 Ohan, welcome to this week's edition of Business in Hawaii. I'm Dalen Yanagida, and we are broadcasting live from the Think Tech studios in downtown Honolulu. If you want to tune in live, we are at www.thinktechhawaii.com, and while there, please subscribe to our programs and get in our mailing list. The theme of Business in Hawaii is to share with you stories of local businesses by local people, and our guests share with us their journey to building a successful business right here at home. The Think Tech studios today is Mark Ritchie, branch chief with the Department of Business Economic Development and Tourism. Quite a mouthful. Thank you so much for joining us today. I know that there are so many things that D-Bed does and so many things that people are not aware that D-Bed does, but first I want to talk about you, about Mark, and how you found yourself in this space. Before we went live, I said, I'm going to assume you have an economics secret. Tell us a little bit about you. Originally from Northern California, but I moved to Hawaii about 14 years ago, and I've worked in economic development and also worked in Silicon Valley at a technology company, and I've worked at a startup here, and I've been working for D-Bed for about five years now, and I work in the business development and support division, and I know D-Bed has a lot of attached agencies and we do a lot of things. Our division in particular works very closely with companies and trying to grow companies, trying to help them create jobs, grow their businesses, make things in Hawaii and that sort of thing, and we do that through a variety of programs, everything from export development to our enterprise-owned program and others. So just from what you see, are there trends as to the different types of businesses that are looking to be established in Hawaii? Do you see trends like that? I think so. I think we have two main pillars of our economy, basically tourism and then also the military, but it's sort of that third leg that our division kind of works with, and we work with organizations like the Hawaii Technology Development Corporation, Innovate Hawaii, which works on manufacturing. We do a lot of programs with them as well, and I think we're really trying to work on that third leg, try to help diversify the state's economy and also create higher wage jobs and things so that people, not necessarily just so people can stay in Hawaii, but that Hawaii can be an alternative for people to live and be able to live comfortably as opposed to having to move to the mainland. On the Business in Hawaii show, we talked to quite a few startups. We talked to a lot of nonprofits. You mentioned that you worked for a startup here in Hawaii. Tell me about your experience in that and the business climate. I think there was a time where people would say, oh, it's so unfriendly to startups, but I think that's changing. I mean it. Yeah, I think there's a lot of business support services out there for startups. I was in a startup that received a lot of federal grants because we were working on projects of interest to the federal government. And there is a lot of federal money out there, for instance, SBIR grants for companies that are just starting out and trying to defray some of that cost for product development or potential product development in the future. I think there's a lot of business support services out there, but we're a small place, but sometimes we're a little bit siloed as well. And I think trying to bring it all together is kind of the trick. So your experience good? Yes, no, very good. Very good at working in a startup. So I know today we want to focus on one of your programs. And I think that it's a program that's actually very well known because it had legs on the federal side. And as you're explaining to me, now has legs on the state side. So tell us about Opportunity Zones, about its infancy. OK, yeah, Opportunity Zones, it was part of the tax package from 2017. In December 2017, it was passed. And this had been around for a couple of years. It initially was bipartisan. And they put the whole program, which is really sort of a tax incentive, into that 2017 budget bill that went through. And basically, it's trying to take capital gains. And there's billions of dollars of capital gains in the US as people cash out of things, from everything from houses to stocks, et cetera. And try to funnel that money or direct that money and give tax incentives for that money to go into economically challenged areas of the country. And so the states, as part of that program, were tasked with nominating Opportunity Zones. And the criteria for that was a couple of things. But basically, Hawaii had 99 eligible census tracts for that. And it's the same formula they use for new market tax credits. It's based on census data. And from the 99, we were able to choose 25. So we worked very closely with the counties and sort of choosing that 25. We received a lot of guidance from Treasury Department, nonprofit organizations, National Governors Association, and other entities. And it seems like there was a phone call every week or a webinar on this. And basically, the guidance was, in those zones, there really should be infestable assets, infrastructure. You should already have sort of other economic development programs in those areas, and so forth. Just a quick run-through on Hawaii Island, we have six Opportunity Zones. And it's basically the whole Hilo area. There are four zones there, and then two on the Kona side. And that is what was in the, we worked with economic development folks and the county planners. And that was their plan to push development to kind of what they, their most kind of urban areas on the big island, which would be Hilo and Kona. And then on Maui, it's basically all Kahalui and then downtown Wailuku. We do have Molokai'i and where Kuna Kaka'i is. I know it's a small place, but there is opportunity there for somebody to do investment in that small, in that town. Then on Oahu, the Opportunity Zones really overlay with the transit oriented development, basically where the rail stations are going. Pretty much a lot of those were eligible to