tax returns ever filing. Now, what’s interesting about that is this is that the tax return becomes there’s an incentive to be more dishonest. When taxes are higher. Yes, because the deduction is higher. So if you can write something off, and your tax rate is a combined 50% tax rate, that’s real money. But if you’re only paying 4% tax in the first place, you start to spend in a more legitimate way.
I don’t like it since I pay 4% taxes. I don’t do anything because of the tax effect, right. Yeah, I do. Absolutely.
Jason Hartman 26:00
high taxes, encourages malinvestment. Okay, that’s what I want to say the side taxes in. Yeah, right. Miss allocates capital.
Yeah, go ahead. I was gonna say investment income is taxes zero percent.
Jason Hartman 26:13
Wow. So capital gains, in other words, right?
No, zero. No, like if you’re a trader trade stocks trade gold. Yeah. That’s your percent. Is
Jason Hartman 26:21
that why all your neighbors are hedge fund managers? Yeah, yeah. So it’s really interesting. It’s
and because you can trade and you don’t have that headwind because otherwise you can be trading all year. You can make gains on 100 trades, losses on 200. And you can stoled over taxes.
Jason Hartman 26:37
Yeah, right. It’s interesting. This is quite a desirable deal. So if you want more information, check out my jetsetter show, I’ve done several interviews on the Puerto Rico tax deal. It is pretty amazing.
The other thing I’ll give people it’s by contract good until 2035
Jason Hartman 26:51
till 2035 and they
enact the AXA asset tax, it won’t affect this.
Jason Hartman 26:56
So if Elizabeth Warren wins, I have a cry
Yeah, but I will cry. I’ll be like, I’ll be crying for you. Argentina will be crying for America, but it won’t affect my bottom line.
Jason Hartman 27:07
You’re exempt down here. That’s great. Okay. Hey, let’s get to the first part of inner interview with the the chief architect for the Obama administration of the opportunity zone legislation. So we’ll get to the first part of that today. We’ll have Part Two tomorrow. And here we go. It’s my pleasure. Welcome, Steve Glickman. He is the former senior economic advisor to Barack Obama, co founder and former CEO and executive director of the Economic Innovation Group. He’s the chief architect of the opportunity zone program. Steve, welcome. How are you? doing? Great. It’s good to have you. Where are you? I’m at DC, but I’m in. I’m on the road quite a bit these days around the country, trying to figure out what’s going on and all these different opportunities on communities. I understand I understand. So the opportunity zone is quite interesting. It’s a special A lot of interest from real estate developers more than investors, you know, it’s somewhat complicated for strict investor, you really have to be willing to do development, how many opportunities zones are there around the 8766 opportunity zones spread out across every state, six US territories, and Washington, DC. And when you architected the program, how did you pick the opportunities zones? I mean, first of all, it’s quite a few of them and their little pockets, aren’t they I like for example, give us a sense of geography and size, what are the largest opportunities zones by I don’t know square miles against and then the smaller so opportunity zones are made up of census tracts. So the size of opportunity zones are within a pretty narrow range by population. So they’re typically between two and 8000 people and in urban areas that can be very small, that can be a one square block. locker two square blocks or more, but in rural areas, it could be hundreds of miles. So it all depends on what kind of geography you live in, in the US. Okay, sort of get back to the first part of your question, though. Lucky for me, I didn’t have to pick the zones. The way the legislation was set up, was that the federal government set a baseline economic standard, something it calls low income communities, which are places that are both at 80% of median income of that state or area and have at least a 20% poverty rate. And then it was left up to the governor’s to pick among those places, 25% of those communities as opportunity zones, and the net of that is an opportunity zones now cover about 11% of the country. Fantastic. What constitutes, you know, I guess a good opportunity for a real estate developer in one of these zones, I mean, with 8000 plus zones, how does a real estate developer pick and Figure out where to invest. First of all, I’d say the the program is much broader than just real estate. This is a program that you can make investments into any kind of asset class. That is essentially right now, yeah, that can essentially take private equity capital. And you’re seeing that around the country as well. Now real estate, of course, is the most active asset class because it by definition is geographically or place based. And because there’s a, you know, a long history of using tax incentives to invest in real estate, the most active part of real estate you’ve seen in the marketplace has been multifamily, basically, investing in apartment buildings around the country, they make up just over half of commercial real estate investments, according to CB r e, but you’re also seeing investments in industrial buildings, in many facilities, and of course, it offices and increasingly you’re seeing this in the business side as well. So we’re seeing companies that are using opportunity zones to build and Finance, entertainment companies and film studios to build renewable energy and telecom infrastructure and to support franchises and other business models that are sort of organically routed to place. And how is the program working out? so far? It’s we’re in the pretty early stages. I guess maybe the predecessor to that question should be when did it begin? But then give us an update if
Jason Hartman 31:25
there are several different, you know, start dates you could refer to, I mean, functionally speaking, we’re really still within the first year of the program. Officially, the program was passed into law, the very end of 2017 as part of the largely republican pass tax, although opportunities owns its origins are in bipartisan legislation, but half supported by Democrats and Republicans. governors then selected the actual census tracts in their states that would become opportunity zones in June of 2018 of last year. Bye The Treasury Department didn’t write the rules of opportunity zones. Until really April of this year, they released two tranches of regulations last October, and this April that make up about 250 pages of regulations. And it was really, as of April of this year that you saw the market take off. So we’re really just about six months into the program. And by the end of this year, I think you’ll see a lot more activity. In fact, we’ve seen quite a bit of activity already. There’s some early data and it show there are roughly 300 opportunities, own funds in the market that are targeting about $65 billion of capital, and they’ve raised about, on average, about 15% of that target. So this program is is responsible for roughly in the realm of about $10 billion of equity investment across the country. Okay, so, I mean, those numbers, they sound big, but in terms of the overall real estate game, they’re actually pretty small right? Do you have a projection or In terms of how big this will grow, how much capital will flow into opportunity zones, ultimately, yes, but let me give you a decent sense of context for that. 10 billion. Yeah, right. Right. Yeah, please do. That’s, that’s always the question. You know, people throw these numbers around and they sound big. But the question is always compared to what, right?
