December 2, 2021

Remarkable Mate

Remarkable business & finance

The Evolution Of Opportunity Zone Neighborhoods, With Chris Knoppe

How can investors execute long-term investments in low-income urban and rural communities via qualified Opportunity Zones funds? And what are the different types of funds in which to invest that spur economic development?

Chris Knoppe owns and operates CBUS OZ Funds with his brothers, Sean and Brian. The fund specializes in urban redevelopment in Columbus, Ohio with a long-term focus on delivering value to investors by providing affordable and attainable housing solutions throughout the urban core of Columbus.

Click the play button above to listen to our conversation with Chris.

Episode Highlights

  • How qualified Opportunity Zones represent a tax planning tool that defers tax and makes a positive investment in struggling communities.
  • Examples of how Opportunity Zones impact lower-income community improvement and real estate development.
  • How to set up an Opportunity Zone fund that accommodates nimble and high volume business.
  • How different Opportunity Zones funds can compliment each other and work as a coherent whole.
  • The location criteria for investing in Opportunity Zones and other considerations when searching for potential properties.
  • Why Columbus and Central Ohio are geographically desirable locations for Opportunity Zones.
  • A breakdown of the Ohio Opportunity Zone Tax Credit program and how it provides benefits to taxpayers on the front end of an investment.
  • How out-of-state investors can benefit from Opportunity Zones tax credits.

Featured On This Episode

Industry Spotlight: CBUS OZ Funds

CBUS OZ Funds is a Qualified Opportunity Zone Fund specializing in urban redevelopment in Columbus, Ohio. The principles of Cbus OZ Funds are distinguished operators who continually identify investment opportunities and execute on redevelopment plans to benefit investors and the surrounding communities.

Learn More About CBUS OZ Funds

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy: Welcome to The Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. Joining me today on the show is Chris Knoppe, managing partner at CBUS OZ Funds. Chris joins us today from Columbus, Ohio. Chris, welcome to the show.

Chris: Thank you, Jimmy. It’s a pleasure to be here. I’ve been following your show for quite some time, and I just wanna commend you on the quality content that you’ve been putting out over the years.

Jimmy: Well, thanks. I appreciate that. Chris, you and I met virtually at a Novogradac Virtual OZ Conference several months ago. I’ve been trying to get you on the show for a while, and you’re ready to come on now. You have a series of Opportunity Zone funds that have invested in real estate in Columbus, Ohio. So to start us off today, why Columbus? What do you like about Columbus and Central Ohio in general?

Chris: Yeah. That’s a good question because as you mentioned, we met at a virtual conference. I’ve also attended a number of in-person conferences over the last few years all over the country, different coasts in north and south. And Columbus as being in the Midwest, it’s a market that’s often overlooked or overshadowed by the Sunbelt or by the different coastal markets, but there really in lies the opportunity and a lot of people don’t realize that Columbus is the fastest-growing city in the Midwest. It was actually one of only 14 cities to add more than 100,000 people in the most recent census measurement. So in the last 10 years, only 14 cities in the United States have added 100,000 people, and Columbus was one of them. The MSA grew at 12% during that time. And actually, by 2050, we’re expected to add a million residents. So we really bucked the trend of the general Midwest region. And we’ve got Ohio State University here. We’ve got some major research institutes. We now have a thriving startup community, a lot of FinTech, a lot of insurance. We have banking, we’ve got big data here, Google and Facebook and, you know, manufacturing and distribution. Being in the middle of the country, a lot of distribution channels run through our city, a lot of logistics and e-commerce and things like that. So very diverse economy, very young population, a lot of cool things happening here.

Jimmy: Good. Yeah. Sounds like it. That was a fun fact. I didn’t realize that it was growing that fast. The fastest-growing city in the Midwest, as you say. So let’s focus in on your investments that you’re making through your CBUS OZ Funds. What types of projects are you focusing on, what is your investment thesis essentially?

Chris: Yeah. So my background is in single-family homes as is my two business partners who are my two brothers. And for the first 10 years of our real estate careers, we were primarily operating in the suburban markets, just doing scattered-site, new construction, and also a lot of buying and renovating, particularly during the recessionary years when there was a lot of bank-owned properties out there. So how that’s pivoted now is as the foreclosure pipeline was dwindling, we were looking for other opportunities. Really, me and both my brothers had lived in downtown urban communities. I was in a community that’s really the Arts District, the primary Arts District of Columbus at the time. It’s called the Short North for those that are familiar. It’s immediately north of downtown in between downtown and the Ohio State campus. And that neighborhood had thrived, even through the recessionary years, had thrived and grown in a really unbelievable way.

