Talking Heads Steve Glickman, Develop LLC
By Darryl Hicks
11 min read
The Architect of the Opportunity Zone Program
As a senior economic advisor to President Barack Obama, Steve Glickman sought out policymakers, economists, investors, business and community leaders and other experts and gathered ideas that could be used to help struggling communities recover from the Great Recession.
After leaving public service in 2013, Glickman co-founded the Economic Innovation Group (EIG), a Washington, DC-based bipartisan research organization focused on addressing America’s most pressing economic challenges, with public policy expert John Lettieri and billionaire philanthropist and entrepreneur Sean Parker (co-founder of Napster, Plaxo and Facebook).
Based on the feedback they received, EIG conceived the Opportunity Zones program and drafted the underlying legislation—the “Investing in Opportunity Act”—that would be championed by Senators Tim Scott (R-SC) and Cory Booker (D-NJ) and included in the Tax Cuts and Jobs Act of 2017.
In September 2018, Glickman left EIG to form his own consulting firm, Develop LLC, to advise Opportunity Zone Fund managers and communities that want to utilize the Opportunity Zones program.
Tax Credit Advisor sat down with Glickman to learn more about the evolution of the Opportunity Zones program, the potential market size, the newly published IRS regulations and where he sees the program headed.
Tax Credit Advisor: What inspired you to create the Opportunity Zones program? Where did the idea originate?
Steve Glickman: The Opportunity Zones program is, in many ways, the brainchild of Sean Parker, who co-founded EIG with me and John Lettieri, to create long-term investments in communities cut off from the economic recovery. Sean realized early on that the tax code was the most important way to stimulate change in the capital markets. We incentivize donations to charities through the Charitable Contribution Deduction and encourage homeownership through the Mortgage Interest Deduction, but a friction has always existed between investors and the markets that would become Opportunity Zones. We wanted to change that mindset by creating a real financial incentive that looked beyond the traditional markets and created what we believe is the first totally scalable geographic incentive program in the tax code and the only program that provides total forgiveness of capital gains taxes.
TCA: Have there been other programs you would compare it to?
Glickman: Opportunity Zones were inspired by early bipartisan attempts by Congressman Jack Kemp and President Bill Clinton to build geographic-based incentives, which led to the creation of Enterprise Zones, Empowerment Zones, Renewal Communities and ultimately the New Markets Tax Credit. All of these programs had limitations, though. Only a few hundred zones were created. They moved a couple billion dollars of capital that focused on small businesses. They had a mixed track record. Most people don’t view them as being particularly effective. The New Markets Tax Credit was more successful, but it only moves about $3.5 billion a year, it’s tightly regulated and it’s not very flexible. With Opportunity Zones, we created a program with no cap that could tap as much capital as needed for these markets. At EIG, we calculated that there is over $6 trillion in unrealized capital gains sitting on the sidelines that could be invested. We also wanted it to be very flexible, so that it wasn’t focused on just one sector but could be used for real estate, businesses, energy, infrastructure, basically anything that you could invest in as an equity investor. We are in essence creating a new marketplace that we think is going to move hundreds of billions of dollars in capital that far exceeds all of these previous programs combined.
TCA: In this data driven environment, how did you measure the potential effect of this program? How did you model its impact?
Glickman: The program is less than six months old. There’s no holistic way to measure impact just yet. Capital hasn’t started to move in scale, but investor demand is very high. There are a number of funds that are launching and beginning to raise hundreds of millions of dollars each and communities are mobilizing across the country to take advantage of it. When the legislation was introduced, there were reporting requirements built into the program, but they were stripped out of the final bill because of procedural reasons. I think there is some movement in Congress to reinstitute some of the reporting requirements, which I think is a good idea. But right now, the flow of capital is not transparent, which makes it hard to evaluate the impact of Opportunity Zones in the earliest stages. At the end of the day, though, this program will be assessed by how many mayors and local leaders see its impact and potential and who use it as part of their economic development toolbox.
TCA: Did you select Senators Tim Scott and Cory Booker to shepherd the bill through Congress? If so, why them?
Glickman: We spent two years before EIG was publicly launched meeting with policymakers at the federal, state and local levels, as well as economists and investors to determine the level of interest for Opportunity Zones. It became obvious that Cory Booker and Tim Scott would be natural champions of the legislation. They understood the communities that the program would benefit. Senator Booker had been the mayor of Newark, NJ, a heavily distressed area, and who had long focused on public-private partnerships focused on economic revitalization. Senator Scott grew up with a working-class background in South Carolina, which has all sorts of challenges and successes around economic development. And they both work well together on issues, such as apprenticeships and criminal justice reform. They were organically very attracted to this model and were willing to put their political clout into the game and convince their colleagues to get on board.