Jason Hartman 33:18
Yeah. So after you don’t come out of a long history in this country of doing place based incentives, and historically, these programs have been quite small, the, the largest program in this space, and the most recent one, which was now about 20 years old is called the new markets tax credit. And that program is responsible for about three and a half billion dollars a year in equity going into these communities. So in the first year of this brand new program, you’ve seen three times as much equity been deployed already. And frankly, that’s an incomplete number. That’s that’s just one accounting firms ability to track of funds. Much of the opportunities own investment in this country is being done. Single deals, both businesses and real estate deals around the country. So that number is probably much larger. So I gave you what I think is a very conservative number. I think this program will realistically be in the range of $50 billion a year when it’s fully up and running in the next, you know, couple years or so. And again, we give you a sense of scale of that. That’s about the size of the entire venture capital industry. Okay, okay. Good. You know, you didn’t mention interestingly, because maybe it’s obviously a different type of program. But we sure were very involved in the go zone. I’m sure you’re familiar with that. And there was also the Liberty zone. We weren’t involved with that. But the go zone for quite a while we thought was a pretty great program. Then, as happens with a lot of tax incentive based things, you know, and I don’t want to be political here, but the tax incentive kind of starts to distort the market after a while, and the economics sort of failed to be the reason That just the pure economics. And then everybody’s like money is flowing the tax benefits and then things get a little out of whack. Ultimately, I just find that to be true over and over again in life. And so the go zone stopped being interesting to us in the latter parts of it, but, but at first, I thought it was pretty great. Any comments in general, when you look at zone based programs, the thing that has ultimately made them unsuccessful has been two big factors, one, their ability to scale both geographically and in terms of the types of projects you can do. And two has been their flexibility. This program is unique in that it covers such a big part of the country, much of which is still untouched by capital investment in this program. So there are still tons of undervalued assets, the downtown’s of entire cities that have not been designated as opportunity zones that can take in billions of dollars of investment in this program. And that doesn’t even Talk about the business investment sector where essentially, if you move a business or create a new business into an opportunity zone, it now becomes an opportunity zone investable business where, you know, your returns on the course of 10 years can grow tax rate. And so I think the potential here is far more uncap than any previous example of place based investing. We know that the total, you know, market of capital gains that you can potentially tap into is $6 trillion, both among individual investors and corporate investors. So you’re talking about a huge amount of capacity that this program still has to absorb. And you know, we’re never going to get anywhere close to that. So I don’t think you’ll see the same natural cap in this program, as you’ve seen in other attempts of doing place based investing. Right, and I know we’ve got to wrap it up with your part and we’ll talk to your associate for a few minutes here in a moment, but I kind of intentionally didn’t ask you to explain the program because we’ve done several episodes on that previously. But you know, since you are the chief architect of it, I’d probably be remiss to not ask you if you wanted to tell our listeners about some of the highlights of the program or anything like that, or, or just anything else you want us to know before you go. Sure.
