How OPAL Fund’s commercial real estate projects are creating an impact-generating ecosystem in Alabama.
The JTC Americas Impact Medallion Program recognizes impact fund managers and industry stakeholders who embrace best practices in security, transparency, and compliance. In this series, we’ll showcase Impact Medallion recipients and how they’re leading the way on Impact.
The Opportunity Zones Initiative got off to a slow start because of a lack of clarity around its rules and a lack of understanding among investors that OZ investments are in fact impact investments. In the past few years, the program has attracted an impressive amount of investment, but many investors still fall victim to the misconception that making an impact must come at the expense of returns. Some OZ funds are proving how wrong this can be, incorporating government incentives to drive returns and make a lasting impact on communities.
OPAL Fund is a family of real estate investment funds that share a common vision to provide attractive risk-adjusted returns for investors while driving progress towards better places & better economic futures across Alabama. This began with the creation of Opportunity Alabama, Inc., a nonprofit organization focused on catalyzing investment in meaningful projects and underserved places across Alabama, which is home to 158 Opportunity Zones across all 67 counties. OPAL has two Opportunity Funds that have invested in housing, industrial, retail, and mixed-use developments throughout the state.
We spoke with founder Alex Flachsbart about OPAL’s role in impact investing, what sets Alabama apart as an investment destination, and how the dual goals of Impact and returns can drive one another.
You recently embarked on an initiative to identify and support Minority- and Woman-Owned Business Enterprises (MWBEs) in the development and construction industries. Can you tell us what brought about this partnership and how it might help business owners who traditionally miss out on bigger projects?
Flachsbart: A big consideration for us is how the secondary and tertiary services involved affect the project, so that we’re thinking about howe we can drive impact across the entire value chain. As we were building out the fund, we wanted to make sure we were doing everything we could to ensure MWBEs were involved throughout the value chain. This is challenging because we’re a PE fund – we are not directly responsible for hiring decisions. As a result, we need to work with the developer and contractor to establish business practices that include MWBEs.
Getting the right outside help is part of this. Selena Rodgers Dickerson has become an invaluable resource to our partners. She helps ensure the bid package goes out to MWBEs that might not normally be a part of the bid process.
OPAL Fund has invested in Market Lofts, an adaptive reuse of Birmingham’s American Red Cross building where 100% of units are priced as “workforce housing.” Have the needs of working professionals changed since the pandemic in terms of what they look for in housing?
Flachsbart: There are 6 projects in OPAL Fund: three in Birmingham, two in Huntsville, and an industrial project in Macon County. Market Lofts is really an all-star project, with 192 units of workforce housing along with 4,000 rentable square feet of retail space in a building that had been vacant for 25 years.
This project shows the value of these government incentives. We were able to utilize both OZ equity and state and federal historic tax credits, and because of the subsidies, we were able to make the financials work. Every unit in the building will be affordable to those in the 80-120% area median income range. A lot of people who work in downtown areas have been unable to live there, and this project changes that narrative. The team that is building it built another building during the pandemic that broke records for leasing, and we’re seeing a real demand for affordable housing that this project helps provide.
Many of our readers may not know about the advantages of Alabama as an investment destination. Can you tell us about why OPAL was created and how you work to overcome those knowledge gaps?
Flachsbart: OPAL was founded in 2018 as a nonprofit economic development entity focused on catalyzing investment in meaningful projects across the state of Alabama. Within the first two years, we were recognized by Forbes as a national leader in OZ-based economic development based on our work to connect banks, OZ funds, and other capital providers to a unique pipeline of Alabama commercial real estate investment opportunities. We also created our Community Growth Accelerator (CGA) to help communities strategize ways to improve quality of place, generating better conditions for growth, and ultimately attract new investment and real estate development. Participants in CGA have secured grant funding for initiatives that include launching a small business revolving loan fund and cleaning up blighted tax delinquent residential properties. Several CGA communities identified property owners whom we have since assisted through the predevelopment process.
By the end of 2020, we realized that we were well-positioned to raise our own OZ fund. So, in 2021, we staffed up, formed a wholly owned for-profit subsidiary, and built a robust underwriting process so that we can actively raise capital to invest in deals that provide risk-adjusted returns for investors while improving quality of place in communities across Alabama. We are solely focused on deals in the state of Alabama, and we underwrite deals throughout the entire state. We believe our alpha originates in our unique understanding of the Alabama real estate market and our extensive network of property owners, developers, investors, and economic developers who keep us informed about the local economic conditions in each of the 67 counties in the state.
OPAL Fund is connected to Opportunity Alabama, Inc., a 501(c)(3) non-profit organization. How does this arrangement work, and what part can non-profit entities play in encouraging OZ investment?
Flachsbart: OPAL Fund is a for-profit fund that offers market-rate returns. We believe in providing impact and returns at the same time, and this commitment to impact is where the nonprofit comes in. If the fund makes money, it feeds the nonprofit, so the organization doesn’t have to fundraise. Half of our investment has come from investors with capital gains, and half from those who have no capital gains. If done right, we can create a flywheel where our skills in generating profit will help our humanitarian impact efforts, which will then in turn encourage more projects that will continue to generate returns. That’s why impact and returns shouldn’t be thought of separately, because they can really help each other.
A frequent criticism of Opportunity Zones is that not enough of the capital being invested has gone toward rural areas. Can you explain the Community Growth Accelerator and how it’s aiding rural communities in Alabama?
Flachsbart: We created the Community Growth Accelerator because we knew many areas of the state – in urban and rural areas – were being overlooked for OZ projects as well as other critical forms of investment. CGA provides direct assistance to community leaders, property owners, and developers to identify project opportunities and to de-risk them by putting them through a rigorous predevelopment technical assistance program.
Our work has supported several exciting projects in rural communities across the state. When Birmingham-based Rhaglan Hospitality purchased the historic St. James Hotel in Selma, we helped underwrite that project, assisted in securing historic tax credits, and introduced the new owner to Woodforest-CEI OZ Fund, which announced its investment in 2021. The St. James is now open as Selma’s only full-service boutique hotel and restaurant. The Regional East Alabama Logistics Park (R.E.A.L. Park) in rural Macon County on I-85 is another project that we’ve engaged with both on the CGA side of our work as well as through OPAL Fund investment. This new industrial park is projected to bring more than 1,000 jobs and millions of dollars in private investment to one of the most rural and historically underserved counties in the state.
Finally, are there any changes to OZ legislation you’d like to see to help you be more effective?
Flachsbart: The two big ones are things that were in the Opportunity Zones Transparency, Extension, and Improvement Act that was proposed in 2022. If the deferral date for qualified capital gains could be extended from 2026 to 2028, it would attract more investors who either didn’t know about or didn’t see the value in OZ at the beginning, which would mean more OZ projects could get off the ground. It took some time for clarity in the first couple years of the program, so extending the date would allow more time for us to demonstrate the good that can be done in Opportunity Zones.
The other element is the proposed reporting requirements, specifically reporting on social impact. The more sunlight in this space, the better. As I said, a lot of good things are happening, and hopefully reporting requirements will help highlight the positive and weed out some of the bad actors.
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