The Innovators: Jackson Dearborn Partners
In this series, Bisnow highlights people and companies pushing the commercial real estate industry forward in myriad ways. Click here to read Q&As with all the innovators Bisnow has interviewed so far.
Officials from multifamily and student housing developer Jackson Dearborn Partners say they have found the key to quickly raising the equity needed to break ground on projects in federal opportunity zones. Instead of spending months dialing for dollars and tapping into established networks of institutional investors and family offices, the company uses CrowdStreet, an online commercial real estate investing platform.
Designed to steer $100B a year into a vast stretch of areas that cities and state governments consider underserved, the opportunity zone program was created by the Tax Cuts and Jobs Act of 2017. Governors designated thousands of low- to moderate-income census tracts, along with a handful of more affluent tracts, as opportunity zones, and investors who fund projects there can eliminate capital gains taxes if they help improve or develop a property and hold it for 10 years.
Using an online platform for opportunity zone projects is the perfect marriage, according to JDP partner Sean Lyons. Finding investors who just collected a capital gains windfall and are seeking to quickly invest it can be a challenge, but CrowdStreet can bring thousands of such people together online.
JDP practically eliminated a process that can take months — it once raised $3.5M in opportunity zone funds in three minutes.
"We never thought in a million years it would happen so fast," Lyons said in an interview this week.
Chicago-based JDP can now raise its opportunity zone dollars from smaller investors, many getting into commercial real estate for the first time. It began its online efforts with Icon, a 276-bed ground-up new construction student housing project near the University of Illinois in Champaign, Illinois. It is under construction and slated to open in August 2021. It then used CrowdStreet to help launch Solace at Ballpark Village, a new 211-unit multifamily project in Goodyear, Arizona, a Phoenix suburb.
Quick and efficient fundraising won't answer much of the criticism directed at opportunity zones. Projects are underway in relatively few zones, many of which were already attracting investment before the program launched, according to a November report in The New York Times.
"The program is often being used to produce high-end apartments or industrial real estate in communities that are largely able to access capital already," Urban Institute Senior Fellow Brett Theodos told the Times.
Lyons acknowledges the problem. But he said he hopes once this first round of development concludes, developers will push out into more disadvantaged areas.
A more efficient method of raising equity could help build up their confidence to do so, he added, and for showing the way, Jackson Dearborn Partners is a Bisnow innovator.
This interview has been edited and condensed for clarity.
Bisnow: Your first opportunity zone projects were student housing developments in Champaign, Illinois, near the University of Illinois, but you did it without crowdfunding. How did that work out?
Lyons: About four years ago we bought three smaller properties that were really close to campus, and the idea was that we were going to convert those to student housing. We needed to raise $10M of equity. Then the opportunity zones were announced, and although we weren't really expecting Champaign properties, particularly ones close to campus, to be in opportunity zones, sure enough they were. We went out and raised money on our own, literally just kind of passing the hat around and getting investors. We had one big investor come in, and then we kind of just pieced it together.
Bisnow: Is it difficult to find these investors through traditional methods?
Lyons: If you’re relying on your relationships, you're going to have a really, really hard time. You have to catch opportunity zone investors people right after they just had some major event, such as selling a million dollars of Apple stock or selling their company, and are sitting on large gains. When we started Icon, we soon realized that the way we were going about it was really inefficient. We were talking to dozens and dozens of investors, and many are like, “yeah, it sounds great, I love the idea, I love the concept, but I'm not in an active capital gains event.” So, that's when we realized that, instead of us going out, shaking hands and kissing babies, we needed to find a way for people to come to us.
Bisnow: What happened when you put the Icon project on CrowdStreet?
Lyons: We decided to try raising about $5.8M on CrowdStreet. The project goes up on the website two weeks in advance of us doing a webinar. We did a half-hour webinar presentation, and then they usually do a Q&A for potential investors, but after just two or three questions, the moderator stepped in and said, “the project is fully funded.” We kind of looked at each other and thought he was joking, because, you know, we never thought in a million years it would happen so fast. And for our Phoenix project we raised $3.5M in three minutes, and it literally broke a record on their platform.
Bisnow: What was it like to raise that much money in three minutes?
Lyons: I’ve been in real estate for 20 years, and I specifically remember that day taking the train home and feeling like this is an enormous game changing moment, both for our company and for real estate in general, that we had cracked the code for what had been a slow and inefficient process.
Bisnow: Why would an investor looking to shelter capital gains in an opportunity zone seek out projects online?