And it boggled my mind how within a half-mile of any direction of downtown and other neighborhoods, they had not shared in that growth. Those neighborhoods had declined for five or six decades and were very low income and suffered from years and years of disinvestment and blight had taken hold and private capital didn’t wanna touch it. So that concept was intriguing to me, and the other thing that I liked about it was our suburban investments were all scattered site. We might be taking the ugliest house on the block and making it not ugly, but the overall impact was fractional. So as far as the pouring our heart and soul into our work, we weren’t really getting anything out of that. And, you know, our staff, I think reflected that, I noticed some turnover in our staff when we were doing that. And then we moved and we started operating into the urban neighborhoods really with our own capital.

So we were able to concentrate some investments in very tightly bound areas and block by block, street by street, start making a difference. And that work was actually really rewarding because you could see very tangible before and after of your efforts, but, you know, the impact on a larger scale wasn’t huge because we were limited by our own capital. We were using bank financing in combination with our money and some institutional non-bank money, but really the overall impact was slow-moving because when you have 50 years of downward trend and you have a lot of boarded-up houses, you know, that tends to attract drug activity and that leads to crime and there are safety concerns. And it’s just really whether a neighborhood’s going up or going down, that effect tends to snowball. And so it was at that period of time where the Tax Cut and Jobs Act came out and introduced the Opportunity Zone Tax Incentive program.

I took notice at the urging of a real estate attorney friend of mine, who knew that we were active in these low-income communities. And we started studying it and figuring out if or how we could apply that to our business model and increase the impact that we were making. And so the tricky part was the OZ framework is set up as a fund structure that’s common in private equity or venture capital, and the way we had operated over the years was doing…you know, we’d done hundreds of little projects, but never in a large fund type of model that’s, you know, commonplace with giant developments. So the challenge was how do we set up an Opportunity Zone fund that could accommodate our very nimble and high volume business? And so we came up with a framework and we formed our first fund just with our own capital gains from selling some of our suburban investments. And for a year, we tried it out to prove the concept and it went well. And we got it all figured out as far as the different deployment timelines that are required for Opportunity Zone funds, as well as significant improvement timelines to the point where we are comfortable launching a second fund to attract outside capital.

So that fund successfully raised $5 million close at the end of last year. And we’re now…we just launched, and actually depending on when this podcast airs, this could be the first public announcement, but a couple of our investors have already invested in Fund III. And we are in the process of launching that now, which will be a much larger fund that we’ll raise over several years with the plan of doing more and slightly scaled-up projects to kind of take it to the next level. So I guess, in summary, we’re concentrating our investments in the urban neighborhoods around downtown Columbus that have suffered from five or six decades of population loss, job center closures, freeways cutting through them, redlining, foreclosure crisis, opioid crisis, all those things. It was just one hit after another. And we’re wanting to use our Opportunity Zone fund to drive the much-needed capital into turning these neighborhoods around.

Jimmy: Terrific. So I wanna focus on more of your third fund and how you’re shifting gears, it seems, from different property types. Let’s return to that in a minute, but first, I wanna get more about the team behind CBUS OZ Funds. You mentioned it’s you and your brothers. Can you tell us a little more about your background and the background of your brothers?

Chris: Yeah, absolutely. We grew up around some real estate family members, some small home building, some rental properties, some hard money lending, actually. And so at a fairly young age, we became familiar with real estate, you know, although it wasn’t like a necessarily driving or burning passion. My passion, as long as I can remember from at least in the schooling years was finance and investing coupled with entrepreneurship. And that’s what I studied in school. And I went into a corporate job in corporate consulting for a couple years. My older brother, Brian, he started off in homebuilding. He mentored throughout the college years in home building, majored in business management and started a small home building business when he graduated. And I actually hired him to build my first investment property in 2005. So he and I have been partners since then. And coincidentally, I just sold that property last year with a capital gain that went into an Opportunity Zone fund. So I held that one for 15 years.

