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Omicron Surge Slows U.S. Office Demand in December

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The CBRE Pulse of U.S. Office Demand slowed moderately in December, likely reflecting renewed occupier caution over the COVID-19 omicron surge.

What is the CBRE Pulse Report?

To gauge the pace of recovery, CBRE has created three indices for the 12 largest U.S. office markets—Atlanta, Boston, Chicago, Dallas/Fort Worth, Denver, Houston, Los Angeles, Manhattan, Philadelphia, San Francisco City, Seattle, and Washington, D.C.

Using CBRE data, these indices measure office market activity each month and provide early indications of when and where momentum in office demand may be shifting. These metrics—space requirements of active tenants in the market (TIM), leasing activity, and sublease availability—provide a clear picture of office demand amid the COVID-19 pandemic.

December Findings

The U.S. Tenants in the Market (TIM) Index held steady in December at a level of 86, with modest declines in tenant inquiries in seven of the 12 markets tracked by CBRE. Three markets—Houston (118), Boston (118), and Dallas/Fort Worth (104)—had TIM requirements that exceeded pre-pandemic levels, while another three—Denver (94), Manhattan (93), and Seattle (93)—were over 90% of their pre-pandemic levels. Chicago (78), where office demand recovery has lagged, saw a substantial 11-point increase in TIM requirements in December, the biggest monthly gain.

Renewed caution by occupiers was reflected in the U.S. Leasing Index, which fell by 10 points in December to a level of 95. Eight of the 12 markets saw their Leasing Index levels fall, with the biggest declines in Houston (68), Washington, D.C. (62), and San Francisco (34). Nevertheless, half of the 12 markets maintained leasing levels that exceeded pre-pandemic levels, with Boston (192), Los Angeles (135), and Seattle (115) showing the most resilience.

Despite the leasing slowdown, the U.S. Sublease Availability Index improved in December, falling 4 points to 193. Unlike the TIM and Leasing indices, a decline in the Sublease Index is a positive indicator because it shows a shrinking amount of available sublease space. Nine of the 12 markets saw their sublease indices decline month-over-month. The biggest improvements were seen in Houston (88), Los Angles (158), and Atlanta (167), which each fell by 7 or 8 points. Despite the improvement, most markets continue to have a sizeable surplus of sublease space and the pace of improvement has been slow.

Notes: All market data is for the metropolitan area, except for San Francisco, which only includes the downtown market, and for Manhattan. Prior months’ data has been revised from previous reports to reflect new information. Data presented in this report supersedes that of previous editions of the Pulse of U.S. Office Demand.

U.S. Average Performance Index

Figure 1: Indexed Average Performance of Sublease Availability, TIM, and Leasing Activity for the Top 12 U.S. Markets

Source: CBRE Research, December 2021.

December Demand Recovery by Market

Boston remained the leader in office space demand recovery in December, followed by Dallas/Fort Worth and Los Angeles. A significant increase in TIM requirements in recent months has helped buoy the recovery of office demand in Houston, while strong leasing has helped Seattle and Atlanta progress toward recovery. Washington, D.C. slipped back a few paces with a slowdown in leasing and TIM requirements in late 2021. Manhattan’s recent progress eased, though it remained in a relatively strong position. Chicago and Philadelphia, where progress has been slower to occur, both saw notable improvement in late 2021, while San Francisco still struggled to regain its footing.

Figure 2: December Office Market Recovery Scale, Top U.S. Markets

Image of market time line

Source: CBRE Research, December 2021.

Tenants in the Market Index

Figure 3: Indexed Square Footage of Tenant Requirements Compared with 2018/2019 Average

Source: CBRE Research, December 2021.

The U.S. TIM Index1 remained steady in December at 86. Three markets—Houston (118), Boston (118) and Dallas/Fort Worth (104)—had TIM levels that exceeded their pre-pandemic levels, while another three—Denver (94), Manhattan (93) and Seattle (93)—were over 90% of their pre-pandemic levels. These six markets have seen relatively stable TIM levels over the past three to four months, consistently at or above 90% of their pre-pandemic levels.

Progress toward recovery has been somewhat less steady in other markets. Atlanta (83) had seen its TIM level climb as high as 93 in October but has since seen modest retreat. Similarly, Washington, D.C. (76) had reached a TIM level of 88 in July before declining since then. Conversely, Chicago (78), where TIM recovery had been slower to materialize, had an 11-point increase in December and has seen steady improvement over the past several months, growing by 20 points since September.

In all, seven markets had declines in TIM requirements in December.

Figure 4: December 2021 TIM Index – Top 12 U.S. Markets

Image of U.S. market list

Source: CBRE Research, December 2021.

1 CBRE tracks the total square footage of requirements from active tenants in the market with minimum requirement of 10,000 sq. ft. The TIM Index compares the total monthly TIM requirements to a pre-pandemic baseline, which is the average of TIM requirements recorded by CBRE in 2018 and 2019. The index level for the baseline is 100. In most cases, when tenant requirements are given as a range, the index uses the minimum square footage. However, Seattle records TIM using the average requirement within the tenants’ size range, while Philadelphia uses the maximum square footage.

Leasing Activity Index

Figure 5: Indexed Monthly Leasing by Market Compared with 2018/2019 Average

Source: CBRE Research, December 2021.

Occupier concerns over the surging COVID-19 omicron variant contributed to a 10-point decline in the U.S. Leasing Activity Index2 in December to a level of 95. Only three markets had increases in their December Leasing Activity indices: Seattle (115), Dallas/Fort Worth (106) and Philadelphia (86).

Despite the monthly slowdown, six markets maintained Leasing Index levels at or above their pre-pandemic baseline. In addition to Seattle and Dallas/Fort Worth, these were Boston (209), Los Angeles (135), Atlanta (105) and Manhattan (100).

Figure 6: December 2021 Leasing Activity Index – Top 12 U.S. Markets

Image of U.S. market list

Source: CBRE Research, December 2021.

2 Leasing activity includes all new leases, expansions, and renewals of 10,000 sq. ft. or more that close each month. The Leasing Activity Index uses a rolling three-month average of leasing activity. Most markets are weighted 20% for the current month, 50% for the previous month, and 30% for the prior two months. For New York and Boston, where more accurate leasing data is available by the end of each month, the weights are 50% for the current month, 30% for the previous month, and 20% for the prior two months. The monthly rolling average is compared with a pre-pandemic baseline, which is the average monthly leasing activity between 2018 and 2019. The index level for the baseline is 100.

Sublease Availability Index

Figure 7: Indexed Sublease Availability by Market Compared with 2018/2019 Average

Source: CBRE Research, December 2021.
Note: In contrast to the Leasing and TIM Indices, a higher score on the Sublease Index is considered undesirable as it reflects an increase in available sublease space.

The U.S. Sublease Availability Index improved in December, falling 4 points to a level of 193—the lowest level since the pandemic began. Despite a modest uptick in October and November, the Sublease Availability Index has dropped by an average of 2 points per month since peaking at 206 in July.

Nearly every market in the Pulse saw its Sublease Index level fall in December. The biggest improvements were in Houston (88) and Atlanta (167), which saw their index levels fall by 7 and 8 points, respectively.

Reductions in sublease availability reflect several factors: less new sublease inventory is being added each month, the volume of sublease leasing is increasing and some previously listed sublease space is being withdrawn.

Figure 8: December 2021 Sublease Activity Index – Top 12 U.S. Markets

Image of U.S. market list

Source: CBRE Research, December 2021.

Office Demand Expected to Regain Momentum

While office demand retreated in December, the setback likely was temporary. Office demand is expected to regain its positive momentum in early 2022 as the omicron surge fades and occupiers continue to pursue long-term plans for office re-occupancy. The continued surplus of sublease space remains an enticement to occupiers looking to take advantage of favorable market conditions.

Robust wage growth is bolstering consumer spending, while business investment to strengthen supply chains and support capital projects likely will increase. This supports CBRE’s U.S. GDP growth outlook in the mid-4% range for 2022, which should help bolster office-using employment growth and thus office space demand.

2022 Outlook For Multifamily OZ Investing, With Scott Hawksworth

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There are many Qualified Opportunity Funds that encompass multifamily real estate and are well worth any investor’s consideration. Investing in multifamily property offers a wide variety of advantages for investors, such as leverage, cash flow, equity growth, and, tax savings. So what’s the forecast for these golden investment opportunities in 2022?

Scott Hawksworth is a co-founder of MultifamilyInvestor.com and an entrepreneur based in Chicago. MultifamilyInvestor.com covers trends and opportunities in multifamily real estate investing and helps High Net Worth investors, family offices, RIAs and financial advisors, and industry service providers navigate the ins and outs of the multifamily landscape.

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

 

Episode Highlights

  • Financial features of a multifamily real estate investment.
  • How do Opportunity Zones offer multifamily investing in tax-beneficial ways.
  • What is the location criteria for investing in multifamily real estate and what are other considerations when searching for multifamily properties.
  • What the future holds for multifamily investments in Opportunity Zones.
  • What are the different forms multifamily real estate comes in.
  • How can investors access institutional-quality real estate in the multifamily sector.

Featured On This Episode

Industry Spotlight: MultifamilyInvestor.com

MultifamilyInvestor.com covers trends and opportunities in multifamily real estate investing and helps High Net Worth investors, family offices, RIAs & financial advisors, and industry service providers navigate the ins and outs of the multifamily landscape.

Learn More About MultifamilyInvestor.com

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. Multi-family residential real estate is the single most popular asset class for qualified opportunity funds and investors in opportunity zones. Novogradac estimates that $15.56 billion out of the $20.28 billion that they’re tracking, or more than 75% of the funds that they’re tracking, have at least some component of residential development. Here to join us today to discuss multi-family as it pertains to opportunity zones but also overall multi-family sector is Scott Hawksworth. Scott is co-founder of MultiFamilyInvestor.com, a property that I am co-owner in, and he joins us today from Chicago, Illinois. Scott, how are you doing, buddy? Welcome to the podcast.

Scott: Thanks for having me, Jimmy. I’m doing great, how are you?

Jimmy: Good. I’m doing very well, Scott. Always a pleasure to speak with you. We’ve known each other for quite some time, and I’m excited about the new property that we’re building together, MultiFamilyInvestor.com. So, we’ll talk a little bit more about that toward the end of the episode today, but first, let’s talk about multi-family real estate in general. And for most of our listeners, I’d imagine you’re kind of preaching to the choir here. I think a lot of people who listen to The Opportunity Zones Podcast probably have quite a bit of familiarity with real estate investing, and in particular multi-family real estate investing. Certainly, there’s some listeners who do not, but I would guess that the majority have some familiarity, but anyway, let’s talk about multi-family a little bit here. And why don’t you give us, Scott, your case for multi-family and why you think it’s a good investment?

Scott: Absolutely. So, I mean, you said it at the top, there’s clearly tons of interest in multi-family, specifically as it pertains to opportunity zones, some big numbers you mentioned there. But for me, you know, even looking outside of just in opportunity zones, multi-family investments I just find to be so exciting for a number of reasons. The first is just that opportunity for an attractive total return. And, you know, and this return includes ongoing cash flow and, of course, the potential for multiple liquidity events, which is always exciting. And then when you just kind of look at real estate itself, and you look at multi-family, you get this exposure to residential real estate, and we’re in a time where there are housing shortages across the United States, and that’s not changing anytime soon. There’s a little factoid I like to share here, construction of new housing in the past 20 years fell 5.5 million units short of long-term historical levels. This is according to the National Association of Realtors report. So, what that means is we are in this period of housing shortage where people need homes, and we’re just not building enough to meet demand, and that creates opportunity.

And then the third thing I always like to mention is that specifically when you’re looking at real estate, multi-family has proven to be the property sector that is most resilient to recessions, and that is according to a CBRE study. So, I know there’s so many people out there that 2008 is still on the mind and maybe they’re on the fence about it, but when you’re looking at resiliency, I think that’s really exciting. And then the other things I would add would be significant tax advantages. And I know, Jimmy, you would have a lot to say about that specifically when we’re talking about opportunity zones. And then, they can even function as a potential inflationary hedge as real estate asset appreciation can outpace inflation. So, those are kind of my why of multi-family investments.

