The 2017 tax overhaul created incentives for investing in certain low-income communities across America, or "opportunity zones" as they're called. In this episode, Margaret Anadu, head of Goldman Sachs Urban Investment Group, explains the opportunity zone investing landscape and the role of private capital in revitalizing struggling communities. "There's no way we're going to change the situation in low-income communities and bring back all of that opportunity without the investment of private capital," Anadu says.
This podcast was recorded on May 7, 2019.
This podcast should not be copied, distributed, published or reproduced, in whole or in part. The information contained in this podcast is not financial research nor a product of Goldman Sachs Global Investment Research. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty, as to the accuracy or completeness of the statements or any information contained in this podcast and any liability therefore (including in respect of direct, indirect or consequential loss or damage) is expressly disclaimed. The views expressed in this podcast are not necessarily those of Goldman Sachs, and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this podcast. In addition, the receipt of this podcast by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs to that listener, nor to constitute such person a client of any Goldman Sachs entity.
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This is an unofficial transcript meant for reference. Accuracy is not guaranteed.
This is exchanges
In fact, when we discuss developments, curly shaping markets, industries in the global economy objects, seaward, global, had of corporate communication to the firm. The question of today's episode is: what's the business case for investing in America's low income
unities dancer that were joined by Margaret Nadu Head of the firms, urban investment group Margaret walk into the programme. Thanks for having me somewhat,
you run a business that invests primarily in low income communities, but before we talk about the business side
was first understand the non financial argument for investing in low income communities. In the. U S, sure it's no secret that ten years into a very strong financial recovery here in the? U S,
there are still towns. Is facing many Americans so just to put a few,
where's around that right now, one in six people in this country live in a distress community that fifty two million people in total, these neighborhoods with low graduation raids, shrinking job markets. Many of them have high
You can see so, while there's a robust conversation, the national level about how we ve record low unemployment, unemployment rates and some of these communities are still as high as thirty percent. So all that's a place matters so much if you
born an educated and living and working in the low
I'm community in the? U S, your experience is vastly different from that of other Americans. So where are these neighborhoods?
Unfortunately, there not random. These are the same neighborhood that have been suffering since redline started decades and decades ago. Pretty much eliminate,
private investment and that then, of course create a vicious cycle of under investment that continue. You didn't get new schools, new buildings, new jobs, etc, and so we simply have to reverse that, and the only way to reverse that is to start to bring that private capital back into
neighborhoods. What about the financial argument for investing in these communities? The two thousand seventeen tax overhaul created incentives for investing in what are called opportunities owns and we'll talk a lot about that phrase. What are opportunities zones
What were they trying to accomplish with this legislation? One of the primary issues in these neighborhoods is that they have not seen the level of investment that you see in other places. They are now
new businesses being open. There are not new buildings going up, there's, not new housing being developed, that's generalization but cross the board, and so the goal of the opportunities on act was to take capital, those trapped on the sidelines and find a way to and sent that capital.
Flow into these neighborhoods in a long term way how the tax provisions structured to accomplish echo, taking capital gains and invest in them and opportunities on funds. You get three benefits that are pretty attractive: one you get to defer pain, that initial tax.
until the earlier of when you sell that opportunities on fund investment or to twenty twenty six, so just a pause in that for a second, its by definition of perishing benefit. So if you invest today, you're gonna get a longer deferral than if you
best, of course, a year or two years from now, and that's what's driving a lot of the energy and real rush in space to really figure this out quickly. The second benefit is a reduction in the original capital gains tax. So if you hold that opportunities own fund investment for five years, you only by ninety percent of that original capital gains tax and the field investment for seven years, you only pay eighty five percent of that original capital gains tax and then the third benefit, which we think is the most attractive, is in that actual opportunities on fund investment. If you hold it for ten years, you eliminate capital gains tax on that
spent entirely, but those three together, it's pretty significant, and that explains why we're seeing so much money flow into the space correct. So there's been some confusion around how would actually work in the details
but Treasury Department Treasury just released a second round of regulations, top clarify how it would actually operate
We learn from that latest batch of regulations and what questions are investor still ask. There were few
main clarification, even though their still question
Lingering really did put this on a fast path, so first one of the original nation.
