Public-Private Partnership the Key to OZ Impact Investing

Jack: Welcome back everyone to the OZExpo Podcast. I'm your host Jack Heald I am joined today by Jerry McGaughy who is the senior manager at Epic Community Impact Fund. Jerry, welcome to the OZExpo Podcast

Jerry: Thank you. It's a pleasure being here.

Jack: It sounds like you're ordering lunch or something there in the background.

Jerry: Yeah, I'm at one of my favorite coffee shops right now. I'm being prepared for our Opportunity Zone meeting tomorrow. We host a meeting every first and third Wednesday of the month. So, I'm getting my deck and presentation ready for tomorrow's meeting.

Jack: Okay. You are in the Atlanta area, is that right?

Jerry: That is correct.

Jack: So, you want to tell us what's your favorite coffee shop is?

Jerry: Well, right now I am in "Drip", a coffee shop in the Glenwood community in Atlanta, Georgia.

Jack: Okay. I'm glad it wasn't Starbucks.

Jerry: I like to go to the local coffee shops.

Jack: That's right. Keep the local folks happy. Alright, so now that we've got that out of the way, I'm going to ask you one more question. How do you take your coffee?

Jerry: Um, I like my coffee, just regular coffee I can't get into all the cappuccinos and all those fancy coffees, I don't know how to pronounce all those types.

Jack: You're not one of those people who does those frou-frou drinks, which is really basically a milkshake, a little bit of coffee sprinkled in it. You're actually a real coffee drinker. I feel better about you already, Jerry.

Jerry: [laughs]

Jack: Okay. So tell us about the Epic Community Impact Fund, how'd the fund get started and what's your focus?

Jerry: Well, our fund got started roughly two years ago. My main focus primarily is community development in urban communities. We first got started when we partnered with a real estate development company called Epic Partners. They've been around about 80 years. It's a third generation development company. So we have Epic Partners and within them, we have Epic City and Epic City is the asset management and property management and real estate arm of it. And then we have Epic Development. Epic development is the development arm.

I met these guys, great guys, they started doing urban development. And I sat down, I talked with them and I said, well, if you are doing an urban development, have you heard of the CDFI fund, the Community Development Financial Institution, where you can use New Market Tax Credits and also LITAC, the low income housing tax credits to enhance your project in those particular communities? So they were like, we'd like to learn more about that. So after our conversation we decided to create a real estate private equity fund and we got certified through the Treasury Department as a CDE, which is a community development entity. And what that allows you to do is that you just apply to Department of Treasury, and you state to them that our focus are underserved communities and that is our mission. And what that allows you to do is to apply for those New Market Tax Credit dollars and those credits you can sell to investors and in return, they get those credits and you get equity investments into your projects and make it more attractive. And we could talk about that a little bit more.

Jack: So, you were already involved in providing funding for the types of communities – for projects in the type of communities – that the Opportunity Zone was designed to serve before the opportunity zone program came along. So you were kind of already well-positioned.

Jerry: Well yeah I guess you can say I'm part of the pioneers. A lot of people thought I was crazy. I was an investment banker and I walked away. One day I was just concerned about underserved communities. “I'm like, how come we don't invest in those different communities?” So I made a phone call to Washington, DC for the Black Chamber of Commerce and just asked them about minority and businesses and these underserved communities. And they mentioned to me you called at the right time. Vice President Al Gore at the time is coming up with an initiative called Business Link and if you'd like to come up here and be a part of this initiative. So that's how I pretty much how I first got started with it.

Jack: 20 years ago, you walked away from the investment banking world. So give us a little bit of your background there. You know, the investment banking stuff, how you got into it. And then I'd really like to hear more about that walking away moment. That sounds significant, but talk to us about the early investment banking.