Jimmy: No, I think that’s great, Scott. Yeah, I’ve always described multi-family as a very resilient and durable asset class. It’s the most essential real estate property type. You can do without retail, probably, you can do without hotel and hospitality, as we’ve seen through the pandemic, especially at the beginning of it, but you need a roof over your head. You need residential real estate and multi-family adds that density component that is much-needed throughout this country, as you mentioned, the housing crisis that we’re facing all over the country, and in particular certain areas of the country are hit worse than others.

I want to lock in on the tax benefits though because I’m a tax benefits guy, I started The Opportunity Zones Podcast and I’m a big OZ guy, so just to quickly review the OZ benefits for a qualified opportunity fund that invests in any type of asset, whether it’s multi-family real estate, or other real estate, or operating business, or maybe something else. Two big tax benefits now that we’re out of 2021, the 10% basis step-up benefit has expired, but still, two huge benefits are outstanding. One is a deferral of capital gains until the end of 2026, and two, as long as you hold the Opportunity Zone investment for at least 10 years, you get to eliminate capital gains tax liability on your opportunity zone appreciation, which I refer to it as probably the greatest tax incentive ever created. So, that’s the qualified opportunity fund wrapper, of course, and its tax benefits, which my listener are no stranger to. But, Scott, are there other tax benefits to owning multi-family residential real estate, or are there other wrappers similar to qualified opportunity funds that you can package multi-family properties into? Give us the lay of the land in terms of tax benefits as you see it.

Scott: Sure. Well, in terms of tax benefits, if you are a direct owner, and even if you’re an investor, of course, there’s depreciation that multi-family investments provide, which is nice to do that.

Jimmy: No, I’m glad you brought up depreciation. Sorry to interject. Because I forgot the hidden benefit of opportunity zone investing, which is…I’m up on my opportunity zone soapbox now. I love this wrapper, of course, Scott, you know that. Depreciation is fantastic until you go to sell a property, right, because that depreciation gets recaptured. But that is not the case with opportunity zones. Depreciation recapture is eliminated for opportunity zone investors, which is another benefit that doesn’t get talked about a lot, and I, frankly, almost forgot to talk about it until you mentioned it. But, anyway, go on, Scott, continue, please.

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Scott: So, depreciation, and then, of course, if you are the direct owner of a multi-family property, you get those nice direct expense write-offs that you can take there. But then you were talking about wrappers, and there’s another wrapper here, the Delaware Statutory Trust, or the DST, which for those unfamiliar is an investment vehicle that’s organized as a trust that generates this passive income from real estate, and it allows investors to see the same capital gains tax benefits that they would get from a 1031 exchange without actually having to actively manage that replacement property. So, that’s really attractive for folks who maybe don’t want to go through all of the hoops to directly manage a property, which can come with some challenges. You can still see some tax benefits there.

Jimmy: Yeah, if you’ve been a 1031 investor and you need to 1031 out of a property but you’re kinda tired of the active management part of being a real estate property owner, you want to get away from the three Ts, right? Toilets, trash, and tenants, right, Scott?

Scott: Mm-hmm.

Jimmy: You can make this passive investment into a Delaware Statutory Trust, DST, yeah. That’s another great wrapper that I like as well. Not as much as opportunity zones, but it’s a good one, I’ll admit. Not for everyone, you have to be a 1031 investor, but if you are, it’s definitely worth looking into. What about some trends, Scott? Let’s move away from tax benefits for a minute. Let’s talk about trends that you see in the multi-family sector and your outlook for the rest of the year. 2022 has just kicked off. Where do you see this year and beyond taking the multi-family real estate asset class?

Scott: Sure. The overall outlook is very, very good. I’m so excited for it, and so many multi-family investors are excited because this housing shortage that I alluded to earlier is not going away, and in fact, it’s impossible to fix in the short term. We just can’t build enough homes to meet that demand. I have another statistic here. On average, the U.S. built 276,000 fewer homes per year than between 2001 and 2020 compared to the period between 1968 and 2000. So, we’re actually getting worse with it. So, again, that creates opportunity. So, look to the housing shortages to continue to exist.

And then when you look at that, you have to also look at population migration. And this is gonna continue to be really, really big in the multi-family space. When you’re looking at where are people moving? Over the past year and anything before that, we’ve had a lot of regions in the country that are benefiting from significant population influxes in really a variety of ways, and real estate has been part of that. So, there’s so much activity happening in the Southwest specifically as people look for warmer climates, maybe areas where there’s, you know, more friendly to business or lower taxes and these types of benefits. So, when you’re looking at trends and outlook on multi-family, a lot of these areas are seeing lots of builds, a lot of investment activity, and then these multi-family properties are filling up really quickly, and that, again, creates a lot of opportunity.

I’ve got another statistic for you here. So, there are low-vacancy rates in a lot of desirable locations that are across the United States. So, as of 2020, 9.7% of housing was vacant, which was down almost 2% from 2010. So, what that means is that there are actually these desirable areas where there are vacancies, so then there’s going to be prices rising. So, that’s really interesting there. Then you have metro-area growth. We’re looking, as I mentioned, we’re talking maybe Southwest, you’re looking at sort of Phoenix, cities like that. Lots of metro-area growth, which, again, creates more demand for housing, jobs, all of that, which kind of affects it.

And I want to talk about COVID-19 a little bit because this is really upended a lot of things, and it’s kind of shifted things. You know, even now, a lot of offices are allowing more work from home, they’re going remote again. This has really changed a lot about the way people are even thinking about their homes because they’re spending more time at home, their homes are needed to serve not only as a place where they can live but as a place where they can work. In fact, I’ve got a little statistic here on that. So, more people than ever before are working from home, and this recent industry report predicts that 36.2 million workers, or 22% of Americans, will be working remotely by the year 2025, and that is an 87% increase from before COVID-19. So, what that means is that, again, more people are reevaluating where they’re living. They’re wanting more space, they’re wanting nicer space. If I’ve got to sit at home and work eight hours, you know, you kinda look at your four walls and think, “Can these be nicer?” You know? “It sounds a little loud here, I can hear the kids in the next room. Can I get something…?”

Jimmy: Yeah, it makes multi-family even more essential, really. Or residential…

Scott: Exactly.

Jimmy: …as a larger asset class group more essential.

Scott: Exactly, exactly. So, I think that’s a really…when we’re talking about trends and outlook, that just is not showing signs of slowing down, and many people have really started to embrace the work-from-home lifestyle, and they like it, and they don’t want to give it up. So, I think what that means is residential real estate, and specifically multi-family, especially when you’re looking at population centers, places where there’s a lot of jobs and business activity, that’s gonna continue to increase and be a factor. And then also, I think that it’s created a lot more flexibility and movement, kind of tying back to that migration I was talking about. So, now there’s folks that can have…maybe they can have a Chicago-based job, but they only have to fly there a few times a year, and now they’re looking, “You know what? I want to go to a sunny place. I want to go to Arizona.” I keep hitting on the Southwest, but that, again, creates opportunity there.

And then the last piece, and I alluded to it before, is this is sort of inflationary landscape protection. We’ll talk about some of the episodes that I’ve had in a bit here, but when you look at consumer price inflation in the U.S., just an example here, it was 13.5% in 1979, which was the worst year since 1947, and dividend income from REITs traded through the stock exchange averaged 21.2% that year, and total returns amounted to 24.4%. Just throwing a bunch of numbers here, but the point is is that it can…real estate, and specifically multi-family, can help act as that sort of hedge with inflation. So, those are kinda the trends and the outlook and where things are gonna continue to go as we look to 2022 because I don’t see any of this slowing down. I see this activity only increasing, and I know, Jimmy, you can speak to the opportunity zones side of things and what’s happening there, of course.

Jimmy: Yeah, as I will throughout the course of the year and in the years to come as well. But, yeah, like I mentioned at the beginning and you did as well, Scott, this is a resilient, durable asset class. That’s why we like it so much. What about cap rate compression? We had a lot of cap rate compression in 2021, you know, what effect did that have on multi-family real estate investors, and are you expecting more of the same in 2022?

Scott: Yeah, the surprising thing is there’s been this cap rate compression, but it really is not slowing investors down. Yeah, you’ve got to pay a little more to get in, but kind of tying back to what you were saying, Jimmy, it’s resilient, and investors are looking for safe investments that can offer opportunities for greater return and they’re not shying away. They’re saying, “Well, this is what it’s gotta be.” We’ve had also some trends in terms of new builds. You know, it’s a bit more difficult to get materials and things for builds, but again, that’s not slowing down the activity because I think you just look at, yes, okay, we’ve got inflation, we’ve got prices going up, but that main aspect of the housing shortages, and the fact that no matter what the environment is, people need homes, is really not deterring investors. I don’t anticipate that will change over the next year.

Jimmy: Yeah, and with bonds and treasuries where they are, you know, probably I would say the next best alternative to get income, current income, is real estate. And I think that helps push up those prices and those values in not just the multi-family sector, but across the real estate asset class, but particularly the multi-family sector for some of the reasons we discussed. Right, Scott?

Scott: Yeah.

Jimmy: Well, let’s pivot now and tell us a little bit more about your story, Scott, and about MultiFamilyInvestor.com, which, you know, I disclosed in the beginning, I’m a co-owner in that property, you’re a business partner in that property, Scott. Give us the story behind that.

Scott: Yeah. So, obviously, I’ve worked with you for a number of years, and if you can’t tell, I’m a bit of a multi-family evangelist. I really do think that investor portfolios can benefit so much from really significant allocation to multi-family. And I’ve had a lot of experience over my career in hosting podcasts and really interviewing experts about a wide variety of topics. Most recently I’ve been the host of “PayPod,” which is a payments and FinTech podcast about financial technology. And I looked at the multi-family sector, and Jimmy, you and I had conversations, and I just realized what an opportunity it was, and I was excited to start a podcast, and a video podcast nonetheless, where I could really speak to folks making this industry run and doing exciting things in the multi-family world. And so, that kind of was the impetus for co-founding this with you, of course.

Jimmy: Good. Well, Scott, it’s been a pleasure catching up with you and learning a little bit more about multi-family and chatting multi-family with you, but before we go, where can our listeners go to learn more about you and MultiFamilyInvestor.com and the multi-family investor podcast?

Scott: Sure. So, MultiFamilyInvestor.com, you can go there. We have all of our show notes posted up there. We’re available on all the major podcasting platforms, of course, and it is a video podcast, so we do have a YouTube channel, and we’re gonna continue to release videos as companions to our podcast. And we’ve got some exciting episodes coming up where we’re gonna be talking all kinds of multi-family topics. We’re gonna talk about workforce housing, we’re gonna be talking to sponsors who are developing properties in some of those exciting up-and-coming and growth areas. And then we have a backlog of episodes, which have been fantastic. We’ve talked about tax lien investing in multi-family, we’ve talked about the macroeconomic case for multi-family covering that inflationary landscape that I was talking about earlier. And, of course, Jimmy, fans of you, if they want to hear more from Jimmy, you were on a couple episodes where we talked opportunity zones in multi-family. So, there’s a lot to cover there, and it’s all at MultiFamilyInvestor.com.

Jimmy: Fantastic. Yeah, and I was a guest on Scott’s podcast once, or actually maybe twice now, and I know you’ve got some qualified opportunity funds sponsors stepping up in the coming days and weeks that are gonna fill in and be guests on your show as well, Scott. So, yeah, if you like what we’re doing here at The Opportunity Zones Podcast, I think you’re really gonna like what Scott’s doing at MultiFamilyInvestor.com. Please go check him out. And for listeners of this podcast, as always, I will have show notes on the Opportunity Zones Database website. You can find those show notes at OpportunityDB.com/podcast, and there you’ll find links to all of the resources that Scott and I discussed on today’s show. And, of course, I’ll be sure to link to MultiFamilyInvestor.com as well as his YouTube channel. Scott, it’s been a pleasure, buddy. Talk to you soon.

Scott: Talk to you soon. Thanks, Jimmy.

New OZ Fundraising $25M For Real Estate, Startup Investments

The Auspicious Opportunities OZ Fund is raising OZ equity to invest in both commercial real estate and QOZB startup businesses. The fund is targeting three initial investments:

  • Zen Building: A commercial real estate asset in Greenville, South Carolina that will be demolished and replaced with a 306,000 office building.
  • Divine Group: A commercial construction development agency that will provide OZ services across the country.
  • Startup Combinator: An incubator for young companies that will have a tenancy in the commercial office building owned by the fund.