The regulations is that you only got that last third benefit. Basically, the elimination of capital gains tax on the investment. If you sold your interest in the opportunities and fund, so it that does it, doesnt really make it possible to do multi ass, a vehicle, because everyone's focused on your sale of the fund, as opposed to what happens when I sell the underline assets. So one of the things of this last run, the rugs clarified is that you get that benefit, that elimination of taxes for holding for ten years when those ass
their sold, not just when your interest in the fund, the sole seems like a pretty technical detail, but if you think about how funds are organised, everyone wants diversification fund managers who used to pooling investment coming up with the theme and investment thesis and then really getting people to buy into that full funder pool of assets. So that was one really important clarification and everyone was about how depreciation will work. So a lot of votes were focused on will after I sell the investment at the end of the ten year period. Are my depreciation benefits under recapture and in most cases they are not. That was another. Really
potent clarification, and then lastly, there were- and this goes to the point about there- still stopping lingering questions. I was a lot of clarification of what businesses would count. So treachery came out with guidance about how you could qualify a business and opportunity sound based on where its located, where the goods and services are sold, where the employees are located to another few different ways to qualify for business business. That's
I think that raise additional questions as well. A misleading see a lot of the interest was unrealistic, as that was clearly within the purview of the rule, where we see
funds. Now they ve got a little clarification on the business. I will we see, funds that specifically focused on businesses in these underserved communities,
we will. I don't think you'll see the same amount of capital and fun generous. Let your seen on the real estate side of- and I think you have done-
at the end of the day, real estate is just definitional place based asset, whereas even now the clarification that what businesses count. I think that
folks are going to struggle a little bit to really create large pools of capital that are going to go into businesses that are deciding to be in a place just because it's an opportunity zone. I think the other issue there is that for private equity funds, that ten year olds going to be a little bit of a challenge, especially for fast growing,
This is like the venture model you go to the next round, you're looking for that next capital rays are looking to take some liquidity off the table, in many cases
Our earlier than ten years. Let's take a look,
about where these opportunities zones are where these communities that are struggling, I think in the past a lot of people
on urban areas, but obviously we all.
That a lot of rural areas have been left behind is well, so what the other
these zones look like on a map. This brought all across the country. Each governor have the opportunity to choose twenty five percent of their eligible low income neighborhoods. So there in all fifty states, Washington, Dc Porter Rico, ten percent of the country.
Population lives in an opportune these out and to allow the headlines were focus on the urban areas that were chosen. A full quarter of them were in rural areas.
but a lot of concern that maybe the opportunities owns it was selected were actually the most distressed really need of capital. If you look at them across the board and compare them to the zones that were eligible for choice, they are actually more distressed, they have lower incomes, have higher unemployment. We ve made actually eight opportunism investments on balance sheet today,
again, there is a significant variety across these neighborhoods in what they look like and what the challenges are. One of the steps that I actually found most striking when we looked across all opportunities zones, is at thirty, eight percent of adults and the selected zones are not working, so I don't think there's any doubt that these are areas in
you need of capital and support. You mentioned the criticism that some of the zones might have attracted
But anyway, without these tax incentives
I'm Portland, Oregon longer
city, her New York were Amazon was looking at a second headquarters. What's the argument to counter that, I really do think those headlines are the exception and not the rule. If you will gradually,
when instituted a really great study where they looked at. Basically, signs of gentrification sat looking at capital, its flowing into a place, educational attainment, incomes etc, and they actually found that only four percent of the opportunism.
We're selected, we're seeing that change anyway over the last couple decades, and so look there's a lot that can be criticised by law,
Alan City, but you also have to really peel away the strategy of the public sector and
The governor every mayor had a different strategy,
here in New York? What we notice is a lot of the senses track that were chosen, including the ones in long island city were also centred around the city's clusters of public housing, and so
yes does. Amazon need a subsidy. We can all debate that, but with people in one of the largest public
in developments in the country have benefited from that opportunity zone. I think so. On the flip side
there are communities that are can have trouble attracting capital even with these tax incentives. How do we think about solving that problem? Is a country
I think this is a difficult one. I mean one of the things that I'll say about this federal tax base: incentive relative to others that we ve seen in economic development space is that it's not allocated so many previous bills, initiatives etc. They would say: hey, California, you get this much based on Population New York. You get this money
etc? So people are gonna leave dollars on the table, so, even if it was in a market that has smaller d
or more distress, incentives tend to get used here. There's no allocation whatsoever, so every single day
could get invested in downtown Portland as an example and you could have rural area,
literally get Zira that's little extreme. But that's one of the problems that fund managers and investors are going to focus on the places that are easier to invest. So what does that mean larger deal sizes?
you are gonna put in the work to structure a deal, and you want to put out a billion dollars are going to do that and five million dollars
Are you gonna try to do that in
your nine dollar chunks, and so I think what the industry and space needs to do is one really get these rags down. So every deal does not have millions of dollars of consultants and lawyers still trying to figure this out
once we get into more of a routine and rhythm about how these deals are structured in those transaction costs can come down. I think I'll just allow for smaller deal sizes, which will be helpful. The others
that's gonna, really important for some of these smaller markets are more challenged. Market is really gonna, be the responsibility of the public sector to market their city market. These neighborhoods
you want just come here and make this one investment. We have a pool of investments, we have a strategy, we have neighborhoods that were focused on, and so I think, the more
that the investing community can feel like they're gonna make investments that are sound. They can do it efficiently. That will help some of the more chow.