Jerry: Yeah. Well, I first started with a firm on Wall Street. I worked with them here in Atlanta, in the Atlanta office and pretty much was just a trader. From there I went to MetLife Securities and I worked in the pension and savings division and I primarily managed what we call GITs, which is Guaranteed Veteran Contracts. All they are just annuities. They are $1 million and up. So I primarily worked with pension fund managers for major corporations. And from there I went to this company – a boutique investment banking firm – when I was raising capital for a municipality and also businesses and golden state projects all across the country. And from there I started driving into urban areas and I was just seeing the lack of resources in those communities. So, I was just very curious about, “What can I do to really help the community?” Because I was living in my own bubble. You know, I lived in a high-end area in Atlanta, which you call Buckhead, where I lived, worked and played there. So I never went outside that bubble. So I never knew what was going on in those particular communities. And I know that can happen a lot – you know, out of sight, out of mind. So, from there I just said, you know what? I'm about to devote my life to this particular area. And so my coworkers are like, "I don't believe you're just walking away from this life. I commend you, but I can never do it, but I commend what you're doing here."

So that's what happened.

Jack: Okay. So it sounds like in terms of the investing in the money management stuff, you have a pretty broad and diverse background prior to making this life change. If I'm reading it correctly. So talk about the last 20 years prior to the Opportunity Zone program because we're going to drill down into the details of that here in just a minute. Just give us kind of the high level, this big change you made to start trying to make a difference in the urban communities.

Jerry: I grew up in Detroit, Michigan. And you know, I just thought about the time when I grew up, we really didn't realize we were poor because we had everything right there. You know, we had local merchants that lived in the community. We played in community. So it was more like community involvement, kind of like a village as they say. And you know, that's how I grew up. And now when I see the community, I noticed how it's been saturated with violence and drugs in urban areas. So I just said, I just need to do my part to see how can I come in these areas and really make an impact in these particular areas using my knowledge and my resources. So that's what it's all about, you know.

Jack: Okay. So a couple of years ago you meet the guys from Epic and you know stuff on the fund management / fund raising / investment side and they've got the sounds like they've got the development, the property management side of it all nailed down, and you guys create the Epic Community Impact Fund. Right?

Jerry: Right.

Jack: So, let's talk about Epic Community Impact Fund and the Opportunity Zone.

Jerry: One day I was just doing some research and I noticed an article that was speaking about the Opportunity Zone about two years ago, two, three years ago before it even became a bill. So I started doing research on it and I'm like, “Wow, this can be a great program if it's done right.” And my whole thoughts were, “OK, let me make sure that this business program actually benefits the people that are in the program.” So what I did, I made a phone call up to Washington DC with the economic innovation group. They are a nonprofit organization that pretty much spearheaded that. They were pretty much working Senator Cory Booker and of course Senator Tim Scott. And you may know that organization is primarily funded by Mr. Parker, part of Facebook and Napster.

He actually wanted to help he was saying, “These guys in Silicon Valley have all this money. There's no need for us to sell our stocks or sell interest because, well, why do we want to pay tax on the capital gains?” But anyhow, I flew up there to DC and I met with the president up there, with the Economic Innovation Group and he was just telling me all about the Opportunity Zone and what's coming down the line. So once I found out about that, I got so excited, I came back to Atlanta and I said, you know what, you're going there. We're going to establish our fund here. So one of the very first things I did, I told the team, our very first $10 million in the fund, several years later once the bill got passed, we sold some of our commercial real estate and we took that capital gain and we put it into our fund.

Jerry: I started calling other private equity firms all over the country and giving them a heads up about this program because the word really wasn't out. So I found one real estate private equity firm that said, "Hey, we're looking to establish a fund ourselves. We're very familiar with this. We want to be one of the first funds out here." And I said, “Well, I know you guys can have some interest in Atlanta and the southeast region. Would you like to do a joint venture with us and raise the fund in conjunction with us, with a joint venture?” They said, “Well, we'd be more than happy.” So out of that partnership we raised $100 million and that was our very first Opportunity Zone investment there.

Jack: Now has that been deployed?

Jerry: We've deployed about 20 million. We did a mixed use development and multi-family.