The fund is seeking to raise $25 million with a $100,000 minimum investment.

 

List of Greenville County, South Carolina Opportunity Zones & OZ Funds

Greenville County, South Carolinahas 9 designated Opportunity Zones.

In total these Opportunity Zones have a population of approximately 26,000. That represents 5% of the county’s total population of 520,000.

The median household incomefor Greenville County Opportunity Zones ranges from approximately $27,000 to $45,000.

The adjacent map shows all Opportunity Zones in Greenville County. Click on any Opportunity Zone for additional information.

List of All Greenville County OZs

The table below lists all 9Opportunity Zones in Greenville County. The first two rows show the state wide average and the average for all South Carolina Opportunity Zones.

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South Carolina OZ Funds

There are 13QOZ Fundsin the OpportunityDb database with an investment objective that specifically identify South Carolinaas a target market. Additional OZ funds may also invest in South Carolina; see a complete list of Opportunity Zone Funds here.

New Startups Break Record in 2021: Unpacking the Numbers

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Portrait of young happy businessman wearing grey suit and blue shirt standing in his office and smiling with arms crossed

By Daniel Newman and Kenan Fikri

Key Findings:

  • Nearly 5.4 million applications were filed to form new businesses in 2021 — the most of any year on record, based on the latest data from Census Bureau’s Business Formation Statistics.
  • The exceptional pace means there were roughly 1.9 million more business applications in 2021 — a 53 percent increase from 2019 and a notable improvement on that especially strong year for economic performance.
  • Nearly one-third, or 1.8 million applications, were for likely employer businesses — a subset of total applications capturing those most likely to hire employees if and when a business becomes operational.
  • Likely employer business applications are up 37 percent over 2019 levels and up 17 percent relative to 2006, the prior peak. Seven of the top 10 highest monthly totals for likely employer filings came last year.
  • Applications for businesses likely to hire employees rose in every state in 2021, but faster in some parts of the country than others, especially in the Southeast.

Introduction

The Covid-19 pandemic disrupted the economic status quo in many unexpected ways over the past two years. While some of these changes have been unwelcome — high inflation rates not seen in decades and supply chain issues leaving store shelves barren — one of the most potentially beneficial developments is the unexpected explosion of new business applications that began taking shape in the summer of 2020. Contrary to expectations, that year turned out to be the best for business applications on record — only to be surpassed in 2021.

A record 5.4 million applications were filed to form new businesses in 2021 based on data from the U.S. Census Bureau’s Business Formation Statistics. This potential entrepreneurial boom in the midst of the pandemic looks nothing like what occurred after the last economic crisis when intentions to form new businesses declined for two straight years amid the economic turmoil of the Great Recession. The latest statistics suggest that the pandemic delivered a meaningfully positive shock to American entrepreneurship that may have significantly altered established trends.

New business formation traditionally helps power economic recoveries, as entrepreneurs and new growth companies take advantage of new market opportunities as well as the resources freed up by firms that contracted or failed during recessions. This mechanism broke down somewhat in the wake of the prior economic crisis, and the depressed startup rates that persisted throughout the 2010s may have contributed to the slow and uneven nature of the recovery that followed. The starkly contrasting ongoing flood of applications this time is an important and promising indicator for the strength of the recovery ahead. While credit was dramatically curtailed and significant amounts of wealth wiped out during the Great Recession, the massive federal support during the pandemic through programs such as the Paycheck Protection Program and stimulus payments to millions of Americans may have helped support existing small businesses and encourage their formation during this latest economic upheaval.

And yet, while the present surge in applications is notable, it provides only a forward-looking indicator that hints at future potential economic activity. It takes time for an application for a new Employer Identification Number, or EIN (the underlying variable tracked here), to actually turn into a new business, and just a fraction of  applications typically complete the journey. Individuals and corporations have many different reasons for applying for EINs, and not every instance reflects a true new company formation in the colloquial sense. Nevertheless, the durability and widespread nature of the surge suggests that it is capturing a true groundswell of entrepreneurial interest in the United States as the pandemic upends industries and careers.

This analysis highlights four major takeaways for business formation that defined 2021. Most comparisons are made relative to 2019 in order to explicitly highlight how Covid-19 has dramatically altered prior trends.

Total business applications were the highest on record in 2021 — a stunning 53 percent jump above the total filed in 2019 and 23 percent higher than in 2020. 

Nearly 5.4 million applications were filed to form new businesses in 2021 — the most of any year on record going back to 2005, based on the latest Census data. The exceptional pace of filing translates into roughly 1.9 million more business applications in 2021 than in 2019 before the pandemic, a 53 percent increase.

The surge in new business filings began in mid-2020, and the latest data show that it has sustained itself through the close of 2021. The 2021 total came in 23 percent higher than in 2020 when nearly 4.4 million were filed by that year’s end. Even though the monthly trends show signs of plateauing, there is little evidence that the pace of new business filings will fall back towards pre-pandemic levels any time soon. In the years prior to the pandemic, total monthly applications averaged just under 300,000, seasonally adjusted. In 2021, they averaged around 450,000.

Annual new business applications doubled in the transportation and warehousing sector between 2019 and 2021. 

The new business surge is broad-based, and total business applications in 2021 were up universally across all major industry sectors¹ relative to 2019 levels, demonstrating just how much the pandemic has transformed the economy. The top five largest percentage increases were in transportation and warehousing; retail trade; accommodation and food services; administrative and support; and other services (a general category including activities such as personal care services and laundry services). Some of the growth in these sectors likely reflect shifts in economic activity during the pandemic to meet increased demand for home-based services. In that sense, the data on new business applications also provides important indicators of the adaptability of the U.S. economy to respond to and reincorporate around changing opportunities.

Amid ongoing supply chain issues that hindered the operations of many businesses last year, new applications in the transportation and warehousing sector more than doubled between 2019 and 2021, the largest increase among all industries by far. This sector had registered the highest startup rates in the economy in 2019 and now appears poised to extend its strong growth. Businesses in this sector specialize in storage of goods as well as the modes of transport for those goods, and the rapid expansion of applications is somewhat expected given the tremendous increase in the amount of goods being transported directly to consumers throughout the pandemic.

Retail trade, the second-fastest-growing major sector, made up the largest overall proportion of applications in 2021. Just over 18 percent of all applications were in the retail sector in 2021, up from about 15 percent two years prior thanks to an increase in filings from 523,000 to 978,000. The vast majority of 2021 applications to form a retail business (78 percent) were unlikely to hire employees, based on the Census Bureau’s estimation (about 5 percentage points higher than in 2019). That is because many applications from this sector during the pandemic have been from so-called non-store retailers that typically sell goods online or deliver them directly to their clients. A spike in this sector is intuitive given how the pandemic has shifted consumption patterns solidly in that direction.

Applications for firms most likely to hire employees also reached record levels in 2021, increasing by 37 percent relative to 2019 and surpassing 2020’s exceptional total by 21 percent. 

The Census data breaks out one particular subset of applications that appear especially likely to proceed to hire workers based on their industry or other information provided (“high propensity business applications,” or “likely employers”), with the remainder falling into a more generalized bucket that includes such entities as non-employer businesses, gig workers, or sole proprietorships.

In 2021, Americans filed a record-breaking 1.8 million applications to form high-propensity businesses — the economically consequential subset of total applications capturing those most likely to hire employees if and when a business becomes operational. These likely employer applications were up 37 percent from 2019 levels, surpassing that pre-pandemic year by 481,000. Seven of the top 10 highest monthly totals for likely employer filings came last year, which helped push the total haul above the level recorded in 2006, the former top-performing year, by 17 percent.

Nearly one-third of all applications last year were for likely employer businesses. These potential startups are particularly important because they represent the businesses most likely to lead to lasting job growth and innovation. The increase was broad-based across most major sectors (only wholesale trade, agriculture, and mining did not surpass their 2019 levels), but certain industries led the growth. Nearly three-quarters of the overall gains above the 2019 total appear in five industry sectors: accommodation and food services; retail trade; health care and social assistance; professional services; and transportation and warehousing.

These leading sectors typically produce large numbers of business applications under normal economic conditions (representing 55 percent of all likely employer filings in 2019), but they also make up an outsized portion of the gains recorded during the pandemic: applications in 2021 to form likely employer businesses in the transportation and warehousing sector are up 71 percent over the same point in 2019, while accommodation and food services is up 67 percent, and the retail trade sector is up 48 percent. The health care and social assistance sector has also experienced rapid increases in potential business formation — up 33 percent relative to 2019. These high-growth sectors experienced extreme shocks to their normal operations throughout the pandemic, and the jump in intent to form new businesses likely reflects a necessity to adapt in response to job losses during the downturn as well as an opportunity to fill new economic needs amid changing consumer preferences, supply chain issues, and novel circumstances brought on by the pandemic.

Likely employer business applications are up in every state, but some unexpected corners of the country experienced especially high growth relative to pre-pandemic. 

Likely employer business applications rose in every state in 2021, but they rose faster in some parts of the country than others, especially in the Southeast. Four of the top five states with the highest growth were in the Southeast (Mississippi, Louisiana, Georgia, and Delaware), while Wyoming rounded out the group. By contrast, several states in the Pacific Northwest, Upper Midwest, and New England regions are seeing their likely employer business application grow at a much slower rate. Alaska experienced the slowest growth, surpassing its 2019 level by only 1.7 percent.

The growth rate map raises several questions. The strong performance of Delaware (+66.5 percent) and Wyoming (+74.3 percent) likely come down to their traditional roles as jurisdictions of choice for new incorporations due to favorable legal and tax regimes. Both went from having just over two-times as many likely employer business applications per 1,000 residents as the United States as a whole in 2019 to just under three-times as many in 2021, disproportionately benefitting from the national wave. While a broadly business-friendly policy orientation and a loose approach to COVID-19 restrictions could feasibly explain some of the South’s relative strength on this measure, variation within the region looks more perplexing. Normal factors that drive business applications higher, such as high population growth rates, do not explain which states lead the region, for example: Mississippi and Louisiana both lost population last year. And given high local poverty rates–indeed the two highest poverty rates in the country in the case of Mississippi and Louisiana–a push into self-employment out of necessity could be as much an explanation as the pull of clear new business opportunities–considerations which would color how one interprets the surge.

At any rate, finding the underlying explanations for state-level variation may be key to unlocking bigger questions about what exactly is being captured in by these promising but early-stage indicators of future economic activity, and how economically significant that activity will likely prove to be.

Differential growth rates aside, a handful of states are capturing the bulk of the growth by volumes recorded since the pandemic began. Of the 3.0 million likely employer applications filed since March 2020, more than half were located in just six states: Florida, California, Texas, New York, Georgia, and Illinois — some of which are among the most populous, fastest-growing, or economically dynamic places in the country — and a reminder that behemoths such as California, New York, and Illinois that often lag on growth measures (each experienced population loss last year, for example) still account for massive amounts of the nation’s new economic activity.

A promising development for the U.S. economy

The surge in new business applications remains promising nearly two years since the pandemic began, but it will be some time before we have a full picture of the net effect of the pandemic on the country’s business and entrepreneurial landscape. In December 2021, there were still nearly 3.6 million fewer people employed full-time in the United States than at the start of the pandemic, based on figures collected by the Bureau of Labor Statistics, yet the number of unincorporated self-employed workers had increased by 349,000 over that same period — a modest sign that some of those missing workers may have decided to chart a new economic path through entrepreneurship in unprecedented times.

While it will take months to evaluate how many of these expressions of entrepreneurial intent covered in the business formation statistics actually turn into new firms that go on to hire workers, any increase in the creation of new firms will be a boon for the U.S. economy: EIG’s analysis of Census data on business dynamics showed that the pandemic has brought a welcome and disruptive end to a lost decade in American entrepreneurship. Heading into the pandemic, the country’s startup rate — the share of all firms in the economy that were formed within the past year — stood stable at 8.2 percent in 2019, essentially unchanged from 2018 and only slightly above the all-time low reached after the Great Recession.

If the past is any guide, research shows there has been a historically high correlation between the number of applications filed and true business formation months afterward. A substantial number of these applications turn into real new firms, and their survival and growth will help power the economic recovery. However, at the same time,  there are reasons to be cautious. Not only is the number of true startups taking shape still unknown, but firms launched in recessions also tend to remain smaller than those launched during good times — leaving their potential impact on job creation unknown, too.

