Small bank’s asset sale is opportunity zone’s gain

When the historic St. James Hotel in Selma, Ala., reopened Jan. 26, it was a banner day for Woodforest National Bank.

The $8.3 billion-asset Woodforest, headquartered about 650 miles west of Selma in The Woodlands, Texas, invested $2 million in the redevelopment of the 184-year-old St. James, which is expected to create 45 good-paying jobs. The equity stake came as part of a larger, $22 million investment fund that Woodforest believes can serve as a prototype for banks interested in leveraging opportunity zones for Community Reinvestment Act credit.

The Woodforest CEI-Boulos Opportunity Fund recently closed after investing in its 11th opportunity zone project. All 11 projects are in Woodforest’s 17-state footprint.

The fund “is a good counter to the argument opportunity zones are a wealthy person’s toy,” said Doug Schaeffer, Woodforest’s CRA executive director.

“We think there’s a lot of potential at the intersection of CRA motivated capital and opportunity zone investments,” said Noelle St. Clair, the bank’s impact investing and strategic initiatives manager.

Created as part of the 2017 Tax Cuts and Jobs Act, opportunity zones offer investors the chance to minimize taxes on capital gains from elsewhere by investing in neighborhoods with high unemployment and poverty rates. Benefits can be significant: Deferral or reduction of taxes owed on the underlying capital gain, along with zero taxes on gains generated by the opportunity zone investments themselves.

Woodforest acquired a capital gain after selling two commercial lending business lines to Sterling Bancorp in Montebello, N.Y., in January 2019. Initially, the bank considered hedging its windfall investing in different multi-investor opportunity zone funds.

Over time and after consultation with Coastal Enterprises, a Brunswick, Maine, community development financial institution lender, and The Boulos Co., a commercial real estate firm in Portland, Maine, focus shifted to a single-investor fund Woodforest could tailor to achieve the maximum CRA benefit.

CEI-Boulos Capital Management is a joint venture between the two Maine groups.

“Noelle met with [CEI-Boulos] and kicked the tires around,” Schaeffer said. “It just became so compelling that we said why don’t we do one together. We’ll just have a single-investor, multi-asset fund.”

According to St. Clair, the fund was initially $13 million. “We ultimately increased it to a $20 million initial investment … and the executive team ultimately topped off the fund to $22.5 million,” St. Clair said.

Included in Woodforest’s portfolio was a $1.3 million investment in a retail-residential development in Philadelphia’s Sharswood neighborhood; a 262-unit multifamily project in Greenville, S.C.; and a retail-residential development in Baltimore’s Penn North neighborhood expected to create 28 permanent jobs as well as 100-plus construction jobs.

Woodforest has 768 branches in 17 states. Outside its home market of Houston, Woodforest is mostly in Walmart stores. It has 38 in-store branches in Pennsylvania, 46 in South Carolina, 12 in Maryland and 41 in Alabama.

The St. James Hotel is about a block away from the Edmund Pettus Bridge, where Civil Rights protestors famously clashed with Alabama state troopers in March 1965. Part of the hotel’s redevelopment plan involved serving visitors eager to explore Selma’s Civil Rights Era past.

“Without their assistance, we would not be opening a 55-room hotel,” Rhaglan Hospitality CEO Jim Lewis said of Woodforest and other financial backers. “The job creation and economic stimulus for an economy like Selma’s cannot be underestimated.”

Projects were selected with input from a committee at CEI-Boulos that ensured each met the requirements to be considered qualified opportunity zone projects. A second committee inside Woodforest focused on their financial viability.

Now, CEI-Boulos is eager to replicate that model with other banks interested in creating opportunity zone funds.

“Woodforest was a wonderful bank to work with,” said Sam Spencer, CEO and managing director of CEI-Boulos. “We’d like to work with more banks and push this model forward.”

“We see this as a template demonstrating how opportunity zones can be paired with CRA to incentivize high-impact investments,” Spencer said.

Mitchell Goldberg, a partner at Berger Singerman in Fort Lauderdale, Fla., said most opportunity zone funds are real estate-based, like Woodforest’s. Indeed, the Woodforest CEI-Boulus fund “can be a template for other banks — so long as the underlying assets of the qualified opportunity zone fund are in line with the bank’s investment policies,” Goldberg said.

“The one thing I always tell my clients, whether it’s a bank or a real estate developer or an individual … is don’t let the tax tail wag the economic dog,” Goldberg added. “All the economics need to make sense. Then, if it happens to be in a qualified opportunity zone, the tax benefit is just the icing on the cake.”

While a number of banks have expressed interest in opportunity zones, Goldberg said he isn’t aware of any that have gone Woodforest’s route and endowed a single-investor fund.

“I personally have not gotten any calls from banks looking to do that for their own account,” Goldberg said.

Woodforest received an “outstanding” rating on its most recent CRA exam in June 2019. Schaeffer says the opportunity zone fund has given it a solid basis for its next evaluation.

“We’ve gotten good feedback from regulators,” he said.