be Opportunity Zones. And we know there'll be a lot of development around the rail stations, and we really want to encourage that, want to encourage housing, affordable housing around there, workplace businesses be around there, and other sort of community based sort of economic development initiatives there so people don't have to get in their cars. And then on Kauai, Kauai didn't really get the census tracts they wanted, but they got 100% of what was eligible. And I think it shows how using census tract data sometimes can play trick you a little bit because they really wanted sort of Lahu'e to be one of them, and unfortunately, that was not eligible. So the two tracts on Kauai was sort of on the South Shore and then up on Hanoi. So in that selection process, that whittling down process from 99 to 25, and when these 25 zones were selected, was there was it an event where communities could voice their interests? Well, that would have been nice, but we had to make the assumption that the county plans, because we were working with the county planners and the economic development folks, had already done a lot of outreach with the counties, not specifically for Opportunity Zones, but for the type of investment and the investment plans they wanted in certain areas. Unfortunately, we were notified, or our governor's office was notified literally at the beginning of February 2018, and then we had till the first week of March or second week of March to actually have everybody signed off on things and then have the governor's office nominate these 25 zones for the Treasury Department. That was sort of the cutoff. So they didn't really give us a lot of time. It was a little bit of a scramble, but we did try to take all the guidance we were given and overlay it with other programs and sort of do our due diligence, although very quickly, to try to nominate those zones. So what are the incentives for businesses and investors? So it can be an incentive for just an individual or it can be a corporation, and all the money that is involved here comes from capital gains. And so, and that capital gain can come from anything, anything that a corporation or an LLC or just an individual will put down on their tax forms as a capital gain, that can be eligible to go into an Opportunity Fund, which then has to invest in an Opportunity Zone. The real tax incentive here is you do have to pay the initial tax on the initial capital gain, although there is some reduction in that for five and seven years, you can get a 10% or a 50% reduction. So if it was a million dollar capital gain, if you hold for five years, you would only have to pay on 90,000, it would be a 10% reduction and then a 15% reduction for seven years. Unfortunately, the program ends in 2026. So because they deployed this so late, people are already kind of foregoing that tax incentive, but the real kicker on this, and this is the way the program is designed, it's designed for patient capital, long-term capital investment. So if the Opportunity Fund keeps that investment for 10 years, then it takes the money out, they will owe no capital gains on the appreciation of that investment. So if the initial investment were a million dollars, after 10 years, let's say it's $3 million, then that investor gets $2 million that there's no capital gain due on. So you also mentioned that the Opportunity Zone program is a federal program. Right, right, or a federal tax incentive, yeah. But that the state. Right, the state now conforms to federal tax law regarding Opportunity Zones. When the program first came out for the first year of the program in 2018, we did not conform to federal tax law regarding Opportunity Zones. In other words, after that 10 years, you would owe why state capital gains tax. We were only one of a handful of states that did not conform. And so in the conformity bill that was introduced in the legislature this last round, they put that in that they would conform to federal tax law regarding Opportunity Zones. So as of July 1st, we now conform to federal tax law. And I think the reason this was done was because we made ourselves uncompetitive vis-a-vis most other states in the United States to try to get investment capital into some of our opportunities. Why was it that the state, the do-attacks or the state of Hawaii didn't want to comply initially? I don't think, I think this all happened so fast. I think it was just a default because there's changes in federal tax law all the time. And so I think that just, it was something they hadn't even really studied and it was, it happened so fast that it just, they wanted to be able to study it before they were gonna say we're conformed to it. And so D-Bed had meetings with do-attacks and kind of, it had a long discussion about sort of the pros and cons. But I think the fact that it made us sort of uncompetitive vis-a-vis other states. Nice. When we come back from a break, short break, we wanna talk about D-Bed, the services that you offer, how people can get involved, inquire about opportunity zones and then you can share with us a whole lot more about the program and where it's going and things that we can look forward to. Okay, thank you. We are going to take that break. This is Business in Hawaii. We'll see you back here shortly. Thanks to our ThinkTech Underwriters and Grand Taurus, the Atherton Family Foundation, Carol Mun Lee and the Friends of ThinkTech, the Center for Microbial Oceanography Research and Education, Collateral Analytics, the Cook Foundation, Dwayne Kurisu, the Hawaii Community Foundation, the Hawaii Council of Associations of Abarbon Owners, Hawaii Energy, the Hawaii Energy Policy Forum, Hawaiian Electric Company, Integrated Security Technologies, Galen Ho of BAE Systems, Kamehameha Schools, MW Group, the Shidler Family Foundation, the Sydney Stern Memorial Trust, Volo Foundation, Yuriko J. Sugimura. Thanks so much to you all. Welcome back. This is Business in Hawaii. With us today is Mark Ritchie from the Department of Business Economic Development and Tourism. Again, a mouthful. But what I wanted to start the second half with is a snapshot of your webpage because it in itself can point to so