Ensuring that many of these likely employer applications do in fact turn into successful businesses with paid employees will help smooth our transition out of this pandemic. This entrepreneurial reaction to the economic shock is a testament to the U.S. economy’s underlying resiliency. Maintaining this high level of new business formation will be crucial in placing the economy on a strong and durable path to its recovery and will help eliminate the startup deficit that had built up in recent years.

Creating Value With ADUs In Opportunity Zones, With Adam Stone

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ADUs (accessory dwelling units) have become more prevalent in recent years. Also referred to as mother-in-law suites, multigenerational units, and in-law units, ADUs offer both environmental and financial benefits for investors and tenants alike. Paired with a Qualified Opportunity Zone project, the advantages of ADUs are even greater.

Adam Stone is a licensed Real Estate Broker, member of the California Bar, and CEO and fund manager of ADU OZ Fund. He has expertise in various aspects of both residential and commercial real estate including acquisition, management, entitlements, litigation, joint ventures, municipal codes, and San Diego zoning and ordinances.

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

 

Episode Highlights

  • Advantages of accessory dwelling units (ADU) and how to go about designing, building and funding ADUs.
  • How ADUs can help with today’s nationwide housing shortage and soaring real estate prices.
  • Why ADUs are increasing in popularity and why pair ADUs with opportunity zones incentives.
  • The different types of ADUs, the benefits of each, and their potential impact on the property value and neighborhood quality.
  • Laws around ADUs, specifically in California, and what to know about zoning regulations and restrictions.
  • How to achieve the full tax benefits of ADUs and the specific tax incentives they provide.

Featured On This Episode

Industry Spotlight: ADU OZ Fund LLC

ADU OZ Fund LLC is a Qualified Opportunity Zone Fund creating new affordable housing in San Diego and other desirable markets that targets and acquires 1–4-unit properties within zoning designations that allow the addition of multiple ADUs for more housing.

Learn More About ADU OZ Fund LLC

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 podcast is Adam Stone. He is a real estate attorney, broker, and now fund manager of ADU OZ Fund, a qualified opportunity zone fund that uses accessory dwelling units as an option to complete value-adds for multifamily residential projects. Adam joins us today from San Diego, California. Adam, welcome to the show.

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Adam: Hey, Jimmy. Thanks for having me. I’m a huge fan of the show.

Jimmy: Awesome to hear. Adam, thanks for joining us today. Pleasure to be with you. This is the first podcast interview that I’m recording in 2022. We’re in the first week of January here. So, New Year, new podcast episode, looking forward to seeing what this year brings for opportunity zones. But let’s turn to you now, Adam, and focus on your fund, which features accessory dwelling units, or ADUs. It’s the first such OZ fund that I’ve come across. So I’m curious to learn more about it during the course of the episode today, during the course of our conversation, but to start us off, a very basic question. What is an accessory dwelling unit exactly?

Adam: Sure. Well, an accessory dwelling unit, ADU for short, is a separate dwelling area on the same property as a primary detached home. Generally, they’re up to 1200 square feet. And I think people are familiar with them. If you’ve ever watched Fresh Prince of Bel-Air, Will and Carlton, they live down in the pool house. That’s an accessory dwelling unit. If you watch “Happy Days,” the Fonz, where he lived, above the garage, that was an accessory dwelling unit. Now, the regulations and laws in California and other areas of the country have opened up to such a point where value-add in the development space, through the use of accessory dwelling units on single-family residential properties, is creating a large market for what we’re looking to do. And we’ve already had some success with that process already. So we’re excited to create a qualified opportunity zone fund to incorporate that model into what we’re already doing.

Jimmy: That’s great. Yeah. So, essentially, it’s oftentimes a guest house, or a pool house, or a carriage house, or maybe an extra apartment that’s built up above the garage, just anything like that. So we’ll refer to all that generally as “ADU” throughout the course of today’s episode. So, you touched upon this in your last answer, but the bigger macro picture, Adam, is that there’s a housing shortage in this country. And we’ve covered that topic on several previous episodes of The Opportunity Zones Podcast, and particular areas of the country have bigger housing needs than others. And California is certainly no exception to that fact, especially lower-income housing, affordable housing, workforce housing. And oftentimes the solution is we just need higher-density housing in a lot of these locations. I think ADUs help provide that. Can you add some additional color there, though, Adam? How else can ADUs help to address that issue?

Adam: Sure, Jim. I mean, you hit it right on the spot in terms of the housing needs and the crisis that the whole country is going through. And I think accessory dwelling units just provides another option, another tool for addressing that situation, addressing that problem. You know, in terms of what we’re doing in San Diego and what the laws allow, you know, like you mentioned, there’s the ability to convert garage space, and even, if you have a piece of property that has a larger lot, and there’s space on that property to build out, you can build in accessory dwelling units. And it does just provide another option for people who want to, you know, help build in those new living spaces, those new areas, for all sorts of people who are needing it. You mentioned affordable workforce housing. We’ll talk a little bit more about that. But yes, I mean, it’s just another tool, an option. I think it’s a great way to add in value for people looking to help address that issue.

Jimmy: And has there been a push by certain communities around the country, and maybe you can speak specifically about San Diego, because I know that’s where you are now, and that’s where your fund has some focus in? In terms of changing the local regulations and zoning laws to allow for this, what exactly is unfolding in that regard?

Adam: Since the start of 2020, you know, we’ve had laws across the state that have opened up the ADU development space. And San Diego has been at the forefront, I would say, in terms of creating laws that allow for ADU development in areas that have the highest density issues, and have the highest need for affordable housing and affordable rents. And they even allow for some of the regulations to not only serve as a tool to create rentable ADUs, but also ADUs that can be, you know, sold and resold to the community, depending on the involvement of nonprofit organizations. So, you know, I think with the creation and enactment of SB8, 9, and 10, and for those who don’t know, that’s state bill, Senate Bills 8, 9, and 10, in the state of California, those are even more expansive regulations, that allow for the development of single-family housing, and provide for more avenues to bring in units and bring in solutions for this growing problem.

Jimmy: Good. And I’ll be sure to link to those Senate bills, California Senate bills 8, 9, and 10 in the show notes, for today’s episode. And as always, you can find those show notes at opportunitydb.com/podcast. What does it typically do to the value of the property? Let’s say the case of a single-family home, there’s a little bit of room on the property to develop an ADU, maybe a guest house or a pool house, you know, what have you, to increase the density, and maybe add another bedroom and bathroom to the property in an ADU. How does that affect the value of the property, typically?

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Adam: You know, it’s just a common answer from an attorney. It all depends. It comes down to redeveloping something in your backyard, where you’re building ground-up, then you’re gonna add in the most value compared to maybe an area in your house that could be walled off and turned into its own separate space, which is called a junior ADU in a lot of areas in San Diego, junior accessory dwelling unit, or if you’re converting a garage, and doing the garage conversion. But just to give you a small example, we have a project right now that is in the first phase of two phases of accessory dwelling unit value-add. And the first phase was taking the existing home, a two-bed, one-bath property, with an attached garage, rehabbing the home, and then extending the garage out slightly to create its own ADU in that garage, converting the garage into a two-bed one-bath accessory dwelling unit. The original purchase price for that home was about $385,000. We’ve had appraised value for just the duplex, or I should say, the ADU conversion, at about $775,000 closer to $800,000 just for the rehab and the conversion there. So, you know, there is a pretty significant increase in value, especially if you’re doing it in a way that’s, you know, rehabbing existing structures, or adding in new value and new square footage to the property.

Jimmy: Right. Yeah, that’s pretty substantial return on investment, then. Pretty substantial value increase. In some ways, I would imagine you could pretty quickly add on some sort of ADU to the home, and then just flip it and get out within a year or two if you needed to. But I would imagine, turning our attention now to your opportunity zone fund, that you wanna have a longer holding period within your ADU OZ fund. But correct me if I’m wrong, and also tell me a little bit more about your fund. What’s your investment thesis exactly, and what are you doing within your fund?

Adam: Right. I appreciate that. And I think the idea of taking that strategy of finding properties that have that value-add potential, we are looking, like I said, the first phase of these projects is taking the existing structures, within the fund, of rehabbing those structures, getting those to a livable, rentable status. But then from there, a lot of our projects that we target are able for an additional significant value-add on their open backyard space. And taking that same example, I mentioned the home with originally a two-bed one-bath with a garage, now through the first phase, the home is now a three-bed, two-bath, with the two-bed one-bath accessory dwelling unit. In the backyard space, the second phase is to add in eight additional one-bed, one-bath units, that would allow for us to go from having one unit originally now to having 10 units. And then, from there, you know, holding that property, cash flowing through the rental income, for the eventual sale exit, after the 10-year hold is established, to get the step up in tax basis. So we’re using that as a way to, again, bring in, you know, the accessory dwelling units, but do it in a way that provides value for our investors and then the community as well. Because these properties are going to incorporate parking, incorporate outdoor community spaces, and things like that. So it’s adding units in a way that doesn’t add in unnecessary congestion.

Jimmy: Oh, okay. That’s pretty substantial then. You’re essentially taking a single-family home with a large backyard and you’re converting it into a multifamily property, in some sense, if I understood you correctly.

Adam: No, that’s correct.

Jimmy: Okay. Good. Tell us a little bit more about your fund. How much are you raising? What areas are you focused on, and what types of property types and rates are you targeting?

Adam: In terms of property types, again, we’re looking at the residential mixed-use space. And then, from there, we are looking for investors who have at a minimum of $50,000. But our raise, initial round, would be $25 million, with a max raise of $250 million. So, within that time span, we’re looking to acquire properties that fit that model in terms of the value-add space, not only in San Diego. We have other markets that we’re targeting. I’m originally from the Ann Arbor, Michigan area, Detroit area, so, you know, there are opportunity zones in those areas that are very attractive. My partner, Matt Williams III, he has a development background in the Atlanta and Dallas area. So, you know, we’re targeting those areas as well, and have some projects that are already in mind for potential expansion.

So, I think the whole idea for our fund is to add dwelling units, not only through accessory dwelling units, but the housing options that fit that market. So, you know, I think we will see accessory dwelling units continue to expand in their regulations across the country. But, you know, until they catch up in other areas, I think there are definitely options that still fit what our fund’s mission is, and adding in those units in a way that provides not only more housing for rentals but, again, more housing for new homeowners, homeowners that wouldn’t have had an opportunity to be homeowners unless there were funds like this and developments like this.

Jimmy: As you mentioned four different markets, San Diego, obviously, and then you also mentioned Ann Arbor, Dallas, Atlanta, what do you like about those particular markets?

Adam: They all share some of the same characteristics in terms of different demographics and sizes, but they’re all areas that are highly sought after. They’re seeing growth and, you know, continued growth in a way that is driving prices up to heights, you know, there’s just new for those areas. So we’re seeing those… You know, Dallas, in particular, they’re starting to incorporate more ADU laws into their own regulation. So, again, that provides even more value for potential developments, you know, things that could have been subdivision build-outs in the past, that might now turn into subdivisions with accessory dwelling units incorporated into it. Again, more value added to the property, more housing added, you know, immediately, to provide for the community’s needs. So, yeah, I think those four areas all serve as areas of high need, just based on their growth, and places that we’re comfortable with and have seen the growth over a span of 10, 20 years, sometimes.

Jimmy: The congressional intent of the opportunity zone legislation in the first place was really to help spur economic activity, and social impact, really, in a lot of economically downtrodden areas throughout the country. How is your fund and the projects that you’re developing helping to deliver on that promise of creating social impact?

Adam: You know, we’re looking at it for three areas, not only just adding in the housing, but also through the job creation that comes into play from the construction, and the ancillary businesses that are going to be necessary to support more of the community. We have our own ideas in terms of what some of those businesses would be, to help serve the community and also fill needs that are already there. But at the same time, I think, in the end, if you’re adding the housing, bringing in the job creation, both through the construction and the ancillary businesses, and then, on the other end, one area that we’re looking to build more support for, and hopefully, these are some changes that we see with the opportunities zone tax laws down the line is just the ability to incorporate more community involvement at the investor level. And I think that’s something that’s important to us too, because we definitely want involvement at all levels, and want people to share in the growth that should happen, and using the fund.

Jimmy: Did you say that was a law that you’d like to incorporate some of that additional community involvement?

