Experience, Expertise and Extraordinary Good Fortune

Jack Heald: Well, welcome back everyone to the Opportunity Zone podcast. I'm your host Jack Heald and I'm here today with Jay Gold who is with Defer Gain. Jay, welcome to the podcast.

Jay Gold: Thank you, Jack.

Jack Heald: So, tell us a little bit about yourself. How'd you get started in this business and we'd of course we'd like to hear about Defer Gain as well.

Jay Gold: Absolutely. I've been a resident of Phoenix since 1978, and I kind of watched it grow. Went to school there and got into real estate construction development after school been doing that for a long time through ups and downs, but Phoenix always comes out on top. So, back in the early summer, last year when it looked like this program was getting legs, we really kind of got in hard and fast and we incorporated our Defer Gain back in July, we actually had our SEC filing of a 506(c) in October of 18.

And I think what advantage we felt we had and the reason we got into this program is because we were fortunate enough to have actually four programs, four deals that were good solid projects that were already in areas that got overlaid as Opportunity Zone. Downtown Phoenix is an unbelievably fast- growing market. We have three projects. We have one called Imperial Apartments, it’s a 104-unit workforce housing project. Another one is Ann Rose Apartments, it's a 241 efficiency luxury apartments. We've got another one called Presidential Residences that's 84 luxury residence apartments. And lastly in Scottsdale, right off the 101 at Talking Stick at the Pavilions, literally a ten second walk to the ball fields, we have Comfort Suites, a-108 unit hotel. And because we were already in these deals, these deals are either already permit ready or will be in the next 60 days. So I think where a lot of people love this program and for obvious reasons they lacked the projects to make this work.

Jack Heald: That seems to be a fairly consistent complaint is there's plenty of money, there's just not a lot of deals.

Jay Gold: Absolutely, and I think it's very sensitive because as a fund you can't take somebody's money, because that's part of their tax strategy, you know? So, if somebody took someone’s money that's going into tax season right now actually and then somebody decided to defer their capital gain and they gave it to a fund. That fund couldn't place it, it'd be very interesting to see what happens. Can they give it back, and then the person is owing all these taxes and penalties? So, I think there's a lot of guidance that we're still waiting on coming out from Treasury that should be coming out any day now. But, with the current time-frame to constraints that we have, I think a fund like ours is real fortuitous because of the deals that we were actually just fortunate enough to have at the time and see this program and see what it offered and move quickly.

So, I think you're right. I think, you know, there's plenty of money out there. It's just matching a timing of the right money and the right partners together. I've got three other partners, combined we have over a hundred years experience directly into the Phoenix market. Mike Lafferty has been a downtown developer working on deals for the last 20 years. He's always believed in downtown Phoenix, a very early guy in that market. Scott Tonn, same thing he has been going to work in downtown Phoenix. Both Mike and Scott had been involved in alternative energy as well. Joshua Duke is part of that group. You know, I've been in the Phoenix market forever and just always believed in it. And I think, right now when we're trying to stick to what we know, I think there's deals everywhere, but right now I think there's plenty in our own backyard.

And, we see them first typically because we have the long-term developers in this particular market. We have great relationships, you know, with the brokers who know that we know how to analyze a deal, understand the deal and close on a deal relatively quickly. And you know, if you're a broker, that's what you want to see. You don't want to spend a lot of time with people educating them and you typically want to go to the professionals. So again, we feel like we're well-placed in this market and feel like we're very well placed in this Opportunity Zone space.

Jack Heald: So, I did a little bit of a reading on your website Defer Gain, are you strictly an Opportunity Zone fund or are you both a fund and developers, where's the space that, that we can slot Defer Gain into this big market?

Jay Gold: We're both right now. I think what we're learning is we're developers, that's what we are. That's what we've always done. that's what we always will do these deals that I just mentioned, would be getting built with or without this Opportunity Zone, this is a benefit, and it's a great space to get involved in. What we do, we get up every morning and we develop real estate. With this fund and this new opportunity we have to learn to go out and become a fund and raise money, and we have.

Jay Gold: And to be may be extra careful, we've brought on a broker/dealer above us that probably isn't necessary, but we felt like as another level of insurance for everybody, that everything's being done perfectly, we've done that. To answer your question, we're both, and we do have a 506(c). We can solicit that, we can sell, we have a fund that's up and ready to receive money. We haven't taken any money yet because we are very sensitive to matching the money with the timing of our projects. There's plenty of money out there.