Jason Hartman 37:14
Well, I always find like a little context is helpful in helping to understand why this came about at all. And I’ll provide a very short version of it. If you believe for example, climate change is the biggest external problem facing this country. The biggest internal problem is this question around geographic inequality. The fact that for the really the first time in our recent history, economic growth during an economic recovery has only accumulated in a very small handful of cities in America. And that has huge ramifications for local economies across the country for health outcomes for people and ultimately for our our economic and political system. This is the first attempted its type to Creating an entirely new marketplace, out of place based investing that’s designed way different than any other type of program. And it’s all tied to appreciation. So this is a program that to be an investor, it starts with having capital gains, you’re able to defer the immediate taxes you owe on having sold a stock or a piece of real estate or piece of art to have gotten those capital gains. But the really big benefit and the really big value for communities is that it aligns the incentives between investors and communities to invest for a very long period of time for sale for investors who are who stay invested in communities for 10 years or longer. Any profits that they see from that investment at the end of that time period, they can earn tax free, and it’s the only part of the tax code that operates that way. It’s the only way to get a full step up in your capital gains bill without having to die first, which is a benefit of the program and the only way you can go from capital gains and business investment to real estate or from real estate To business. So it’s a it’s a very unique and very powerful instead of that’s much more akin to like the charitable contribution deduction in its scale than it is to any previous program. And so this is a big experiment, right now around the country of whether this can align the long term strategic interest of communities and their leaders like mayors and county executives around the country, with investors and with the need that the federal government has to start to dramatically change the way economic growth is working in America. And I think we can get to the scale and the type of activities and the type of communities where we’re going to start to see really powerful transformative changes happening around America. But we, as we mentioned at the beginning, when the first inning here, and I think people have to be willing to be patient. It’ll be interesting to see how it plays out because some skeptics would say that this will just lead to more gentrification as it upgrades these areas, just pushing prices. and affordability down and pushing the people at ostensively is to help pushing them out of the neighborhood again, coming. You know, like, look at Oakland, California is all the rich tech money is flowing in there. I mean, are there any safeguards against that? Or is it going to have that kind of gentrification effect? I mean, gentrification. Some people love it. Others hate it, right? It depends what side of the economic pie you’re on. But just maybe a comment on that before you go.
Jason Hartman 40:27
There are a lot of scarred rails. But let me let me start with, again, the premise here. Most communities across the country in most cities don’t look like Oakland. They don’t look the Bay Area. They don’t look like Los Angeles or New York, and the Urban Institute, which, you know, studies gentrification very closely evaluated all of the operations in America, and that less than 4% of them are at any near term risk of gentrification. So this question of gentrification is a problem that very small number of communities face, it doesn’t mean communities don’t face displacement, but it’s Much more common for economic distressed areas to see that displacement come from a lack of capital, then not too many, because you start to lose your most talented, well connected capable people to other cities because there are just no job or business opportunities in your local community. Now, for certain cities, this isn’t this isn’t a big challenge. And there are the same guardrails you have now in that the sort of investments that people are really concerned about in the gentrification conversation are ones that are already very closely controlled by local governments through the use of permitting and entitlements, and other land use, that dictate what kind of real estate projects can go in and what those strings have to be attached to get approved. This program doesn’t change any of that. It just provides access to a new form of capital that would have never existed to make a number of projects that were never viable, viable again, and it’s really, you know, created to target the places like Detroit in the Southside Chicago in Cincinnati and Cleveland and Berlin. Hamden, Erie, Pennsylvania, which are all active in this marketplace, whose downtown’s are, are empty. And they need to start to rebuild these 50 year old bones into modern communities so that businesses will take stock there and start creating the businesses that will lead to real economic growth. Yeah, it’s really quite interesting. I know, we’ve got to wrap it up. But I’d love to talk with you sometime about how does one sit down and architect a program like this? I mean, just the central planning, if you will, of it is pretty complicated, because they’re always these intended and unintended consequences to these things. And it’s just so hard to determine how things will really play out in real life. I’d love to have you back on the show to just talk about how you, you take a blank sheet of paper and and figure something like this out. It’s pretty amazing. You know, it really is I’ve got a hint at the law. I’d be happy, happy to come on. And I just to give a really short answer to that question, the way we dealt with that complication and You know, it’s unclear whether we how well we figured it all out was by decentralizing the execution of this program as much as possible, putting governors in charge of picking the zones instead of the federal government, empowering investors to decide what projects they were going to invest in making it a real marketplace that tied long term profitability with economic growth in communities. And that’s controversial. It’s philosophically a real debate between how people view the use of private capital and the role of government in economic development. But I think the one thing that was clear to us is that whatever the government has tried so far, hasn’t worked for 15 years. Most of the community we’re talking about that are now distressed have been distressed over the last four or five decades and we have to try something new. And we’re in a place now where government is broken, you need to tap into all of this excess private investments I’ve had in the market and trying to engineer a new marketplace, where they’re naturally giving, making their next investment in some of these places. It may not work. But creating a decentralized approach is the way we dealt with having to figure out how to solve all those problems from Washington. Very interesting, very interesting. Before you go, is there any website you want to give out or anything like that, and we’ll talk to your sister night, I’m sure he’ll talk about this a bit more are working with to an entity called lighthouse dot one, which is basically a new approach and tying impact oriented capital, particularly capital in areas like the Bay Area, which have access to an enormous amount of capital gains with projects around the country that are able to be transformative in communities. And so we’re, you know, on the hunt for those projects and those type of investors that have shared that kind of mindset that are aligned with, you know, the whole goal of why this program was created. Fantastic. Well, thanks for joining us. We appreciate it. And we will go over and talk with your associate Peter Hirshberg and hear what he’s up to and talk about his new book may Happy to come on anytime. Thanks for having me. Yeah, thanks for joining us.
Jason Hartman 45:06
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