many resources. Why don't you tell us about that? Yeah, we have sort of a dedicated webpage for the Hawaii Opportunity Zones. And in there, we have maps that you can download but also GIS maps that you can zoom in on or you can get to street level to see where the zones are. We have fact sheets on the zones and cluster of zones and some of the demographics, what kind of real estate information and sort of investment priorities and sort of assets in those places. Just, and this is sort of a really good resource page. You can get to it by going to invest.hawaii.gov. And it'll take you right to that page. We'll make sure that we get that open on the link somewhere. So people reach out to you and you folks put together quite a few programs to provide educational opportunities about Opportunity Zones. Tell us about that. Yes, yes. We have an event coming up October the 17th which will be downtown here and it's an update on understanding Opportunity Zones. We have two people coming in from the mainland, a tax lawyer who's done extensive speaking across the country and extensive work on Opportunity Zones and then an accountant from Novogradik and he's gonna be sort of doing a deep dive into Opportunity Zones from an investor point of view but also from what we'll look at particularly from the lawyer's point, tax lawyer's point of view, Mark Schultz from an investee's point of view. Somebody looking for an opportunity fund investment and it'll be a pretty deep dive. We're partnering with the Hawaii Society for Certified Public Accountants and they're offering continued education units for this and then also with the Hawaii Community Reinvestment Corporation and it'll be here downtown here at Fuller Hall at the YWCA from nine o'clock to about, we'll probably go about two o'clock. Is there a sign up for that? Yes, you go ahead and register if you go to invest.hawaii.gov forward slash oz, go to the events page and there's registration links, a separate registration link for the accountants if they want the continued education units and then another link for everybody else. So we also said that there was a quick wrap up for you folks for the program. Have you gotten much traction? Well, deep it's role in this, it's a little bit interesting. I mean, this is a federal tax incentive but now we also have the state tax incentive where we conform to federal tax law on this but there's not a whole lot of reporting requirements and this is very private sector driven. So deep it's role in this is really to provide a lot of information, back sheets kind of market our zones, let people know what investment possibilities might be there. We're doing a series of workshops in November that is looking at sort of community based projects that will be in our zones, trying to get them investment ready and then we're looking at trying to promote those projects 10 or 15, 20 projects to local investors or opportunity funds and even mainland investors to let kind of the country know that we do have a lot of great things happening in our opportunity zones and similarly worthwhile projects. As an economic development agency we're looking for projects that ticks some boxes in terms of community based economic development, workforce housing or low income housing component, creating jobs, company expansions and sort of distressed areas, those sorts of things and each of the projects that we want to profile we want to be able to succinctly say from a community based economic development point of view why this is important. So how do you get the messaging out or to mainland investors? So, you know, my guess is that- That's the upcoming step that we're going to be working on. Yes. And we'll probably be profiling things on our website. We might even do, we actually already have East Coast investors express interest in Hawaii's opportunity zones and so we will have a kind of a well-developed marketing plan once we get our 10 to 15 projects that we really want to profile and try to run with that and that'll probably be in the new year we'll be starting that. I know that there are a lot of folks who are going to want to know the success rate of opportunity zones and when we were talking earlier you said that's forthcoming, do we know- We're looking at, because of the tax bill in 2017 was passed under reconciliation, the original program, so to speak had a certification plan where if you were going to create an opportunity fund you would have to be certified by the Treasury Department and then you had to do like Andrew reporting where the investments are going, which zones, what type of investments, those sorts of things and then the Treasury Department was then supposed to be writing a report. Because the bill was passed under reconciliation meaning I guess they had less than 60 votes all of the non-budget part of it was stripped out. So it's been introduced in both houses of Congress to put all that back but I don't know the status of where that'll go. So to your point, what we can do is we can report on our projects that we're trying to promote, our 10 to 15 that we kind of falls into our C-bed or our community-based economic development program but if somebody were to say how much opportunity fund capital went into a particular opportunity zone in Hawaii that'd be very difficult for us to probably calculate just because they haven't put in the tracking mechanisms. There may be ways around that and we're trying to explore that like with no tax, DCCA, that sort of thing. So what the structuring of the Hawaii opportunity zones and the rollout, you've got some informational sessions coming up. What about opportunity zones and their successes in other states? Have we modeled, have we? There's been news articles, I think people have seen like in the New York Times or Washington Post and sometimes they're somewhat negative, some of the articles and I think the reason is, and we said this last year when we did our just understanding opportunity zones, session we had almost 150 people show up for that one but a lot of these projects were already, like shovel ready or already in progress and then an opportunity fund kind of jumped in and did an investment. Hawaii