Value Walk’s Q&A with Marcia Kadanoff, co-founder, president & COO at Lighthouse.one. In this interview, Marcia discusses her and her company’s background, bringing accredited investors with OZ projects together, vetting potential investors, the goal of the OZ legislation, how Opportunity Zones work, free capital gains with OZ investment, unscrupulous operators in the OZ industry, nationwide real estate trends, if WeWork’s botched IPO will have an impact on real estate, and the role of nonconforming states for encouraging investments in OZs.
Can you tell us about your background?
Lighthouse.one is led by urban innovation experts and former tech sector executives, Peter Hirshberg, CEO, and Marcia Kadanoff, President and COO. Peter and Marcia hail from Maker City®, which has an extensive track record of working with cities, towns, and the private sector to create new forms of civic innovation, economic development, and transformation.
Steve Glickman, one of the architects of the Opportunity Zones (OZ) program, joins as a senior advisor. Glickman is also the founder and CEO of Develop LLC, the nation’s leading advisory firm dedicated to building and supporting Opportunity Zone Funds seeking to positively transform low-income communities across America, and he is one of the nation’s top OZ experts.
What does your company do?
Lighthouse.one brings together the most promising OZ projects and accredited investors on its community-centric platform. OZ projects ranging from commercial real estate and affordable housing to sustainable infrastructure and high-growth startups can easily be discovered and gain access to capital like never before. Investors can build a unique OZ portfolio across target regions, industries, project types, and social goals.
How is that different than traditional banks?
A traditional bank cannot invest in an OZ project be it real estate or an operating company. Only an OZ fund can invest in these projects, which are located in 8,700 communities across the U.S. as identified by governors in collaboration with municipal leaders. An OZ is a low-income community as defined by a census tract – or – it is located directly adjacent to such an area.
Some projects – particularly those that are real estate – consist of equity financing from an OZ fund plus debt that is financed through a traditional bank. That said, there are no particular federal incentives for the bank to provide this debt financing.
How does it work? Do you need to be registered with FINRA, SIPC or any of those?
To avoid getting overly technical, we operate as a technology platform, bringing together accredited investors with OZ projects. Our service is designed to match investors with projects based on a variety of criteria: geography, social impact, type of project, etc. The potential investor picks the projects they want to invest in without relying upon a so-called expert to pick the projects. We vet projects carefully, standardize paperwork, create the special purpose vehicle (SVP) that just happens to be an OZ fund, and then create all the paperwork the taxpayer needs to qualify for specialized treatment of their capital gains under the OZ legislation. To do all this, we do not need FINRA, SIPC registration – although as we get bigger, with more assets under management – this can and will change.
Is your platform exclusively for qualified or accredited investors only?
Yes, you must be an accredited investor to use the Lighthouse.one platform.
Do you vet potential investors and allocators?
Only accredited investors can find OZ projects on the Lighthouse.one platform. The SEC defines an accredited investor as an individual residing in the U.S. is accredited if he or she meets either of these two criteria:
- Earned income exceeding $200,000 for each year over the last 2 years ($300,000 if you have a spouse), and also have the expectation to earn similar figures this year
- Has a net worth of $1,000,000 individually or with a spouse, excluding their primary residence
As of September 2013, the SEC requires that companies that discuss their financing publicly must authenticate that investors are accredited. This process involves submitting documentation showing that you meet one of the accredited investor criteria. Certain jurisdictions may also have other requirements.
Is any industry more impacted by rates than real estate? How much does Fed policy matter for your firm?
Right now, capital is (relatively) cheap for both real estate and operating businesses. But capital is not spread equally with 5 cities on the two coasts getting 70-80% of venture capital: San Francisco, San Jose, New York, Los Angeles, and Boston. The goal of the OZ legislation is to get investment dollars flowing into low-income cities that ordinarily do not see the VC and other forms of investment needed to create jobs and more equitable opportunities for the people who live there.
Are you involved with Economic Opportunity Zones (EOZs)? Can you explain how they work?
Investing in qualified OZ real estate and businesses is complex but it doesn’t need to be. Lighthouse makes it easy for accredited investors to find quality deals and for OZ fund managers, property developers, and entrepreneurs to locate new sources of investment capital.