And so he and I had been working together for a long time. And then our younger brother, Sean, he joined us about eight years ago and he started working right away in the real estate business. So that’s a little bit of our background. We’ve been involved in over 1,000 real estate transactions, buying, selling, rehabbing, home-building, lending. So we’re very well-versed and excellent at acquiring properties, particularly smaller asset properties.

Jimmy: So a lot of deep experience with real estate investing, particularly in that area, thousands of transactions, that’s impressive. Let’s focus on your third fund now. The goal there is to bring the commercial corridors back to life. Can you tell me what’s next with that fund and what you’re hoping to achieve there?

Chris: Yeah, absolutely. So the first two funds, the first one being our smaller starter fund that was our capital, and then the second one being our external investor fund coupled with our own capital as well. So those two funds were the early entrance into the Opportunity Zone neighborhoods, so to speak, and really tackling the low-hanging fruit. And so the focus of those funds was boarded up houses, boarded up duplexes, vacant four-unit properties, it was really about as big as they got. And they’re still doing that and they’ll continue to do that for 10-year time, but so as not to compete with those two funds and to actually work in tandem with them. The focus of the third fund is a little different. And I explain it in an evolution of the neighborhood, so to speak. So, you know, the first two funds are taking obsolete housing that’s dilapidated, mostly vacant housing, needs significant improvement and bringing it back to life.

So doing that accomplishes two things, not only are you removing the blight, which tends to attract crime, so you’re solving some of the crime problems and the safety problems, you’re also providing housing for people despite boarded-up houses existing, there’s still a shortage of housing out there. So you’re bringing new housing back to life. And what that also does is bring residents back to the neighborhood. So we’re seeing the neighborhood populations go up. We’re seeing the overall atmosphere of the neighborhoods improve from a beautification and a safety standpoint. And what that does though as the population starts growing again and you also gain a mixture of incomes in the neighborhood, there’s a demand for commercial services again, which has been long gone. And so the major corridors of the neighborhoods, I call them the business or the commercial corridors, they used to be thriving with hubs of business, walkable neighborhoods, where, you know, you could go and have a meal, you could go entertainment, there’s businesses with jobs, and that’s really gone away.

And so now the commercial corridors are mostly vacant buildings, or there’s a few operated by non-profit agencies. They’re doing community outreach, which is great, but it’s a lot of just vacant land too. So the goal of Fund III is to compliment the efforts that we’re doing in Fund I and II by still staying housing-centered, but by scaling up a bit and going into the mixed-use category. So there’s existing buildings that we are buying and renovating for commercial purposes. There’s also mixed-use buildings where you could have a storefront with apartments above it, and then there’s new construction opportunities as well. So Fund III, we’re tackling not the 200-unit projects that a lot of big developers do, there’s enough people doing those, and we’re not interested in competing in that segment. And frankly, I don’t think it’s the right fit for these Opportunity Zone neighborhoods, but we wanna build what’s been referred to as the missing middle of housing. So it’s your 8-unit building or your up to a 30 or 40-unit building.

So it could be a small apartment building with some ground-floor retail, something where the coffee shop can go in or the deli or a pizza restaurant, there’s demand for those things now, now that there’s more residents moving into the neighborhoods. So we view them as very complimentary and the next evolution of the Opportunity Zone investing.

Jimmy: That’s great. That’s a good story that you have as you’re rolling out your third fund here. Have you actually witnessed the Opportunity Zone program transform these neighborhoods in Columbus in the short amount of time that it’s been since the legislation was enacted?

Chris: That is a great question. And it’s a fairly timely one as well. You know, as you mentioned, we’re only a few years deep into the program. And so there’s a lot of questions that remain, but actually our local newspaper, “The Columbus Dispatch” reached out to me recently a few weeks ago, they did an article where they were highlighting the recent census numbers. And they were specifically talking about a few of our urban low-income communities that have lost residents for, like I said, five, six going on seven decades since the 1950s. And the basis of their reporting was very factual and also retrospective because the census numbers, as we know, were published in the 2020 census. And it was a measurement of what happened between 2010 and 2020. Well, over a 10-year period, a neighborhood population can go up or go down. But what the census doesn’t tell us is the year-by-year change in the population.