Jack: Alright, so you've got the investors, you've got to keep them happy. But I know from the little bit that I've heard you talk, that the impact is very important to you. How do you go about satisfying these investors who want to see the right return on their money and at the exact same time actually make an impact on the community? What is it you do? How do you do that?

Jerry: Right. Well, we do capital stacks. The one good that thing about the Opportunity Zone fund is that you can combine it with any other tax credit or any other program that may be out there. What we do, we go into a community, we find ways to capital stack the program. So we look to work with the local housing development authority. And they have what you call tax allocation dollars, meaning that those particular dollars are calculated by the tax revenue of that particular project or that community. And they actually would put that capital into your particular project. So that's instant equity into your project.

Jack: That's from some sort of government program, right?

Jerry: Yeah. It's coming from beyond the local city. It's tax abatement dollars. For instance, this particular project, you run the tax dollars per diem on that particular... what would it would generate in taxes. And you just calculate that and pretty much the formula and whatever that number is, they will actually give that to you as the equity for your project.

Jack: Wow.

Jerry: That would also reduce the cost of that project. And would also at the same time bring in other equity and uplift the IRR for that project. So that's just one. Second of all, you have what we call New Market Tax Credits. I mentioned this before. The majority of your New Market Tax Credit communities are primarily are in the Opportunity Zone. So those dollars are very competitive. But if you have a viable project that you can prove that you are making an impact in that particular community, then you can apply for New Market Tax Credits. Now what are the benefits of the New Market Tax Credit? Well, say for instance that you've got a $10 million project and you get $5 million in New Market Tax Credit, then you can sell those credits to investors.

Jerry: So investors get a 39 percent tax break spread out over seven years with that, were the equivalent to be roughly around 7 to 6 percent return. So now you're already up to a 6 percent or 7 percent return on their investments already based on that tax credit. So you add that. Then also, you have grant programs for affordable housing, program that not only foundations but the city, most of the municipalities want to make sure that they implement affordable housing, those particular programs. So you get additional grants for that particular program. Now you are able to provide the affordable housing. Now you took a regular, something like a 11 or 10 percent IRR and turned it into like a 20 percent IRR and still provide affordable housing or whatever community assessed cities that you created for that particular community at the same time.

Jack: So, it sounds like the secret sauce with your fund is you, with all these connections that you have to various types of local, regional, state, and federal assistance programs that can be added to the capital stack. Am I interpreting that correctly?

Jerry: That is correct. Because a lot of your investors, especially, your real estate private equity investors, they aren't familiar with those programs. I mean, they pretty much just focused on building, find the land, building, whatever there. And then you'd go by the recent comps in that area and then then you pretty much sell or pay rent based on that. But most of these guys, they don't understand that you are changing the community, that you can't look at those particular comps for that community. You are changing the community, building wealth in that particular community. So once you do that and you add in those particular incentives, then that would make the whole project more attractive to those particular investors.

Jack: I think I understand what you're saying, but I want to just mirror back to you what I think I hear, and you tell me whether I've got it right. So, what makes the Epic Community Impact Fund able to both satisfy the very demanding needs of these private equity investors while also being able to deliver the kind of community improvement community impact that the Opportunity Zone is designed for is this particular set of facts: you take, not merely private equity as part of the development. I mean the Epic Community Impact Fund is the private equity side of it. But you add to the capital stack a number of different types of – for lack of better word – government program money, whether that's a grant or a tax credit or development funds. But it's all basically coming from the government with a different set of requirements in terms of return on investment than a private investor would have. And because of the addition of those, it makes the IRR a lot more attractive for the private side and it makes the community impact a lot more likely for the public side.

Jack: Did I summarize that well at all or did I make it make it more complicated?

Jerry: Yeah, you did. I mean just to give it a quick term, all it is, it's a public/private partnership and in order for you to make those types of impacts, you have to have a private/public private partnership in order to make it work. You know, so that what we look at.