TCA: On October 19, the IRS and U.S. Treasury issued proposed regulations for the Opportunity Zones program. What was your initial reaction? What would you like to see changed or clarified further?
Glickman: In general, I thought the proposed regulations were a step in the right direction. They answered many questions that real estate investors, in particular, had. They created more flexibility around the timing that an Opportunity Zone Fund must deploy capital by creating a safe harbor vehicle that funds can use to hold capital for 31 months. They clarified that in calculating the statutory requirement that investors put at least as much improvement dollars into the project as they did in acquiring the project, land values can be excluded, which makes it more likely that investments will be made in denser, urban markets where land can be a large part of the overall purchase price. And IRS provided definitional clarity, in particular, on how you define a business that’s investable and created a reasonable threshold that 70 percent of the business’ tangible property had to be in an Opportunity Zone. There are still a lot of open questions for business and real estate investors. On the real estate side, for example, there are still some basic open questions, like how depreciation and refinancing work within this program. For business investors, however, there is currently a much steeper hill to climb. There are still several threshold definitional questions around how you make business investments in entities beyond newly created companies. And for all investors, there’s a big open question around whether funds can recycle their investments, so that they can sell an investment and reinvest into another asset without any unintended tax consequences. That was the intent of the program, but Treasury has not been clear on whether funds can move their capital from asset to asset without creating a longer period of time that investors must hold their interests in the funds to get the full tax benefit.
TCA: The wealthiest individuals and companies benefitted from an earlier tax cut. This program offers them another tax deferral and possible savings. How did you balance that with the needs this program can fulfill?
Glickman: The goal was to incentivize capital from the private investor community, who have been the beneficiaries of the widespread growth in the stock and real estate markets. But, the idea is to get that capital off the sidelines and to incentivize those investors to put their capital to work in communities that had been cut off from the capital markets. It stemmed from a realization that federal and local governments don’t have the balance sheets to make investments at this scale, or in many cases, even the proper vehicle to invest in job-creating businesses or real estate development projects. We wanted this to resonate with the private market and we think it has.
TCA: You’re now advising investors and communities across the country who are interested in taking advantage of the Opportunity Zones program. What’s the first thing you tell them? What noteworthy trends are you seeing in the marketplace?
Glickman: At its core, this program is about making long-term predictions, backed by private capital, on what neighborhoods are going to appreciate meaningfully over the next decade or more. While there will initially be lots of deals that are very opportunistic, what’s really interesting will be the places that you see transform over time. I tell investors and communities to prepare for that reality. For communities, it means building a strategy and cataloguing and organizing assets in such a way that will attract investors. For investors, I suggest the mirror image of that, which is that you should be identifying places where you will have local partners that understand this program and use that measuring stick as a way to identify where the critical mass of your investment dollars should go. I take a very long-term view of how communities and investors should view this program, because it takes a long time to transform neighborhoods. Development projects can take several years. Transforming neighborhoods can take a decade or more. You see that where I live in Washington, DC, where just in the span of 20 years there has been an enormous amount of change, development and business activity that was unthinkable when I first came to town. I think the city and its residents have benefited from that and the question is who’s next? The South Side of Chicago? St. Louis? Louisville? Baltimore?
TCA: You seem to be focused on urban markets. Can the Opportunity Zones program realistically turnaround rural areas of America that are suffering as much as their urban counterparts?
Glickman: Absolutely, there are a number of interesting investment opportunities in smaller communities, which make up 25 percent of Opportunity Zones that can support projects, like renewable energy infrastructure, vertical agriculture and manufacturing. But investors will initially look more closely at densely populated areas. It’s a totally market-based program, so wherever you can make good long-term investments work, you’ll be able to see a lot of impact.
TCA: Where do you want to see the OZ program 12 months from now? How will you measure the results and the impact?
Glickman: Twelve months is a pretty short lens to assess neighborhood transformation, but I think you’ll see some changes. I foresee more regulatory clarity that will make it easier for investors to come in. Big institutional wealth managers who oversee a huge number of capital gains in the marketplace of high net worth investors will spur more investors to come in. Eventually, I think you’ll see substantial individual and corporate capital coming in, which will push investors to look beyond the low-hanging fruit of real estate projects that we are seeing now and get into second and third-tier markets. As we get regulatory clarity, I think we’ll also create room for a business marketplace to complement what’s happening on the real estate side. The two need each other. You can’t build successful real estate projects without having businesses that come in as tenants and provide services to those commercial or residential developments. On the business side, it’s hard to stimulate business development without real estate where people want to live and work. So, I think you will see a more crowded marketplace with more capital and a bigger range of assets. That’s when things get really exciting.
Story Contact:
Steve Glickman
info@developadvisors.com
http://www.developadvisors.com/