Opportunity Zones were established in the 2017 Tax Cuts and Jobs Act, and there are now over 8,700 OZs in all 50 states, the District of Columbia, and five U.S. territories. Opportunity Zones are defined by low-income census tracts designated by governors. The legislation incentivizes investments in these low-income communities by deferring, reducing, and potentially eliminating capital gains taxes.
We have heard Economic OZ projects are super hot what is going on and what should those investing there know?
Right now there are more projects than investment dollars and the vast majority of projects are real estate versus operating businesses – but here’s the thing: the OZ legislation provided a relatively shallow incentive to reduce (by a maximum of 15%) and defer (by a maximum of 10 years) capital gains on the front end of the project. It’s on the backend where things get interesting; if you keep your dollars invested in an OZ project for a full 10 years, 100% of capital gains on your OZ investment will be free of capital gains. This incentive is terrific and really favors operating businesses that can sell at high MOIC versus real estate where MOIC typically does not exceed 2x.
With any hot new industry unfortunately many unscrupulous operators swoop in – ValueWalk sees this with crypto and weed, for example – I assume we will soon see this with Economic OZ projects: how can investors prevent themselves from getting scammed from shady Economic OZ projects?
There are no standards (yet). If you invest through a traditional OZ Fund – look at the background of the GPs and also at the investment thesis. Our preliminary work validating the Lighthouse One value proposition is that there is a sector of investors who do not want to pay 2/20% as in a traditional fund and also want to pick their own investments.
Also, make sure that the OZ fund you select has a track record in what is called community engagement: understanding what the community wants and how to overcome resistance to projects that the community.
What are the nationwide trends regarding RE?
- Winner take all urbanism
- Remote work is everywhere – jobs are going away
- Flight from major cities to suburbs and secondary cities is creating hidden gems
The nationwide trend is towards what we call “winner take all urbanism”. To participate fully in the innovation economy, many established companies and startups focus on establishing operations in only a handful of cities. These cities are getting stronger and the cost per square foot – both for businesses and to purchase a home – is rising much faster than inflation.
Recognizing this more and more, companies are encouraging their employees to work remotely to save money on real estate and also on salaries.
Finally, some of the biggest cities are seeing a net exodus of workers due to two demographic bulges. Millennials who now want to start families and are moving to the suburbs and/or secondary cities to be able to afford a house; Baby Boomers who are aging out of their houses in the suburbs and primary cities and now want to downsize.
Due to these trends, now is a great time to invest in real estate in a secondary or tertiary market.
Is the WeWork “botched” IPO having any impact on Real Estate and/or Economic OZ projects?
We don’t think that this will have any impact. After all, WeWork does not own its buildings; in most cases, it is long term leases.
WeWork recently expanded into secondary cities away from the two coasts. We hope that the delay in their IPO will not cause them to pull back from their commitment to secondary cities.
What do you think of recent proposals to cap interest rate?
This won’t affect OZ projects which are structured as equity not debt. We really do not have an opinion here except to say that a strong consumer economy benefits everyone. And for a strong consumer economy, we need reasonable interest rates and protections for the most vulnerable of our people.
If you could craft one piece of legislation on Economic OZ projects what would it be?
What bothers us about today’s economy is that most capital is extractive in nature, designed to exploit the differences between the haves and the have nots.
We would like to see more thoughtful legislation like the OZ legislation designed to get a public-private partnership flowing that is not extractive in nature but designed to encourage people to work together to build the future they want inside of cities.
Final thoughts on Economic OZ projects?
There is a lot states can do – particularly nonconforming states – to encourage investment dollars to flow into OZs.
Nonconforming states are states that do not automatically adopt the same tax treatment as the Federal government. Take California. In California, long-term capital gains are taxed as ordinary income. Therefore, a California (nonconforming state) taxpayer cannot benefit as fully from the OZ legislation compared with a taxpayer in New York (conforming state). This sets up states to compete with each other in a way that does not seem all that productive.
We do expect local governors to address this. Most of the Commonwealth of Puerto Rico, for example, is an OZ. On top of the regular benefits of the OZ legislation under federal law, Puerto Rico provides an additional 15% reduction and deferral of capital gains. They did this to make investing in Puerto Rico particularly attractive.