Lyons: It's hard to find quality opportunity zone projects to invest in. They're not readily available on the market. A number of them are being done by larger funds, who don't necessarily take outside investment. And so they struggle to find good deals. That's where the CrowdStreet platform is the perfect marriage, because it's a marketplace where they can sort out and pick deals.
Bisnow: Who are the OZ investors that come to you online?
Lyons: They're not necessarily real estate investors. That's been the biggest change for us. In our careers, we've been accustomed to talking to people who invest in real estate for a living. But for these investors, this may be their first real estate deal ever. It’s a dentist in Sacramento who just sold a bunch of stock. So we spend a lot of time educating them on the opportunity zone program and what the benefits are. That's not something we really anticipated. It's impossible to pinpoint the profile of the OZ investor, but that's what makes it so attractive. This has essentially democratized real estate investing.
Bisnow: What features were you looking for in an online crowdfunding platform, and how did CrowdStreet meet your requirements?
Lyons: Quality control was really big for us and for CrowdStreet. They don't just take anybody. To get on their platform we went through the equivalent of securing a very large loan. It's a really rigorous vetting process, and the individual investors, who have to be accredited and meet a certain threshold, are vetted as well. That way you know that they actually have the money, and they're not just kicking tires.
Bisnow: Has the pandemic had any impact on crowdfunding OZ deals?
Lyons: Nothing is happening face-to-face right now. But people didn't stop having capital gains events during the pandemic, and we’ve been able to scale up our business because these investors, who can be anywhere in the world, can find us through the CrowdStreet platform. We don’t have to do any of the traditional things that people do when they want to do a deal. It's all streamlined.
Bisnow: Opportunity zones were meant to attract investment to disadvantaged areas. Is that happening right now?
Lyons: Not as much as it should be. This is where you run into a bit of a gray area, because the program was designed to redevelop communities in need, but what you're seeing is that everybody, at least in this first phase, is going after the low-hanging fruit, the best opportunities.
Bisnow: Why is that happening?
Lyons: Assume that you are not a professional real estate investor, the kind we’re now seeing for opportunity zones. How easy is it for you to get your arms around what we're presenting? In the case of our Champaign deals, we're within walking distance of a top-tier university with tens of thousands of kids. An inexperienced investor can hear that story, and think, “OK, this is something I would invest in,” you know, without getting into all the details of the returns and everything else.
So, only about 3% to 4% of the roughly 8,700 opportunity zones are currently seeing actual investment. And some of those zones do violate the intent of the program. For example, all of Downtown Houston is an opportunity zone. There is also a yacht club in West Palm Beach that’s part of an OZ, so it’s all gotten a fair amount of bad press and complaints that it’s making the rich richer.
But the developers didn’t design the program or choose where opportunity zones would be. The governors did. It shouldn’t be a surprise to anyone that developers would follow those parameters, and go to the most attractive zones. But that’s not sustainable. Hopefully, by this time next year, because the most attractive sites will have been picked, the program will do better.
Bisnow: If crowdfunding makes it easier to raise money for OZ projects, could that help open up other areas to OZ development?
Lyons: Crowdfunding can help in the long term. You know if you can raise money in 30 minutes, that question is basically answered for you, provided the deals pencil out. That will help push developers to pursue projects they may not have otherwise.
Bisnow: Does this type of crowdfunding have any wider implications beyond just being a good way to fund individual deals?
Lyons: When we were shopping around our Phoenix project, we came across a private equity group, and they wanted a controlling seat at the table. They are used to getting what they ask for because it’s the golden rule: You have the money, you call the shots. We went back to them and said, “We appreciate it guys, but we can raise this money in 30 minutes and not concede anything.” These guys were like, “wow, no one has ever said this to us before.” It’s going to take a while, but I think in a year or two, this is going to be a pretty big wake-up call to the private equity firms. There is now an alternative, a Plan B, and I don’t think the industry is fully prepared for that disruption.
Bisnow: Why do you think the commercial real estate industry is stuck doing things the old-fashioned way?
Lyons: This is probably not politically correct to say, but commercial real estate is an old boys’ club. It’s a lot of old, White men who like things to be done a certain way. I’d love to see more women and more minorities in the industry. I hope to see that change in my lifetime. But it's an industry that's very resistant to change.
CORRECTION, MARCH 10, 8:14 P.M. CST: A previous version of this story had the incorrect value for the Phoenix fund raise.