Jack Heald: You, you have brought up a situation that I hadn't ever thought about before and that is preexisting, projects that were already in the works and just happened to end up being in Opportunity Zones. I haven't heard of any of the, the tax implications or the investment implications around that particular situation. Are those properties subject to any kind of weird rules because they were already in effect when the Opportunity Zone rules kicked in or did they, did they start after the official start date?

Jay Gold: Jack, that is a great question. And there is a rule, and the rule is, it has to be an arm's length transaction. So if you were the original owner of a property and, you already owned it prior to December '17, you would need to dilute your ownership to either sell it to somebody else in the fund or sell enough of it that you couldn't own more than 20%.

Jack Heald: I was also fascinated with, the on the website, you guys talked about your experience in, I think you said photovoltaic. I kind of interpreted that as solar. Is that the same thing?

Jay Gold: Yes.

Jack Heald: Okay, and are you seeing solar project, being pitched or being accepted and built in Opportunity Zones? Have you run into any, are you doing any?

Jay Gold: That's an interesting question and I have not seen any. It'd be interesting because they typically take up so much land and there's so many rules to this. I wouldn't discount it completely, but we are not focusing on that at all right now.

Jack Heald: I want to think about the Opportunity Zone, the rules as they stand right now we're all sitting around waiting for Treasury to get their act together and clear some things up for us. However, I'd like to focus on what we do know. What part of the act are you most confident about, and don't have any concerns that keep you from going forward. What parts do you feel like are solid and dependable right now?

Jay Gold: Well that's an interesting question, Jack, because with government entities and Treasury, I don't know that you could say you could ever be 100% solid on anything.

Jack Heald: Good point.

Jay Gold: So with that said, we looked at this very strategically. So there's different levels that you can look at this. There's the rules that we know, there's the rules that we think we know. And then there's the PPM level, the GP level and the LP level. And so, on all those different levels, you can structure this thing so that everybody kind of knows what we're doing. And what we tried to do is stay right in the middle of the fairway, so that if Treasury came up with some favorable verifications, our deals get better, but if they don't, they don't get worse. So, I think we spent a lot of time on strategy, making sure that our deals will do at least what we're projecting. And if, like I say, if Treasury comes along and does what we think they're going to do, our deals get better, and we have a lot more flexibility.
This is bipartisan legislation. It's very rare in today's environment that, you know, even Gavin Newsom has looked through the program and likes it. So, I think this is really beneficial for both sides of the aisle. And I think they're going to do everything they can to make this thing work. And if there's any tweaks, I think they're going to be in favor of getting more done than less done.

Jack Heald: Um, let's talk about, let's talk about your role in Defer Gain. There's four partners, I believe. What, what is your job? What are you best at, personally?

Jay Gold: I'm a developer. I used to own a company called Acorn Building. We used to build buildings back in my other life. And then I developed master plan communities. Our company, that I was a vice president of, actually had a home building company under it. I've done a lot of commercial development, Walmart centers and such, industrial offices. That's just what I do. I get up every day and put my pants on and I develop real estate. So, there's not really any defined roles, per se, in our organization. We all can do everything. It just depends on timing and you know, who's available to do which deal. But I think each one of us can do everything.

Jack Heald: So here's an interesting question, what do you hate? One of the interesting, one of the interesting things that happens when I asked that question, all the different questions that it triggers a question that triggers questions. You know, we want our listeners to, to really feel a connection, with you. And, often times people are connected over the things that drive them crazy.

Jay Gold: I don't know if I would say hate. I'll tell you the things that drive me a little crazy are programs that are designed to do one thing and then they have provisions in them that stop you from doing that. So, I'll give you an example on this particular deal. In this deal, there's a 30-month provision that from the date we take money, we have to put it into the ground in 30 months. So on one hand, what we'd really love to be doing is doing what this program was designed for and going into neighborhoods that really could use capital injections and guys like us to come in and make the neighborhood better for, it's current residents.