in some areas. So we ve seen investors rushed to raise money as easy, a new fund almost every day I, but how are the investors actually proceeding? Are they rushing to deploy capital given the nature of the tax break and the need to get an early or they take it slower? So I think there has even been
change over the last couple weeks since the last round of rag that I think personally has been positive. So first, a range of investors that have reached out to us no demonstrated interest is pretty broad. You have everything from high net worth investors. Institutions corporations have the foundation and philanthropic community trying to see what role they can play and I feel like with a lot of questions and the rag. So much of this was about what's the eggs.
structure and let's quantify this benefit and what's the real incentive now I feel like there's more movement, to talk about what are the deal's? What are we investing and what are the risks of these underline ass? A class than power
Jackson, where do I want to vast? You know you hear about big national opportunity funds, but are people really gonna in a thoughtful risk, managed way, invest across all fifty states? I don't think so. I think what you will start to see is more regional.
develop where there is a specific strategy around a neighborhood, specific ass, a class and less all of the conversation about the structuring and tax incentives etc. But more. What are these?
Yet what are we doing so? You mentioned some of the investors that are getting into the space. Is this composting the goal of getting new entrants in the space of these, the usual players just using a new structure? I think these are dappling. You
I think if you sort of thing about coming
any development and economic development. Broadly, it's not like. We just started talking
low income neighborhoods at the end of twenty seventeen, so
our many community development financial institutions who are significant space, but what are they do they tend to? You
lending. You have the Sierra motivated banks, who tend to do a lot of lending as well tax credit investing. This is about private equity, we're talking about capital gains and benefits that you get only
true equity ownership. One of the big entrance into the space is the traditional real estate, private equity community, and I do think it's important and positive and progress
for a lot of these institutions and fund managers to be thinking about neighbourhood that they, just quite frankly, I don't think would be talking about if it weren't for opportunities
So Margaret you run Gormans urban investment group and you been investing in these kind of community for a long time now you re
thinking the strategy for your own team. In light of these recent developments in the opportunities on opportunity, we ve been investing like you mention in the communities for close to two decades, and so there's
a change in strategy. I think the way that we're thinking about it it's another tool in the tool about. So our approach, which weave develop again over the last twenty years, has really showed us that to go into these neighborhoods and make a difference is very difficult to do it with just one product or one ass, a class, and we started primarily just.
private equity and just focus on housing and over the years we realized. You really have to be able to think about fresh food and grocery stores, schools, assets that are going to create jobs, workforce development, and then we built out the financial products as well, so not just equity, but doing that tax credits really being able to be solution, oriented as opposed to product oriented and since we think about opportunities owns this is
another benefit and incentive that is going to drive, work and communities that were already doing so. If we look back across
the eight billion that we ve invested. We looked at this the other day over six billion of that,
was an opportunity sounds so, in fact, this is work that were already doing. We think we're gonna, some great new players in space as folks are to showing in demonstrating so much interest, and we think it's something we're gonna be using not in isolation but
part of a comprehensive strategy, so you talk a little bit about how our philosophy investing has changed and we might in the past him thus in a single asset, but now we're looking multi acid strategies that sort of taken no account
the challenges in one of these neighborhoods so has played out in some
places where we ve invested its allowed us to be just fine
solutions oriented to, if you take a place like Newark, New Jersey, for example, housing, certainly
and they're gonna before we got involved, there hasn't been a quality new construction, housing development in the downtown over forty years. If you can imagine that wasn't the only issue, they also issues around fresh food issues around the school system. When we start investing in New York, the graduation was barely
of fifty percent, and to being able to really have capital and solutions for a range of challenges. It allows you to accelerate that economic
and when you can really focus on multiple angles. You looted
this earlier, but there's been some pushed back around the opportunities on funds and some people have been saying that the supervision
pouring requirements, are a little bit lax and that there's not a good way to ensure that
funds- are actually meeting the criteria. We are we on that component, making sure that the investment processes pretty rigorous your correct. Currently there
party requirements are close to non existent. There's not much. You have to do other than to the business or real estate project that in the right place and self certify that you ve done so. However, just recently the programmes, initial cosponsor centres, Booker and Scott just relief, the draft of a bill that would require investors to report annually to Treasury some basic details about their opportunities on invest,
and this hopefully, will not encourage increased focus on impact for fund managers, but also be an important data aggregation process for policymakers, taxpayers more broadly,
to really evaluate whether this programme truly did have the intended impact or another cod
mercy around the opportune zones is the argument that investors are just coming into these disadvantaged areas to make money and they're. Not.
concerned about the community and human aspects. How much of a concern that?