Jack: You've taken the whole concept of the public/private partnership with the Opportunity Zone where the primary – I've talked to enough people in this business who understand this – the primary thing we think of about the public side is that the federal government is giving us a tax deferral. That's kind of been the biggest public side of it. It sounds like you are dramatically amplifying the public investment in these things. Right?

Jerry: Right. That's what we are doing.

Jack: That makes me think that that this is not a model that could be replicated just anywhere because there's probably relationships and knowledge that is unique to you or unique to your organization that makes this a little bit different. I don't want to put words in your mouth, but that's how it strikes me. You have the knowledge, 20 years of experience of putting together these kinds of capital stacks that I don't think most fund managers have.

Jerry: That is correct. It's all about relationships. I mean, you just cannot go into any community, which you'd have to do it. It's a process. And the very first thing you have to do is you have to go into the community and you definitely have community engagement. You have to see what the community needs and where they are at, what they want in their community. And once you get the community, then you get the local city council person or the commissioner, whatever it is, in that particular community. And then once you get that support, then you actually start getting into city support. And once you get the city on board, then that's when you start getting the other centers into your particular program. Because what you have to do, you have to build trust in those particular communities. Because they've heard the story so many times.

Jack: Sure.

Jerry: Developers made promises to them. They even signed a community engagement letter. That's just like, man, I'm engaged and by law I have to marry you. I don't have to do what I've said. These communities have been ostracized or tricked so many times, that you have to build relationships with them and trust. And then once you get that, because what you have to do in order to get those incentives, you have to show how you are impacting that community and what type of jobs that you are creating. What we do, we require our developers to train other minority or women developers or hire them on the construction project. So we create jobs locally in those particular communities. So that's where they like to see how you are impacting the community.

Jack: Now, it seems to me that this is something that requires very personal, local relationship building. So I would guess you are intimately familiar with a locality, what the needs are there, and what the programs are that are available there? Am I reading that correctly?

Jerry: Yes, because a majority of the community already know what they want. They already have some plans. And I bring Opportunity Zone funds and community funds, what we call CDFI funds.

Jack: CDFI, is that a private organization or that public organization?

Jerry: No, it's a certification that you get through the Treasury Department. There are several programs that go through those. Most of your community banks or credit unions may be a CDFI. They just get the certification because there are bank enterprise awards where they can get up to $2 million grant matching dollars for their funds. So what I do, I said, “Well your clients with the $2 million, I'm bringing the matching part, because I got an Opportunity Fund that can match those dollars that you have with those particular communities.” So now we solved the matching part of it and you have so many CDFI's all over the country and CDE community developments to apply for New Market Tax Credit. And this is the new program for them. So they love what I'm doing because majority of your CDFI's are lenders, they are on the debt side. So they don't understand Opportunity Zone. They don't know how to work with Opportunity Zone, they don't know how to manage that. So I bring the equity, you bring the debt and then now we've got a perfect match, a marriage because they can use that money either for loan loss reserve or they can use as equity in the project.

Jack: So, let's talk specifics. What kind of projects have you got working there with Epic Community Impact Fund?

Jerry: Right now we are going into a specific community here in Atlanta. I would mention it, but I don't want everybody to run over there and run the prices up. Like, “Oh, he's bringing big money into that community. I'm about to buy up everything in that community.” Our strategy is this: what we are doing, we just partnered up with another one of the top 25 influential Opportunity Zone funds in the country. You know, part of you guys' top 25. It's one of those guys there. He just closed on a $400 million, well just say a half-a-billion-dollar Opportunity Zone fund. What I tried to do, I tried to find Opportunity Zone funds to partner up with that has to be willing to make the social impact in the community and have those understandings.