Adam: I think in, just in terms of some of the possible changes and ways to expand and open things up. I know that in some states, I believe Ohio is one state that has allowed at a state level to give at least some benefit to the opportunity zone investment for people who aren’t using capital gains. So I think that’d be an area that if possible we could, let’s say, incorporate in California, or find some way to get, help build in involvement from the community as a whole.

Jimmy: Yeah, I think there’s a lot still left to be written in the story of opportunity zones. I do think some additional changes to the law, and changes to some of the regulations could help open it up a lot more. So yeah, that’s an interesting idea, I think, there, Adam. Well, what can you tell us a little bit more about the team at ADU OZ fund? You mentioned your partner, Matt Williams, briefly, a few moments ago. Give us a little bit more background on him, and on yourself as well, and the experience that you two have.

Adam: Okay, yeah. Matt is, he’s a retired military veteran. He, since serving in Afghanistan and being active, he has been in the development space. And like I mentioned, he has familiarity and success in multiple different markets. I mentioned Dallas and Atlanta, but also areas in Pennsylvania, obviously, in San Diego, other parts of California. So, he’s definitely the construction development manager in terms of knowing how to execute these projects and put them together. On my side, I have a background as a real estate and business attorney. I’m also licensed as a real estate broker. So, you know, I really focus on knowing how to navigate the laws, and combine the different areas of local, state, and federal law, to try to synthesize a formula that fits our model, and that’s compliant with what’s out there, but also allowing us to take advantage of the laws and codes that are designed to spur on this type of development. So, you know, I think we create a great team. Outside of that, you know, we do have, we keep a very experienced staff of experts and consultants at the ready, and they’re on our chain, just in terms of helping us navigate the opportunity zone tax laws, and just design and build out our projects in general.

Jimmy: Good. Turning back to your fund for a moment now. You just launched it, just within the last few days, end of 2021, or maybe beginning of 2022 here. You’re raising $25 million. What types of properties have you already identified? What does your pipeline look like exactly?

Adam: So, right now, we have a couple infill lots that we’re redeveloping. Those are already under contract, and more are working towards just the design for what the build-out would be on those. And then, I believe I mentioned earlier, in the Atlanta region, we have some connections to a subdivision that is located with an opportunity zone that is needing to be finished off, built out. And that’s another area, again, that we would look to potentially bring in the use of accessory dwelling units if it made sense. But, you know, in the San Diego space, we have multiple other projects that are in the pipeline, that fit that larger-lot, mixed-use or single-family zoning designation that is primed for value-add.

Jimmy: And, wanna speak about some of the challenges now with managing and raising money for an opportunity zone fund. It’s a heavy lift, just doing the types of development that you’re undertaking to begin with, but then you’re also layering the opportunity zone tax benefit on top of it. And you’re also dealing with a lot of local regulations and zoning laws as well, and local tax incentives and tax benefits. What have been some of your biggest challenges so far in terms of getting this fund up and running, and developing these properties and raising money?

Adam: No, that’s a great question. I think, like you said, there’s a lot of different areas and directions to go into, to really cover all of your bases in terms of building relationships, and making sure you’re covering those different levels that, the need that you want to make sure the fund moves in the right direction. I think, for us, we see it as a challenge but a opportunity to put together different collaborations that may not have always been used or utilized to put these types of projects together. For example, we are working with nonprofits and other organizations that could immediately use this housing to build support and traction for the projects, that would allow, you know, in a sense, for it to gain some more familiarity and comfort with this type of accessory dwelling unit value-add.

And, you know, I think just in general, accessory dwelling units have met some negativity from people who may not want them in their neighborhoods, but I think it’s impossible to deny the need for housing. So, you know, I think what we’re looking to put together, and how we’re looking to execute, you know, that’s why I mentioned earlier, the need for adding in parking and adding in some of those community amenities that allow us to say, hey, you know, we’re looking to address this problem. We’re looking to provide a resolution to this situation that really fit this need, but at the same time, doing it in a way that still is conducive to a quality neighborhood, and building community in a way that helps revitalize it.

Jimmy: Very good. Well, Adam, it’s been a pleasure speaking with you today and learning more about accessory dwelling units and your ADU OZ fund. Before we go, though, can you tell our listeners where they can go to learn more about you and the ADU OZ fund?

Adam: Sure. Thanks again, Jimmy, for having me on the show. For all the listeners who wanna get more information, please, you can reach out to us at info@aduozfund.com. Visit our website at www.aduozfund.com, or you can even reach out with a phone call at 619-704-2477.

Jimmy: Perfect. And for our listeners out there today, I will, as always, have show notes for today’s episode on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast. And I’ll be sure to link to all of the resources, and I’ll even list that phone number as well, that Adam just gave, and all the other resources that Adam I discussed on today’s show will be linked there as well. Adam, thanks again for joining me today. Been a pleasure.

Adam: I appreciate it. And one more thing. I did wanna mention @aduozfund is our Instagram handle. Please follow us, and we’ll keep you updated on our projects and our progress for everything going on.

Jimmy: Fantastic. And we’ll link to that in the show notes as well. Thanks, Adam.

Adam: Thanks, Jimmy. Appreciate your time. Thank you.

Opportunity Zone Impact Investing Survey, With Reid Thomas

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Impact investing is an investment strategy that strives to generate social or environmental benefits in addition to financial gains. It also spans diverse range of assets, including bonds, public equity, and private equity, such as opportunity zones and New Market Tax Credits. But how does impact investing work, and how might one select a specific fund to invest in?

Reid Thomas is Chief Revenue Officer and Managing Director of JTC Americas, the North American division of JTC Group, where he is responsible for overseeing the day-to-day operations of the Specialty Financial Administration business unit.

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

 

Episode Highlights

  • Information about JTC America’s survey on the impact investing elements of opportunity zones.
  • Investment types that are highly specialized and with a focus social and economic good.
  • How to identify investment activities that can create an impact based the social and/or environmental issues they want to address.

Featured On This Episode

Industry Spotlight: JTC Americas

JTC Americas, formerly NES Financial, is the North American division of JTC Group. JTC is a publicly listed, global professional services business with deep expertise in fund, corporate and private client services.

Learn More About JTC Americas

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. And today we’re discussing impact investing and an upcoming impact investing survey. Joining me today to discuss this is Reid Thomas, Executive Vice President of Sales and Marketing at JTC Americas. They are the organizer of the survey that we’ll be discussing today, and they’ve partnered with me and my team at OpportunityDb to bring this survey to the industry. Reid, thanks for joining us today. I believe you’re joining us from San Jose if I’m not mistaken. Is that right?

Reid: That’s right, Jimmy. And it’s always a pleasure to be here. Thanks for having me on again.

Jimmy: Yes. A pleasure to have you on the podcast. You’re one of my most prolific podcast guests. You’ve been on a few episodes with me. I’ll be sure to link to all of your prior appearances on The Opportunity Zones Podcast in the show notes for today’s episode. So let’s talk about the impact investing survey that JTC Americas is organizing. First, what is it exactly, and why are you doing it?

Reid: Yeah, what we’re really doing is putting together…we’re doing a survey in order to put together a market research report that really focuses on the impact investing elements of the opportunity zones. And it’ll extend beyond that but opportunity zones is obviously the homebase for this. And the reason we decided to do this is because it’s no secret that the future of the opportunity zones program depends really on the perceived success that the initiative is gonna have in terms of delivering the economic results to communities in need. I mean, Congress has been all over that. That’s the rhetoric we hear consistently. There’s quite a few versions of legislation that have been introduced to propose measurement of impact and impact reporting. All of the different industry groups and various stakeholders are behind that initiative as well. So, what we really wanted to do was use this survey to develop research to really help the industry understand what’s going on in terms of investor motivations, as well as sponsor desires.

Jimmy: And I’m curious now, who are you expecting to take the survey? Are you surveying the different product sponsors, fund managers, whatever you wanna call them, or are you surveying investors or a little bit of both? Who would you like to have take the survey?

Reid: All of the above. One of the things we’ve observed is that we’re seeing fund managers, in particular, starting to shift to promote the impact elements of their funds more aggressively. And that’s what got us started on this. That’s a trend that we’ve seen across our client base now of over 200 opportunity zone funds. And so we were curious when we saw that as to what was behind that. And so we interviewed several of our clients to put the structure of the research report together, the survey together. So, part of the questions were oriented at additional sponsors to really learn what their views are on the importance and relevance of impact, how that plays into their fund formation strategies and investor recruiting strategies. On the other hand, investors were very interested to learn what investors are looking for and how this all connects. So this is one of the real important reasons why we’ve partnered with your firm, Jimmy, because you guys do such an excellent job of communicating with the community that’s out there. By partnering with you, we can get a really good perspective, not only of what fund managers are trying to do but what investors are trying to do. And hopefully, by connecting those dots, we can help fund managers design and develop products that are better suited for investors and we can help investors find the types of investments that they’re looking for.

Jimmy: Yeah, I think in some ways, we’re trying to get to the bottom of, I don’t mean to put words in your mouth, Reid, so push back against this, if I misspeak here, but I think we’re trying to get to the bottom of, is impact investing important to the investing community? And if so, why? And so then how can investment product sponsors or fund managers better market their products to drive home that point? Is that right? Is that kind of what we’re getting after here?

Reid: Not only is that spot on, but in addition to that, we’re looking for more detail than even that. So as an example, how do investors prioritize the impact elements of their investment? What kinds of trade-offs might they be willing to make, if any, in terms of an investment yield for certain elements of impact? What kind of reporting are they looking for along the way that the sponsor could provide? Those are the kinds of things that we think will be really, really helpful. But at a high level, you’re absolutely right, that’s the goal.

Jimmy: What other types of questions are you asking on the survey?

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Reid: Yeah, those are types of questions, those are good examples of questions as to what we are definitely doing. We’re also asking lots of questions for fund managers in terms of their current fund structures, the types of things that they’re investing in, how they’re measuring and tracking the impact of the investments they’re making, those types of things. So it’s really a comprehensive survey. I think, in total, it’s about 25 or 30 questions. And we’re sending it out to enough people and we’re hoping to get lots of responses so that it’ll be certainly statistically valid, and something we can slice and dice in various ways together to provide the industry with some really meaningful information.

Jimmy: Yeah, the survey is open now, and we’re helping you promote it because we’re invested in learning the answers to a lot of these questions. And we’d like to hear from as many investors and fund sponsors as we possibly can. So, if you are interested in learning more about the survey, you can head over to opportunitydb.com/survey to learn more and to participate. Reid, I wanted to ask you about JTC Americas. I know you’ve been on the podcast several times before. You and I know each other quite well. We’ve known each other for a few years but for those who may be unfamiliar with JTC Americas, can you tell us a little bit more about your firm, its history, and what you guys do exactly?

Reid: Sure. So JTC is a global company. Actually, we’re a $1.5 billion market cap company traded on the London Stock Exchange. We have offices in 23 countries around the world. About half the business is a private wealth, private client business, and the other half is administrative services, like fund administration. So JTC Americas, we’re really focused on providing fund administration services to investment types that are highly specialized and really have a focus on ultimately doing good. You know, there’s been so many financial initiatives and incentives created over the years with good intentions, but far too often they fail to ultimately achieve the goal that they’re intending to. And one of the reasons for that is because the administrative burden can just be so huge by trying to provide all the data everybody wants, trying to meet all the regulations or compliance standards. These burdens can be just too much to allow the initiative to ultimately succeed. And in some cases, when there’s not enough of that stuff, then the system or the initiative gets abused, and it fails in that way. So, our approach was to really develop our own technology, which we use to do the administrative services to both protect against abuses and fraud, protect investors, protect fund managers, and at the same time, make it easy for them to comply with all the regulations and standards that are out there, including just basic financial reporting, financial statements and the like. You mentioned, we work together a lot, really in the opportunity zone space, because that’s an area that obviously, is a financial investment vehicle that has a lot of complexities, but it’s intended to do good and we wanna help see that through.

Jimmy: Yeah, your firm was perfectly positioned to capture a lot of those funds that needed that type of professional services, that fund administration platform that you have. When we’re talking about impact investing, especially with this impact investing survey that we’ve been discussing since the top of the show, what type of impact reporting does your fund administration platform offer for private equity funds or opportunity zone funds specifically?