How do you think about that problem? I think it's a valid concerned.
I think, it's a little too binary for one to suggest that people who are motivated by profit cannot make a positive impact. I just adjusting that's fundamentally false
The grocery store in your neighborhood is probably financial profit motivated, but they still supply fresh food, that's good for you and your family. I dont think it has to be so either or
What I will say is that I do think that the challenges in these communities are complicated. They did.
Happen overnight. Their significant overlap, unforced-
Lee with Red lining dating back to the nineteen thirty one banks with the explicit support of our federal government, basically would not lead to the majority of black tuition
get neighborhoods in this country, that's complicated stuff. We're not
solved overnight, we're not gonna fix it overnight, but I do think that every investment people should be thoughtful about,
is this really moving the needle in a positive direction or not, and even if you don't care about impact child care about risk management, so the
the day. If you're going to invest in a business or we'll stay project, it should be one that the people in that community want and are going to utilise and is going to be productive, and I just think that
will take time for a new investment community who hasn't focused on these neighborhoods to understand that
and I think that's the case when any one goes into a new asset class. I think this is just particularly nuanced.
Tomorrow, when you came to Goldman, did you think he'd be working this pace, or how did you first get interested in this kind of investing? I thought that its
point in my life. I would be in this space more broadly right when I was twenty one years old are probably couldn't really articulate exactly what the space was, but you know
but my very early years and like us, Nigeria, and was able to witness poverty
level that I think was quite profound and stuck with me and then went at middle school in high school in Houston, Texas, where I lived in a fairly low income neighborhood. So these chow,
jobs are not foreign to me. The idea that we are you
are and live, and your neighborhood really matters is something that I understand. Personally.
So in getting to Goldman Sachs again start nearby investment for by started in our equities division being able to join
the urban investment group and use my analytical scales skills and be a deal junkie, forget
in a way. You know it's probably not somebody nine vision when I walk through the door, but I've been the urban investment grouper almost fourteen years now- and it's been a great experience so when you think back of your experience,
here over fourteen years in this space. What gets you most excited about what's happening today? I really have to take it back to opportunity sounds.
Not necessarily the specific incentive, but I think the dialogue were n
community and economic development can be a very new
she and sort of isolated world within investment and investing, and even with all
talk. I would say over the last month- and I call it for five years when impact investor
has gotten a lot of attention. You know it's still sort of off on the side in a way
big opportunity sounds just have a lot of people talking about neighborhoods that they wouldn't be in not even just in the investment
meaning, but you have you no mayor
economic development agencies almost ass. I once a pride but to some
a bit more energy around solving some of the challenges and their neighborhood in really being thoughtful about what public private partnerships can do and so will see what happens with opportunities owned and what these funds and looking like an
Investments had happened, but I think that the dialogue right now healthy so Margaret in there
second to last, just to recap: what's the business case for investing in America's low income communities? Is
what is really important national conversation today about income inequality and the haves and the have nots, and there are their views on all sides, but I think one
we can all agree on is that everyone should have the opportunity to grow and succeed and to have that opportunity. We think it's really important to live in a neighborhood. That's quality, housing that your family can afford great schools. We can learn access to fresh food, great health services and, of course, an array of jobs. That's gonna give you the opportunity to take care of your family and right now, that's just not the case in many low income neighbourhoods, and despite that, within those neighborhoods, there are, of course, incredibly smart people with great business. Ideas who want to innovate want to grow, want to solve some of these challenges and that's a we're. Looking for investors, we seek to back those people and their projects and their businesses and their ideas and there's no way we're going to change the situation, low income communities and bring back all of that.
opportunity without the investment of private capital market for joining us today. Thank you are driving me. That concludes this episode of exchanges. Goldman Sachs thanks for listening, and we hope you join us again next time. This part castles recorded on May seventh, two thousand nineteen, this podcast should not be copied distributed, published or reproduced in whole or in part. The information contained in the spot cast is not financial research nor a product of Goldman Sachs, global investment research. Neither Goldman Sachs nor any of its affiliates makes any representation or warranty as to the
you see or completeness of the statements or any information contained in this podcast, and any liability, therefore, including in respect of direct indirect or consequential loss or damage, is expressly disclaimed? The views expressed in this pot cast are not necessarily those of Goldman Sachs and Goldman Sachs is not providing any financial, economic, legal, accounting or tax advice or recommendations in this pod cast. In addition, the receipt of this past by any listener is not to be taken as constituting the giving of investment advice by Goldman Sachs too. That listener, nor to constitute such person a client of any Goldman Sachs Entity
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