Because I had several other funds that wanted to partner with us. They just didn't understand and were not willing to learn. You know, they were just telling me, “Jerry, at the end of the day what we are looking for is a minimum of 18 percent return or higher. If you can't do that then you know, I mean if we help somebody in the community along the way that's fine.” I'm like, “Well I don't think that's going to be a perfect match.” So I'm going back to a specific project. So what we are doing, we are taking qualified investors and what we are actually doing, we are putting them into what we call a real estate fund. And we also partner up with Opportunity Zone funds. They also put money into our particular fund. Now what we're doing with that fund, we are first stabilizing the community. So when I say stabilized community, we're going in, we're buying the houses, we are bringing the houses up to par and we're making them affordable. Then we are turning around, we are flipping those homes and selling them. And then now, we've taken part of the capital gains and put it into two of the Opportunity Zone funds. But now we're creating wealth for them.

Jack: Let me stop there real quick. So the initial stabilization is not done through the OZ fund because what you’re after is you stabilize them. OK. So the capital gains from the stabilization are what's going into the Opportunity Zone fund.

Jerry: Exactly. Now at the same time, we partnered with Opportunity Zone funds that are buying the homes that are for rent so they can rent the homes out for 10 years or whatever like that. So the good part about that is that what they like about us is that we bring the house up to par and we do the capital improvement requirements for those particular homes in those particular communities. And also we worked with local nonprofits and another organization that provides the housing counseling for these guys and financial literacy to actually move the guys into the particular property. So at the same time, the Opportunity Zone fund can just purchase the particular property from us. They own the property. So what they like about it is that they have a piece of property that's already with a tenant in it, is already up standards. And now they are happy, because they have assets that's ready to go and producing revenue instead of buying, waiting, bringing up to par. And you know, that just takes time. So that's one of our strategy.

Jack: It's a very narrowly focused strategy that – now that you say it – it's kind of obvious. That makes a lot of sense. But until I'd heard you say it I hadn't really thought of that kind of approach. Very creative. Very good.

Jerry: And then one more part to it, and let me, I'll close out on this now. The Opportunity Zone funds that we created – and say we as the people that we created wealth for them. We normally set up at a 70-30 split because Opportunity Zones, you don't have to put all your capital gains into an Opportunity Zone fund versus the 1031 exchange; you have to take all your real estate capital gains and put it into a 1031 exchange.

So what we try to do rather, we do 70-30 split. So we do the 30 percent that would be your income and then the 70 percent would be your wealth building. Now with Opportunity Zone, once we get the community stabilized, then we'll do the commercial corridor. Now we'll hold those commercial corridor for over 10 years now and we put tenants that are in the community and those local businesses like the business I'm in front of – a coffee shop – and then now we can put them into the community and I build long-term wealth for everybody. And that's how you make an impact in the community.

Jack: That's a big vision, Jerry.

Jerry: Yeah. Well we plan to do this all across the country,

Jack: If folks are interested in talking to you about the Epic Community Impact Fund, or get getting involved with you in some way, shape, or form, what's the best way for them to do that?

Jerry: They can go to our website at www.epicimpactfund.com. Or they can email me, jerry@epicimpactfund.com.

Jack: Very good. And I'll remind our listeners if this information will be printed on the podcast website so you can go there to pick it up.

Well, Jerry, I have really enjoyed getting to know you. I'm very impressed with your vision and the fact that you've actually put your money where your mouth is and are walking the walk, not just talking the talk. Have you got any final words for us before we sign off for the day?

Jack: Well I guess the only last word is that if anybody that are either Opportunity Fund investor, community organizations that would like to know more about our concept and what we are doing, please reach out because we are looking at doing this concept all across the country and communities. We really want to make sure that we are impacting these communities and keep us... [horn honking] I guess that's a truck. My sign to go.

Jack: Alright. Well Jerry, thanks so much. It's been a pleasure talking to you. I hope I get to meet you at one of these expos here in the near future, New York and Chicago. So hopefully I'll see you there.

On behalf of Jerry McGaughy of the Epic Community Impact Fund. I am Jack Heald for the OZExpo Podcast. Thanks for joining us. Be sure to press that subscribe button so you're updated when we release new episodes. That's occurring all the time. And we will talk to you next time.

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