Reid: It’s interesting because when we were building our product, we looked for solutions that we could implement that aligned with sort of the types of work that we would have to do anyway to provide the financial accounting, financial reporting services. So what we developed, we developed on our own. We also partnered with Howard W. Buffett, who’s famously the grandson of Warren Buffett, who has developed a way to report financial impact called Impact Rate of Return, that we could create an algorithm to work with. And so, by doing the fund accounting that we’re doing anyway, we can provide sort of standard information, like, what is the Impact Rate of Return, sort of to Howard’s formula, ut we also can calculate jobs created, labor income generated, taxable revenue generated for the community. We can track those kinds of things as just standard practice. In addition, we created the ability to have it be customizable because everybody has their own sort of passion for something, right? So, if the investment strategy is really oriented at improving education, there’s a way we can configure the solution to report on various education-related metrics. So we’ve been involved with a number of very, very interesting projects with all kinds of interesting goals, and we’re excited about using that system to help them achieve it. And then the reporting is something that’s online, available in real-time that the funds can use and to help them market their successes. Investors can track progress and something that’s available to all of our clients today.

Jimmy: No, that’s great. It’s great work that you do. And I know you represent a lot of qualified opportunity funds that are open and receiving capital and closed funds as well. You represent a lot of the industry is what I’m trying to say. I wanna get back to the survey for a moment. Actually, let’s zoom out and take a look at impact investing as a whole before we do that. And maybe I’m about to ask you a question that you’ll say, “Well, I don’t know. I gotta wait until the survey results come in,” but I’m curious if you do have any idea. I guess a two-part question for you, Reid. One, do you feel that there has been a trend toward impact investing from investors over the last several years or over the last generation or so? And two, why do you think that is if that is the case?

Reid: Certainly the data supports that that’s a trend. Impact investing is, I suppose, one class of the broader ESG investing definition. ESG, as a category, has exploded in the last years, it is extremely high profile, and the data would suggest that ESG funds actually perform…funds with an ESG focus or investments in firms with an ESG focus have a more positive…ultimately a more positive return. And so the market has been growing like crazy. This is particularly true, we find internationally, the European markets are further ahead, I would say than the U.S. is, in terms of its investing emphasis in this area and in terms of the reporting requirements. There’s much more governance and compliance sort of reporting standards in Europe. But the U.S. isn’t that far behind. And I think part of it is driven by just the shift in our demographic. It seems that this is…climate change, as an example, social impact, helping other communities, these are the things that have come to bear, I think, both from a generational perspective, as younger people mature, this has been something that’s front of mind for them. And now that they’re of age in many cases where they can make investments, they wanna help. Also, the pandemic that we’ve gone through for the last couple of years has certainly heightened awareness of folks who are challenged in some of these communities and could really use some help. So it’s becoming a big deal. It’s continuing to gain momentum. And I don’t think there’s gonna be any slowing it down. And in fact, I think just like we’re talking about in OZs about having some level of reporting related to the impact benefits of the investments, I think we’re also gonna see even at an SEC level, more diligence and more focus on making sure that ESG metrics and ESG reporting actually stand up to what they’re saying.

Jimmy: Yeah, particularly, if that was the intent of Congress when passing some of these laws that created some of these tax-advantaged investment vehicles, opportunity zones, being the elephant in the room here, of course, that we’re discussing right now, I think it’s important that at some point, we as an industry are able to prove that, hey, yeah, this is actually creating some impact. And in some of these places, it is doing the work that Congress intended to do. Absolutely, Reid, I couldn’t agree more.

Reid: Yeah, I think in terms of, you know, why this is happening, that’s one of the…bringing it back to the survey, going that next level down to try to look at the specific motivations of investors and what determines which impact investments they might pull the trigger on versus others is really where we’re trying to go with this survey, ultimately, right, to get it to a much granular level to help fund managers actually decide how to implement and structure funds in a way that can be most successful for everybody.

Jimmy: Right on. And the survey is open right now and it’s gonna close fairly soon, I believe. But once all the numbers are crunched and you’re able to put together a report, is that report going to be made public to anybody who wants to get access to it?

Reid: Yeah, that’s our plan. Definitely, those that respond to the survey, of course, all the responses will be anonymous and private, but on an aggregate, we’ll make the data available to those that participate. And we’ll also, through your help on your website and other marketing events, let folks know how to get that information.

Jimmy: Very good. Reid, well, like I said, the survey is open right now. And we are working with JTC Americas to help promote it and drive some response to it. So if you are an opportunity zone fund sponsor, or issuer, or if you’re an impact investor, or OZ investor, however you identify yourself, we would love it if you could help us out and take the survey. You can learn more by heading to opportunitydb.com/survey and there you can learn all about how to take the survey and how long it will be open for. And actually, if you’re listening to this podcast, maybe a few weeks after it’s aired, the survey may already be closed, but then you can opt in there to learn more about how to access the conclusions from the survey. So, either way, head to opportunitydb.com/survey to learn more. Reid, it’s been a pleasure speaking with you today. Appreciate your time.

Reid: Always a pleasure, Jimmy. Thanks so much for having me on. And thank you to your listeners for listening.

Successful Opportunity Zone Investing Strategies

Opportunity zone investments come with inherent potential risk, but they also offer several key advantages. Before diving in, it’s important to understand investment strategies specific to OZ assets and projects.

This episode is the audio version of a live opportunity zones panel at the AnySizeDealsWeek Festival of Real Estate Innovation in Las Vegas, Nevada with, a focus on successful opportunity zones investment strategies. The panel was moderated by OpportunityDb founder Jimmy Atkinson. Panelists: Ashley Tison, Bo Kemp, Peter Ciganik, and Jill Homan.

Click the play button above to listen to the audio recording of the panel.

Episode Highlights

  • How the Opportunity Zone program offers tax benefits to investors making a qualified investments in Qualified Opportunity Funds (QOF).
  • What gains are eligible for deferral, when investments in QOFs must be made.
  • How Qualified Opportunity Funds can remain an option for deferral of capital gains within noted time frames.
  • Depreciation recapture and how does it work with investing in OZ projects.
  • Why multifamily properties can be more resilient than other asset classes.

Featured On This Episode

Industry Spotlight: AnySizeDealsWeek

AnySizeDeals Week is the annual Festival of Real Estate Innovation. It’s the premier thought leadership and dealmaking event in the real estate industry. It’s 3 days of dynamic conversations, networking, dealmaking, and showcases for the most influential leaders in the real estate and PropTech Space. The event caters to senior executives at large real estate firms, big tech companies, and startups.

Learn More About AnySizeDealsWeek

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. Back in September, I visited Las Vegas, Nevada, to moderate a live opportunity zones panel at the AnySizeDealsWeek Festival of Real Estate Innovation. This panel focuses on successful opportunity zone investing strategies from varying perspectives. Enjoy. Before we dive in, let’s get an introduction from each of our panelists. I’ll start with the Bo Kemp there at the end. Introduce yourself. Say hello.

Bo: Hello, everyone, Bo Kemp. I’m the CEO of Southland Development Authority. We managed about 45 cities, towns, and villages outside of Chicago doing economic development. I also am a partner with a group called the Fluent Group, which is based in Los Angeles, California. I’ve been doing OZ work since the beginning. I used to work with Cory Booker prior to the legislation. So, I was early on in the space. I’ll hand it over to you, I guess.

Ashley: I’m Ashley Tison. I’m an attorney and I founded a company called ozpros.com with Jimmy. And we set about to become the LegalZoom for opportunity zones back in 2019. And we very quickly figured out that giving people the ability to do it themselves was a really bad idea because they always mucked up the forms. And so, we kind of became a full-service shop for helping democratize access to opportunity zones. So helping people across the country that had smaller projects or that had bigger projects but that wanted to get to an answer on those really fast to come up with a solution for that. So, we bring in kind of big firm experience and expertise, but we do it on an affordable, as-consumed basis. So we do that via strategy calls. We’ve got off-the-shelf funds and QOZBs that we offer as well. And then we do ongoing compliance training to help people build their compliance muscles as they go forward with their opportunity zone endeavors.

Peter: Good afternoon. Peter Ciganik with GTIS Partners, an investment fund manager based in New York. We manage about $4.5 billion of assets across residential and industrial properties. And since 2019 have been investing in opportunity zones in a fun format because a lot of our past projects basically ended up into zones when they were designated and we figured out why not put a nice and attractive tax incentive on top of what we do anyway. So here we are, a couple of years later, a project underway. And one of them is actually here in Vegas. Symphony Park is the master plan downtown, and happy if you would join me later in the afternoon for a tour of it.

Jill: All right, good afternoon, everyone. My name is Jill Homan, president, of Javelin 19 Investments. So we’re an opportunity zone investment and advisory firm. We focus on three verticals, the first of which is we’re doing some development in opportunity zones. Secondly, I’m a registered investment advisor representative. So I am affiliated with an RIA and we provide investment advice to investors and family offices who like to allocate and use this incentive. And thirdly, we are working with two opportunity funds. One is a sports-anchored opportunity fund and the other is a West Coast-based opportunity fund and we’re serving to enhance their really investment advisory and underwriting capabilities.

Jimmy: Well, thank you panelists for being here. Again, I’m Jimmy Atkinson. I’m the founder of the Opportunity Zones Database at opportunitydb.com which serves as an educational platform and a matchmaking platform connecting investors who have capital gains to OZ funds and deals who are seeking capital. And I’m also the co-founder of OZ Pros along with Ashley Tison as he already mentioned.

So, today’s panel or this panel right now, we’re really gonna focus on successful opportunity zone investing strategies. The four panelists up here today have a lot of deep experience seeing a lot of deals and seeing a lot of investors. And they have a good handle on what worked. They all bring different perspectives though. So we’ll get to that in a moment. But first, I wanted to just kind of zoom out and take a look at what we have on the screen over there, which is really the impact fact that the opportunity zone benefit has on returns on an after-tax basis. And Jill and Peter, I wanna turn to you and get your thoughts on this. And Jill, this is your slide. You presented that to me. So take it away for a minute and kind of walk us through.

Jill: Sure. I’ll start and then hand it over to Peter. So, if you remember nothing else from me, you can remember a lot from everybody else, but nothing else from me, my takeaway is that when you look at the total opportunity zone incentive benefits, the net benefit is, potentially, a higher after-tax return in the order of magnitude of 40% to 50%. And so this is what really this demonstrates in the slide is looking at the pre-tax, or I’m sorry, the after-tax returns without the benefit and then the after-tax returns with the benefit. And it shows…I can’t even see from here. It’s so bad. But that’s what the slide shows and I think it says 8% and then it’s at 12%. So it’s showing the after-tax return. And then I know, Peter, you all have done research on, you know, what’s driving the alpha of that return. So I can just hand it off to you as well if you want to elaborate on that.

Peter: Not much to add to that. I agree, it adds about 4% or so to your underlying investment return. So, if you’re asking where to make a 10% return with this benefit, it would be 13%, 14%, maybe a little more depending on your state of residence, just from not paying taxes. But if you remember anything from me, that doesn’t matter if your asset doesn’t make a profit because there is no tax if there is no gain. So all of what you invest in should start with, as you’re doing nonprofit work, the return of the underlying asset. And it is a great tax benefit program for developers and operators in these locations that can add significant value. But it all starts with market selection, property selection, and sound investing in the underlying deals.

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Ashley: You know, one of the things that this does not show is, not only does it use your after-tax return in the form of zero capital gains after a 10-year hold, but it also eliminates depreciation recapture. So after you’ve held your investment in a fund for 10 years, any capital asset that’s owned by the fund gets a step-up in basis to fair market value, which takes away capital gains but it also eliminates depreciation recapture. And so, when you’re able to model that in on top of this, it’s significant about what that does on an opportunity zone deal versus a non-opportunity zone deal.

Bo: If I can actually add to that, we were having a conversation at lunch for high capital intensive businesses where that depreciation recapture is a big deal, you should be thinking about this as an operating investment, right? So those businesses that you’ve got to invest a lot of money of fund, in order to get started, that recapture is life-saving.