It's not necessarily just gentrification. But, when you tell somebody you have 30 months to do that, it's literally impossible. You’re talking about a general plan amendment and going through cities and you can't even get a set of plans to the city in that amount of time. I've discussed this with people at conferences and they asked why, you know, why we're not doing that. As far as going into neighborhoods that really, really, really need what we're doing and we just can't, it could not happen in a million years. So, pretty much when you give a developer 30 months, that has to be a project that was probably going to happen anyways.

Jack Heald: Right.

Jay Gold: So, you know, again, I wouldn't say I hate that, but it's frustrating.

Jack Heald: What's your feel about that particular part of the rule? I'm hearing folks with different opinions. You know, it's hard and fast. It's not going to change all the way up to Treasury is looking at it seriously and is thinking about, at least clarifying so that the program can actually accomplish what it's intended to accomplish.

Jay Gold: Yes. I'm hearing the same things. I can't tell you what I'm thinking. I can tell you what I'm hoping.

Jack Heald: Okay.

Jay Gold: And what I'm hoping happens is they come up with something that says, if you're working on something and you file a plan with us, showing them what it's doing and you're working that plan in your everyday day, spending money towards that goal that you have, whatever amount of time that it takes to do that. Rather than handcuffing you because cause you have a fiduciary duty of the people's money you're spending.

Jack Heald: Oh yeah.

Jay Gold: You can't just go out and hope that everything falls in line because it typically doesn't when you're dealing with communities and when you're going into city council and you’re trying to change zoning and do different things. There's a lot of discussion of back and forth that rightly needs to happen, but it doesn't happen quickly.

Jack Heald: Now, you bring up an interesting situation. As I understand it, the Opportunity Zones had to be approved by each individual state, the governor had to nominate, but it ultimately boiled down to the localities themselves providing information. And that leads me to my question. What has been your experience with the individual, governments, the local governments? re they aware of Opportunity Zones? Are they working with you? Are they being surprised by it? What are you finding out there in the local government level?

Jay Gold: Well we're really, really fortunate to be in Arizona and I think we have the best governor in the country with Doug Ducey. He is brilliant and he's a huge on this program and he is proactive. He was one of the first guys to get his list of parcels turned into Treasury and approved by Treasury and very strategic. And I think he's come up with projects that can work with the current restrictions. And I think the way he's laid it out is there's a lot of stuff that's in the zone, that once hopefully we get the clarifications that I just mentioned and hope we get, that we'll be kind of phase two of this program. You know, like OZ 2.0. I think, I think OZ 2.0 is going to do what this thing was intended to do. I think OZ 1.0 is going to be a learning experience, you know? And I think that guys that were fortunate like, like Defer Gain and my partners will be able to get these deals done that, you know, frankly we would've got done anyways.

Jack Heald: Right. what has been the single biggest challenge that you faced, in your development as it relates to the Opportunity Zones? You may have already touched on that, but I hadn't asked that question directly.

Jay Gold: Yeah. The single biggest challenge is really just, trying to develop a strategy that works for our investors, works for ourselves, works for the neighborhood, we went kind of semi blind? You know, so typically we know the rules, and they're hard and fast and we know exactly what we can do. Here we've kind of had to leave that sides that we talked about, you know, and just play right in the middle of the fairway because we don't know. But we don't want to be surprised. So again, we feel like no matter what happens, we're fine, you know? If hopefully things happen that we think should happen, we're better. But yeah, it's always difficult coming up with a strategy that works for everybody when you don't know all the roles.

Jack Heald: Right. So have there been any pleasant surprises?

Jay Gold: Yeah! A really pleasant surprise. I think that in working with the communities, for instance, the Talking Stick Project is with Salt River and going in with the tribal community, they've been more than helpful. They love this program. They want to work side by side with us. They want to do other deals with us. You know, we've taken a very forward approach to how we do this. We've worked with direct lenders. We have a program set up for debt on this. Not just equity, that works within the rules. We set up more long-term money than short-term money, because of the long term nature of the program. So, you know we're talking to the community, the tribal communities. They, from time to time, have people that want to do deals. It would be like a really nice project, but it's sometimes difficult getting them financed because of the tribal community and the nature of a ground lease. We've kind of overcome all those things right now with our project, so, they'd love to work side-by-side with us to help others that are trying to do projects. They've been very helpful to us. I think the city of Phoenix is the same.