doesn't really have a whole lot of those types of projects because people are still trying to get shovel ready, going through permitting and doing those sorts of things. And so I think a lot of the initial money went to projects that were already gonna happen anyway. Now, as we get towards 2026, the end of the investment period, hopefully maybe that'll change and we'll actually start seeing money go into different areas. There are over 8,000 opportunity zones in the United States. So it'll be interesting to see where investment money goes and if some zones get any money at all but I think kind of the jury's out on that right now. So as we learn about opportunity zones here locally, what is your hope? What do you hope to see in terms of that result? Yeah, I hope to see, again, kind of deep-eds role as maybe sort of a facilitator and kind of putting that information out that we could have some good 10 to 15 kind of community-based projects that take a lot of boxes for community-based economic development through new services and communities that don't have a lot, new employment, maybe high-wage job employment. Housing is always an issue here. And affordable housing is a big thing. So if we could get some of those under our belt, I would be very happy with that. Do you have any legislators championing your cause along with you? I think so. I mean, we're gonna invite legislators to our October 17th event because I think just a lot of people are not is up to speed on opportunity zones. And on the mainland, I think it's the same way but that's why we're bringing kind of some national experts have done a real deep dive into this area to come to Hawaii because we need to sort of create the opportunity zone ecosystem. In other words, we need to have tax lawyers in Hawaii that can advise clients on how to structure a deal, how you get your money out after 10 years. We need accountants that know the right tax forms and how to structure these sorts of things. And so that's kind of something we're trying to create by doing these sessions. Do you find that potential investors are going to be hesitant because the ramp up is not, you said the program ends in 2026. Right, and the final rules aren't even out yet. They're supposed to be, the final administrative rules are supposed to be out by the end of this year. So people are still making investments and there is sort of a legal concept that if you sort of rely on current guys, there's already been like about two tranches of stuff that have come out. So there are investments happening already but some people are just a little bit hesitant because there's still some ambiguity and that's the type of thing we'll cover on October 17th in our session. So aside from the October 17th session, where else can we find you? Well, we'll be doing workshops. If you go to our website under events, we're asking people that might have potential projects if they like to sign up with us and we'll be doing workshops on Oahu and this will be in November. On Oahu and then all the neighbor islands will be doing workshops if we have enough people. And the idea there is to try to get those projects investment ready so that when we start marketing to opportunity funds or potential investors either locally or on the mainland that they're ready to go and their chances of success will be increased and like getting some opportunities on funding. My guess is that those marketing plans to go to market is gonna come after the final rules are released? Probably, yes, yeah. We're sort of looking at possibly doing project showcase of maybe 10, 15, 20 projects going on in Hawaii, inviting mainland opportunity fund investors or managers, fund managers and also local investors. According to DOTACs, I think it changes on a year to year basis but just the figure for capital gains that people declare on their Hawaii state tax forms is roughly $2 billion. So there's not that all that would go into an opportunity fund but there's a lot of local money from capital gains that people might wanna invest and invest locally and keep it there for 10 years and be able to kinda see their investment. Is there any motivation to attract more local investors than mainland investors? Yes, we've started, we're kind of backing into some of that now and on October the 17th when we do that session, we really are gonna do a deep dive into creating your own opportunity fund because it can just be a single individual for a single investment. It could be a group of individuals for single investment or it could be a whole group of individuals to go into a fund that will have a fund manager that then will either do one investment or maybe multiple investments across Hawaii or across the US. I would love to see an announcement where somebody is putting together a Hawaii Opportunity Fund and to invest just in Hawaii's opportunity zones and to take investment for anybody in Hawaii with a capital gain. That hasn't happened yet. Well, so everyone that watches your YouTube clip now has heard it but that's what you're looking for. Yes, yes. I want to make sure that your viewers know where to find this information on Opportunity Zones if you could give us that website address again and how to reach out. Yes, and that's kind of our workspace so anything we're doing we'll go up there. It's invest.hawaii.gov, board slash oz. Perfect. Mark, I really appreciate the information that you've shared. I think because it's a territory that hasn't been really explored and because you folks are still awaiting the final rules on it. But I know that quite a few people have been talking about it's all the hype, if you will. Okay. For business development. So thank you again for joining us. We look forward to having D-Bed on future shows to talk about all the other amazing programs that you folks shepherd there. Unfortunately, we are out of time. Thank you to Mark and D-Bed for joining us. Big thank you to the awesome production staff here in the studio. If you would like to be a guest on the show, please like us and subscribe and leave a comment below. Business in Hawaii airs every Thursday at 2 p.m. and we look forward to seeing you here next week.