And so the conclusion of the article was one of the neighborhoods that had long lost residents had actually gained population in the last decade, but two of the other neighborhoods continued to lose population. And one of those is a neighborhood on the west side of Columbus, where our office is located and it’s one of our most active investment neighborhoods. And I can tell you that from my vantage point, we are walking the streets on a daily basis. And every season that goes by, there is noticeable change. And if I had to pinpoint it, I would say that the population downward trend probably bottomed out in the 2019/2020 timeframe, and that we’re now reversing course on an upward trajectory. Every season that goes by, you just see the difference. And so, yes, I can say that the Opportunity Zone program and the fund structure has allowed us to attract the capital needed to increase the impact that we’re having, and I think the tide is changing in some of these urban communities.

Jimmy: Yeah, that’s great. I mean, that’s a great success story to be able to tell, not just locally, but nationally as well. As attention gets drawn to the Opportunity Zone program, it’s always great to be able to point to some case studies that show that, yeah, “Hey, look, this program is doing the good that it was intended to. Here’s some population growth in this area that’s an Opportunity Zone in central Ohio.” I think that’s terrific. Ohio is an interesting state in that not only does it fully conform with the Opportunity Zone tax benefits, like most of the states do, but on top of that, they also offer what they’re calling the mixed-use buildings. Can you tell us a little bit about that, Chris?

Chris: Yeah, I’d love to. I actually get that question a lot because when I go to these conferences, I’m the Ohio guy and they’ve all heard about this tax credit and they wanna know how it’s working. And it really is a cool thing that the state of Ohio has done is put us on a competitive level for attracting capital. So the way it works is that the state…it’s anybody who invests any type of capital, whether it’s capital gains or non-capital gains, but anyone who invests capital in Ohio Qualified Opportunity Zone fund is eligible to receive a 10% state income tax credit. While that might not sound exciting to a lot of people, particularly if you aren’t in Ohio, they’ve added some aspects of the program that do make it very appealing for everybody nationwide. One of those aspects is that the tax credit can be sold. It can be transferred one time.

Put real numbers to it. If you invested $100,000 into an Ohio Opportunity Zone fund, you would receive a tax credit certificate equal to $10,000. It’s 10% of your investment. So that tax credit certificate can then be applied towards your Ohio income tax and carry forward for up to five years. Or if you prefer, you can sell it to another taxpayer who then pays you cash for it. So we have some out-of-state investors, for example, Florida, Arizona, where they don’t have much use for state of Ohio income tax credit, they’d prefer to get cash. So they’ll sell their $10,000 tax credit to another Ohio taxpayer at a discount. So maybe they sell it at a 20% discount. They get $8,000 in cash and the person buying their tax credit saves 20% on their state income tax. So that’s the way the program works. It’s been very effective and easy to navigate, and we’ve also assisted our out-of-state investors in selling their tax credits to help them avoid any type of middleman or broker fee, it’s been a win-win for everybody. So a very powerful extra 10% kicker in year one courtesy of the state of Ohio.

Jimmy: That’s tremendous. That’s just, you know, I’ve referred to it as just free money from the state of Ohio to further incentivize investors and developers to make use of this program and build and move businesses into these struggling Opportunity Zone areas. I think it’s tremendous. And that’s great to hear that even out-of-state investors can benefit from getting 80 cents on the dollar for these tax credits in some cases that’s fantastic. Well, Chris, it’s been a pleasure speaking with you today. Thanks for your insights. And thanks for all that you’re doing in the Columbus area to revitalize some of those communities in need. Before we go, where can our listeners go to learn more about you and CBUS OZ Funds

Chris: cbusozfunds.com is our Opportunity Zone fund website, cbusozfunds.com. And for those that aren’t familiar of CBUS is C-B-U-S, and it’s abbreviation for Columbus. So cbusozfunds.com. You can also find me on LinkedIn. You can follow our fund and our activities on LinkedIn, Facebook, Instagram, Twitter. We also have a Columbus Opportunity Zone meetup group.

Jimmy: That’s great. Chris, well, I’ll be sure to link to all of those resources in the show notes for today’s episode. I’ll also link to that Columbus Dispatch article that you referenced earlier. For our listeners out there, I’ll have show notes on the Opportunity Zones Database website, where you can find all of those resources that Chris and I discussed on today’s show. You can find those show notes by heading to opportunitydb.com/podcast. Chris, thanks for joining me today. It’s been a pleasure.

Chris: Jimmy, thanks so much for having me.

The Evolution Of Opportunity Zone Neighborhoods, With Chris Knoppe