Jack Heald: You know, it's good to hear. I was looking at an Opportunity Zone map of Arizona, just this week and I noticed that it looks like there’s a whole quadrant of the state that is an Opportunity Zone, but I know it's almost all tribal lands. And I remember thinking to myself, wow, I'd love to see stuff happen there, but. . .

Jay Gold: We would too, and it's always been somewhat difficult because, you know, their sovereign nature and banks have been hesitant. If money doesn't go, projects don't go. I think more so than most. It's beneficial for everybody, for the tribal community as well as Phoenix and Scottsdale, because it's all one big community that you're driving through those communities every day. As you go down Pima Road, you're on tribal land. So, It's one community that's called different things, and the money going in will be beneficial for everybody.

Jack Heald: And that brings me to my next question, which is I know one of the big concerns, at least primarily on the, on the political side is the social impact from Opportunity Zone investing in building versus the investor returns problem. Talk about that a little bit.

Jay Gold: Well, I think I touched on it earlier. I mean under the current rules it's probably going to just, you know, creates gentrification under what I would what like to call 2.0 I think it's going to get back to what it was intended to do. And it really kind of, you know, go deeper into neighborhoods that would not have seen capital infusion and are going to get the capital requirement because of this program. Under the current rules, that's very difficult to do. And I just don't see a lot of that happening, you know, and to touch on the second part of your question with, you know, investor return. It's a fine line. You want to work within the communities and be beneficial to the communities. But at the same time, you know, it's a for-profit deal and people that invest money with us are investing to make a return. So I think the program has to adjust to the market. And the markets need to be able to make a reasonable profit for the risks that they're taking.

Jack Heald: Well, Jay, we know that people who are involved in significant decision making at the federal level, pay attention to us and are listening to these kinds of broadcasts. So I think I know what those rule changes are, but why don't you tell me what you see the changes that need to be made, for OZ 2.0.

Jay Gold: Ah, that's quite a list. In the case there were changes, I think one thing that I can touch on is right now, there's a disconnect because at the end of December, 2026, the people that put money in have to pay their taxes. Yet, they can't get their money out for a couple of years later. So, that causes an issue. Either there they're very high net worth individual or fund that can pay their taxes separate from the money they put into fund, or the funds need to have to kick out some kind of ordinary income to them or put a reserve away or something that seems like it was, it was oversight. It seems like the way that happened was legislation was getting put forward, drawn up in 2016 and I kind of think that it was just a typo, but it caused a pretty big problem. I'm hoping that gets fixed because that's going to cause issues for a lot of people in it's just confusing.

There's certain things whether or not you could take a project you have, sell it prior to the 10 years roll of money back into the fund, that would tend to make sense to me because it's causing, there's more money trading more deals getting done and that's what this was designed to do. But we don't know if we can do that and how that would work. So, things like that.

Jack Heald: Very good. Well, yeah, that the, the disconnect between the 2026 date and the tenure date is the one that seems to jump out at everybody.

Jay Gold: Yes. It must have been some sort of an error.

Jack Heald: Although I haven't heard anybody say they thought it was a typo now that's, that would be kind of funny.

Jay Gold: How else could it have happened?

Jack Heald: Oh my gosh. Yeah.

Jay Gold: When you look at it when it was first designed, it was from 2016. So 10 years would have been 2026. That's when they tried to do it.

Jack Heald: Exactly, you're probably right. Somebody said oh, it's 2016. Well, if 10 years from now without even thinking.

Jay Gold: Right. And when they, and when they finally put it through, I think something just didn't pick that up.

Jack Heald: Yup. And that's how the sausage is made. Right?

Jay Gold: That's how that sausage got made.

Jack Heald: Well, Jay, I appreciate your time here today. If folks want to get a hold of you or, or Defer Gain, what's the best way for them to do that?

Jay Gold: You can go to our website like she's just defergain.com not gains, Defer Gain. Again, by getting that name, I think it tells you how quickly we were in the market that that was available. or you can call us at 480-729-6292, and, you know, we'd be happy to talk to or meet with anybody.

Jack Heald: Very good. And, I'll tell our listeners that all of your contact information will also be available on this podcast site so folks can just see it and click on it. Well, Jay, I appreciate your time today. This has been the OZExpo podcast. I'm your host Jack Heald. We'll talk to you next time.

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