Ashley: You know, it’s also interesting about this kind of as a strategy, to your point, about stuff that has lots of capital assets on the front end, is that when you…So the way that it works is you get to defer capital gains taxes until 2026. When you go to pay the taxes in 2026, it’s either on the amount of your original gain or the value of the investment at the time. So for something that’s capital intensive, it has a lot of depreciation in those capital assets that are able to be taken on a bonus basis. Like solar, for instance, the value of those goes significantly down when you have to calculate that amount that you’re gonna pay taxes on in 2026. So in and of itself, those types of investment strategies can be worked in to reduce the amount of gain that you actually pay when you pay the taxes in 2026, and then you ultimately don’t pay the depreciation recapture after the 10-year hold. So it becomes extremely powerful when you get creative on an investment allocation strategy like that.

Jimmy: So suffice to say it’s an amazing tax benefit I usually call it possibly the greatest tax incentive ever created. It really is quite powerful. I wanna dive in now let’s talk about what are some successful opportunity zone investing strategies? As I mentioned, you each bring a different perspective. I’ll just kind of rattle through all four of you right now, and we’ll go back. But Bo Kemp, you bring the perspective from municipalities primarily in integrating developers into those municipalities. Peter, you work a lot with institutional investors and from the developer side, so you bring that perspective. Jill, you work with a lot of high net worth and ultra-high net worth investors. So I wanna hear that perspective from you. And then Ashley, you kind of get the scraps, the grab bag, as we like to call it. And maybe we can hear a little more operating business talk to you because you’ve put together a lot of operating business deals. We’ll start on the far end there with Bo. What are some successful opportunity zone investing strategies from the municipal point of view?

Bo: So, for those who were here in the morning, you got a chance to hear the mayor speak and I’ve had a chance to hear her in a couple of other instances. Someone asked a question about what they were doing here in Las Vegas to really promote investments in their opportunity zones versus Dallas, where I think he was from. It’s a great question. Different cities have done different things to really try to promote opportunity zone investments. Some of the places you probably will hear about are places like Louisville and Erie because they were very early on in the process. Alabama as a state has done a pretty good job in trying to do this, but it’s really all over the map where cities are, but where they’re moving towards is understanding that they are in a competitive race for capital, as they’ve always been, but that opportunity zones give them a way to actually focus their attention in marketing around specific areas and opportunities.

And so what you’re starting to see, and I think the project that you’re gonna take everybody to, Peter, is a perfect example, a master concept area that probably has as many as 30 or 40 potential investments in that one location, but they’re doing them one-offs at a time, right. So you might be invested in a couple of the mixed-use or residential areas. Someone else is maybe doing some of the retail. Someone else may be involved in another component that may be an operating company that’s there. And what the city is doing is actually putting together a broader master plan. They’re thinking about the types of public incentives that they can leverage to attract you as an investor to that area or you as a developer to that area, and then they’re laying on top of that, what I call, pre-development expenses.

And that can be anything from, again using, Peter, your example, I hope I’m not messing you up, the example that you just talked about CSX where they’ve done a lot of the Brownfield cleanup work. So that’s money that’s coming from the state or the federal government to pre-develop the space that you’re gonna develop in. It could be layering in streetscape or other infrastructure that takes away cost and mitigates your risk as a developer in a particular space, again, money that comes from outside of you, but can have a direct impact on an investment. In some cases, it’s actually even more creative than that. And right now, there’s a particular opportunity because of the ARPA money, or the American Rescue Plan Act money, to have municipalities, both cities and counties, leverage money directly into transactions that make sense for them as a whole. So I don’t want to take too much time. I’ll leave the up for other questions. But that’s kind of some of the things I’ve focused on.

Jimmy: There’s the CARES money available too still, right?

Bo: CARES money is still available, technically, until September 30th. Some of that money might be available until December 31st but it’s supposed to stop and it’s going to be transferred, essentially, to the ARPA money, which is the American Rescue Plan money.

Jimmy: All right, I think we’re gonna want to hear more from you in a moment but we’ll keep the line moving here. Let’s go to Peter next. I’m gonna save you for last, Ashley. You’re a grab bag. All right.

Ashley: All right. I’ll bring it home.

Jimmy: There you go. Peter, you deal a lot with institutional and end developers, what’s their perspective on opportunity zone strategies that are working for them?

Peter: As an investor developer, obviously, we come to this from a point of view of developing for profit. At the end of the day, there is a role for municipalities to develop their preferred locations and that’s a public benefit for the government. For investors, there is always a profit motive, but it can be combined with doing something good while doing well. Everyone loves that, right? And opportunity zones are actually very well-conceived for that, not only do they focus the municipal attention to a select few areas where this capital can congregate and create something meaningful, but they provide a way for us to nudge a project that maybe would have happened, maybe wouldn’t have happened because it’s kind of just on the cusp but with the incentive it does work, works very well, from the point of view of making some profit, but also bringing a new area to life like this master plan in Vegas, which has taken quite a while.

I mean, the city has been trying to develop it for 15 years. It’s just the last three years that has really taken off with a new Cleveland clinic, with a new hotel, and now to apartments. You know, the city had to invest incredible amount of capital and effort in building a park and a new symphony hall first before they could even attract the capital. And unfortunately, that wasn’t sufficient. There had to be some tax incentive for private money to come in and build the apartments to hotels. So it’s these kinds of areas that will be helpful for where projects are on the cusp, but it will bring them over to highly profitable and highly desirable project like this.

Jimmy: And Jill, you work with a lot of clients, ultra-high net worth clients. They have capital gains. What are they looking for? Which type of deals do you like to place them into work or show them oftentimes?

Jill: So for the investors that have capital gains, I would say more often than not, they’re on the clock is what we call it. So with the OZ cash incentive, there’s a short amount of time from when you realize a capital gain to when the gain needs to be properly invested in a qualified opportunity fund. And so in that instance, more often than not, investors are looking for investable deals. So that’s either a fund that is accepting capital in the near term or it’s a project that is ready to accept equity and it’s at that stage in the development process. And a lot of the investors that I’ve worked with have generated their gains, you know, maybe they sold the property or sold their business, but they’re not really real estate developers. So, we’re very cognizant of when these investors are coming into the project. And so meaning, we’re really not interested in taking land development risks and not horizontal risks but coming in when there’s, you know, more than like a picture early in the process and kind of rough estimates but when there’s actually in the design development phase, perhaps the general contractor has provided input, received some input from subcontractors. So that’s the point for those investors that are coming in.

In terms of the strategy, you know, just to step back, I would say, at this point, I’d like to have something more thought-provoking than to say multifamily, but to say multifamily. And also, I would say, at this point in the cycle, it’s also considered a defensive asset class. It’s one of the most, if not the most liquid asset class. So meaning you have Freddie and Fannie Mae that provide liquidity for takeouts. There’s still construction financing available. Even during the pandemic, there are developers that were able to secure construction financing. And when that’s not available, you have HUD financing. So you have liquidity of the financing. You also have…really when it’s harder for people to buy residential properties, that means people have to live somewhere. So, multifamily is also a good asset class from that perspective. So that’s something that we’re focused on is really multifamily that is investable or multifamily that’s in the pipeline of multi-asset funds.

And then in terms of markets, we’re really looking at the obvious high-growth markets. So we’ve done analysis to look at markets that are growing faster than the national average, and also have a higher educational attainment than the national average, and also where the housing spend relative to wages does not exceed a third of an income. So the bottom line is when you’re reading it out, people moving from California to Vegas, my cab driver said, “They need to get on that highway and go home. They’re making housing more expensive here.” But, you know, there’s truth to that is it’s more affordable relative to California. So it makes markets like Boise, Denver, Vegas more attractive than compared to markets like San Francisco and Los Angeles. So anyway, a few thoughts.

Jimmy: That’s great. Thanks for those thoughts. Ashley, turning to you now. First of all, how many different OZ deals that you’ve worked on structuring or forming funds for, and what are some of the more interesting ones you’ve seen, and what are some of the more successful ones you’ve seen?

Ashley: So I think we did a count. And this is, like, actually, maybe even earlier this spring, and we’ve had 500-plus strategy calls at this point. And we’ve set up over 490 entities. And so we’ve done a lot. We’ve done a lot of different ones. I would say that the lion’s share of those are folks who are setting up what we call a self-directed captive fund where they’ve got their own capital gains, they know the project that they wanna do, and then they are utilizing this program in order to take advantage of the ultimate tax benefits that we talked about before. And so that runs the gamut. I mean, it’s traditional real estate deals. We’ve got a lot of people that are actually buying completed.

So one of the things inside of the program is that you can either substantially improve something or you can buy something that’s original use. And so we’ve got a lot of folks that are buying newly completed, like, four-plexes and/or duplexes. And they’re able to set up kind of a simple structure to be able to take those down and then to be able to put those into the portfolio and collect the cash flow off of them. And so then that ranges from that kind of interesting small mom-and-pop real estate developer to, you know, people that are doing agricultural deals. A lot of people are doing farm stuff, rural-type development deals. We’ve seen a lot of surge in even more tertiary markets like Gary, Indiana, and other places like that where they’ve got substantial opportunity zones and now because of COVID and the expansion of work, there’s folks moving to there and they’re creating that kind of critical mass.

But the final piece, and I think the one that’s been most interesting that it has the potential to be the most interesting, is operating businesses because it’s not just real estate that you can do inside opportunity zone deals, and you can actually do operating businesses. And when you couple in Section 1202 inside of that, where you set one up, your operating business up as a C Corporation, you’re able to cut that whole time down to five years. And then you can use the opportunity zone piece as a mitigation play against that kind of 10x and/or $10 million cap on the 1202 exemption. And so I know that Paul Family Labs is set up as a 1202 piece. We’ve had lots of conversations about folks that are setting their operating businesses up under 1202. What we typically recommend is that they set them up as an LLC. And then if they get across that threshold where they’re making money that they convert to a C Corp, so they can take advantage of that.

Jill: Do you wanna unpack that a little bit like 1202 is qualified small business stock…?

Ashley: Yeah, sorry for my…

Jill: This is a separate…It’s not opportunity zone but by…you know, as Ashley described, by smartly pairing the two, you’re able to get some tax benefits if you only hold for 5 years and you’re not able to make the opportunity zone 10-year hold. Do you wanna…?

Ashley: Yeah, so section 1202, I think it was initiated, like, back in the early ’90s. And it was specifically set up for private equity funds to encourage them to hold for what, at that point in time, was a long time, five years. And if you held for 5 years, you got up to 10 times your return or $10 million, it gets exempt from capital gains. So it’s not quite as powerful as the opportunity zone because it’s not quite a step-up in basis to fair market value. So it doesn’t eliminate that depreciation recapture but it does eliminate capital gains. And so, that program, coupled in with opportunity zone program, can be an extremely powerful mix. To your point, they are distinct but when you twin the two of them that can be really powerful.

Jill: Just real quick, I’m working with Fortuitous Partners, which is setting up a…they set up an operating business, qualified opportunity fund, that includes a brand new professional soccer team. And so part of that investment, if you were to invest capital gains, you would get all of the tax-free appreciation of that soccer team or all of that appreciation, that soccer team would be tax-free. And so it’s really turning around what has been an otherwise slighted area in the State of Rhode Island. And so it’s an exciting project the team’s working on.

Bo: For any of you who are in the market to buy a professional team, that’s a really big issue because most of the value…I had the benefit or the pain when I was very young working on professional sports teams, all their money is basically tied up in depreciation or amortization, essentially, of their brand. So, that’s a huge benefit to make those people who are rich enough to buy a team a lot richer very quickly.

Ashley: What’s also kind of cool, so we’ve seen, kind of to that point, a lot of folks recently, Jimmy, kind of having a conversation about how you can incorporate crowdfunding and Reg A+ and some other kind of cool securities plays to be able to take a QOZB public. And talked with the gentleman that’s doing private investments in public equities. So, he has a couple of shells and he’s turning those shells into QOZBs and utilizing that as a mechanism to be able to fund smaller QOZBs that he’s pulling into his overall arrangement. So not dissimilar from kind of a spec concept. And so, all of these strategies are utilizing the opportunity zone program in the context of them, but are drawn from other, you know, creative financing mechanisms to bring more capital to the table.

Peter: I love all of these. And I’m puzzled why more upgrading companies are not basing their business in opportunity zones. But I have a really simple one for you. Even a lease counts as an opportunity zone asset. So if you had a company just come and lease space in one of our buildings, then you can qualify that as an opportunity zone business.

Ashley: Not to get bogged down into the weeds of that, but to your point, it’s actually the net present value of all future lease payments that you have a number attached to. So if you do a 3-year lease with five 3-year options that have a number, right, where you do like a 1% escalator in them, you can count all of those values towards your net present value, which can be a huge number that goes into your 70% good asset store. And that’s even more powerful and it makes it fairly easy to comply with that 70/30 asset test.

Jimmy: When you say that, 70% of a qualified opportunity zone business’s assets have to be “good assets” that are located in a zone, that’s a good way to kind of clear that hurdle. It’s really good. Bo, you were gonna say something.

Bo: Yeah, I was just…This lease issue, one of the projects I’ve been working on is in Tampa, Florida next to University of South Florida where they bought an old mall and they’re reconverting it into a mixed-use location. But we’ve been talking to the major, you know, real estate companies out there because we’re trying to move a company, they’ve got 500 employees, they think they’re gonna go public in 2 years, into an old J.C. Penney’s. We’re gonna take 500,000 square feet and make that lease into an OZ for that purpose. But they’re thinking about it on two levels. One, they get the benefit of the opportunity zone lease opportunity benefit, but they’re also thinking about the fact that a portion of what they’ve ended up taking public as a company would then become part of their opportunity zone investment and strategies for them to think about how to manage, you know, the holding period that they’ve got with their stock through that opportunity zone. We’ve not been through this process, maybe you guys have with a company that’s gone public as an opportunity to investors. But we’re really eager and think that there’s some really interesting strategies to figure out how to manage that issue of the point that you gotta hold the stock after you’ve actually gone public.

Peter: I don’t think there’s been one. It’s been, you know, not enough time for that. But I look at what smart companies are doing. And there is probably 2 million square feet of development in downtown San Jose opportunity zone that’s being done by pretty smart people. There is another one that we actually sold, a large project in Boulder, a town in Colorado that’s become a hotbed for innovation as an opportunity zone. And we recently sold a project to a top three tech company in an opportunity zone. I’m not sure what they will be doing there but if all of their ventures and their little startups that they finance are qualified as opportunity zone businesses, one day they may IPO them tax-free.

Jill: And Peter, you guys are set up as a REIT. There could be, you know, opportunities for some type of upgrade or public. And so I…

Peter: The opportunity for the actual real estate business to also make itself public. And that would be a fantastic result for investors because they could hold a tax-free share liquid instrument that can be traded on stock exchange for 40 years, 30 years, until 2047. It’s a quirk in the regulation that allows that. It’s between 10 and 30. It’s not that 10 is the time when you have to sell, it’s the minimum. The maximum is a 30-year hold for this. And if you have a public share, that’s almost like a 401(k) or an IRA for 30 years.

Jimmy: Yeah, you shouldn’t be asking how quickly can I dump this, you should be asking how long can I hold this for, right?

Peter: Can I keep it. You’re so right about that. And I get this question like, how can I get out of this? And I’m always puzzled. You know, yes, exit is important. You need to understand liquidity options. But the right question is what you just asked, how can I own this tax-free longer? That’s how value is compounded over time.”

Ashley: So I’m making the analysis to it’s almost like a super Roth IRA. And within your Roth IRA, you’re not looking for when you can pull money out of that. All right, you’re, like, let it sit in there and let it eat tax-free. So the reason why it’s a super Roth IRA, and a self-directed one at that, is because you can use it for your own deals, it’s tax advantage going in, and then it ultimately is tax-free coming out all the way up until December 31st, 2047.

Jill: So when we meet back here in, let’s say, summer or maybe September of 2047, I actually think there’s gonna be litigation around the 2047 because that was not in the legislation. That actually was invented. It was a date invented through the regulations. And so there’s a strong argument to make, that the regulators really overstepped the bounds of what they’re allowed to do. So I think there’s grounds for litigation there. So, see you guys in a few years in 2047.

Peter: You need an advisor to really guide you through some of the complexities.

Ashley: Yeah, I’ll be here, I’ll be here.

Bo: Maybe we can let it ride forever, not end in 2047. But just to, kind of, close out that discussion, if you have…we were talking about operating business, what’s going on in San Jose, tech startups. If you have an operating business or a startup and you can locate anywhere, you’d be crazy not to at least consider making a qualified opportunity zone business just because of all the benefits that are available to you.

Ashley: Well, it also allows you to receive opportunity fund capital, which is a huge differentiator. So it’s got all this benefit on the back end, but it also opens up this pool of capital. So, we’re talking with a company right now that’s really active in the angel network space and they’re getting ready to IPO. And they’re raising a bridge fund prior to that IPO. And they specifically had the conversation, “Well, we can put our business anywhere, why shouldn’t we just make it an opportunity zone business, and then I can set up an opportunity fund?” I said, “Well, I think you just answered your own question.”

Jimmy: There you go. I wanted spend a few minutes, I think we’ve got a few minutes left, I want to discuss one more topic and then we’ll get to some Q&A. A lot of people are concerned with the new administration and the new balance of power on Capitol Hill, and what may become of opportunity zones. In the morning panel on opportunity zones this morning, at least one of the panelists made clear that opportunity zones aren’t going anywhere, but there probably are some changes coming down the pipeline, at least in terms of greater tax policy. So question to all my panelists now, post-tax policy changes, what impact is gonna be had on opportunity zones? Bo, I’ll start with you at the far end down there.

Bo: Well, there’s some aspects of that question about the demand and supply that’ll lead to some others. But I will speak to, just broadly, some context. One of the slides that I didn’t provide for this, but I often do in presentations is used as a proxy for what’s likely to happen to opportunity zone legislation, EB-5, and New Market Tax Credits. And just to use the proxy, when they were initially legislated, how long it took before people started to actually make an investment, how much money was actually invested, and how often have they been reauthorized because one of the questions is, will they be reauthorized? And in all those instances, the opportunity zone legislation has outperformed in terms of the amount invested, the time and speed at which it’s been put to work, relative to EB-5, or the visa program if you’re familiar with it, and New Market Tax Credits. But both those other programs, EB-5 and New Market Tax Credits, have been renewed multiple times.

And I use that just to give you a sense of the likelihood of OZs going away, from a legislative perspective, are low. What is highly likely is that there will be some legislation that’s attached to a different level of transparency with regards to where the investment is made, what the intention of the investment is, and some of the other metrics related to the dollars in and whether or not it’s achieving the other social goods that are supposed to come out of this. I don’t think that should scare most of you in the room. I think it’s a reason why partly I’m on this panel is making sure that you are working in tandem with municipalities that you are investing in matters so that you’re doing a good job in terms of managing, kind of, the community engagement aspect of this. But I think because of the added transparency, it actually will probably help to promote opportunity zones going forward. So I’ll leave it there for others to talk about some of the supply and demand issues.

Jill: Just building on that point, I think Bo’s entirely right. And I think the marketplace has accepted that there should be some amount of reporting. I know Senator Tim Scott, and I think Cory Booker was involved in the IMPACT Act, which would legislate reporting. But I think the one point to make around this, and that’s why I refer to it also as a tax incentive is that in contrast to New Market Tax Credits, there’s no enabling legislation or annual appropriation that needs to happen with opportunity zones. It’s the legislation passed in 2017 and that’s it.

Jimmy: New markets are capped at $3.5. billion a year. There’s no cap on opportunity zones.

Jill: Yeah. So when you start selling all your Apple stock, they might, you know, say that you gotta cap it now. But, you know, this is a tax incentive that if Congress does nothing else, and the president does nothing else, it will expire at the end of 2026. And then just one other quick point, with the 544 pages of regulations, there’s really few on-ramps in order to make changes in my view because once you start pulling on the thread, it creates a lot of complications. And I think one of those on-ramps is the fund certification. And so the question is whether reporting what happened through the legislative process or whether there’s any chance of reporting happen at the fund certification process.

And then I just leave you with this thought in that, you know, while it might feel like politics, we just ended with a presidential election, the fact of the matter is that between now and tax year 2026, we still have three new Congresses and one new presidential election. And so really, what we’re talking about are changes in the interim, which can be changed in the next election. And so I think, you know, the jury’s still out on whether they’ll even be a comprehensive tax reform because unless you’re dealing with SALT tax legislation, I think there’s some members that won’t even move forward. So I think it’s just…I mean, Bo, you would know better but it’s just there’s a lot of sausage-making still has to happen.

Ashley: So, I guess it was a little birdie from the opportunity zones coalition that is actively working on bipartisan legislation that they’re currently developing right now. And I don’t think that any of the legislation that we’ve seen from either party, whether it’s Republican or Democrat, if it’s a single party legislative endeavor, I don’t think that any of those have legs. I think that we could see elements of some of those to they’re going to influence where ultimately the bipartisan legislation will go. But the word on the street relative to what is potentially likely to come about as a result of bipartisan legislation would be a two-year extension on the program. So it effectively would shift the deadlines out two years, which would be great. Hopefully, they won’t pass it until January of 2022 so that, that way, it’ll get everybody off the sidelines for that 10% bump. And then if you’re in by that date, it would actually give you 15% and then give us another 2 years to get the 10%.

And then kind of…So as part of that right on the Republican side would be ability for governors to designate another 10% of their low-income census tracts, and then as kind of a give on the Democrat side would be that they would start to phase out some of the non-low-income census tracts. So the ones that kind of snuck in as contiguous parcels that probably shouldn’t be opportunity zones, that those would be eliminated going forward. They’d be grandfathered in on projects that are there but then going forward, they might get, you know, eliminated along with…I think everybody’s in agreement that there’s gonna be some kind of impact reporting requirement that happens inside of that.

Jimmy: Good. Peter, let me get your thoughts real quick. And then I know we gotta wrap things up. We got a break coming up, then we gotta save some time for panel after that, but go ahead.

Peter: Well, I hope the little birdie gets his wings and flies.

Ashley: Beautiful, wouldn’t it?

Peter: It would. But what we do know is that opportunity zones were not mentioned in the tax reform, which is a hint that there probably isn’t a big change forthcoming, at least as it is now. And by 2026, it will expire if it is not renewed. So we have plenty of time to invest. Now, if I were to look at this from a rational point of view…I’m not sure rationality is a good guide in today’s Washington. But if I were rational, why would you ever go back and cancel something for which money has already been raised and systems have been set up, and people already paid their taxes years ago? You would have to make people refile their taxes if you did something to this program. I hope that such irrational behavior will not ensue.

What you can do, which actually is pretty easy to do, is to make the money do what you want it to do. The money is already there. So I don’t fully expect that the Treasury or some agency in the government will come up with a guideline, a program, a requirement to invest more of the money in affordable housing, more of the money in ESG-friendly type of investments, resilient in nature, and that it will be put to good purpose. And we fully agree with that. That was this third of the program. It was just taken out literally in the last minute from the original regulation.

Ashley: So the legislators that are watching this live stream right now, what I’d love to see, in addition to that, is to open up non-capital gains money specifically to what you’re talking about, affordable housing, ESG, anything that’s got like a governmental program that’s teamed up with a CDFI, non-capital gains money can go into that it gets the same benefit. That’s my answer.

Jimmy: That’d be great. That’s a great wish list. Steve, do we have time for a question or two or do you want us to wrap up?

Steve: If you want to…

Jimmy: Okay. We’ll open it up for questions now and then we’re getting the hook. So if anybody has any questions, wild them out here. Go ahead.

Bo: So if you took the same chart, the incentive that I’m aware of, and you might have all different experiences, that uses these returns the best is historical tax credits, but it’s not the only one. So the way to think of it is, there are roughly 11, you know, different types of incentives that you could leverage from, you know, city and state, philanthropic, you know, TIF or tax increment financing, to various other forms of legislation, you can use any and all of them in combination with an opportunity zone. Now the issue is if you’re doing something like affordable housing…So every type of investment has kind of a sweet spot of things that do work and some things that are complicated to do from a legal and structuring perspective. So maybe someone else will speak to that issue, but none of them are mutually exclusive.

Peter: The more generous they get, the more complex they tend to be and more restrictive, but with opportunity zones, I would say they actually made it really quite easy for the investors, people who want to invest the money. It’s fairly complex for us as the managers. There’s no question there’s no easy program there. But as far as the investors, this is probably the easiest thing I’ve seen.

Jimmy: I think we could take one more question. And then this is the last one. Will, go ahead.

Will: Ashley answered that. That was a really good question and good answers from all. Actually, without going too far into the weeds, talk about incentives or how those things can be employed or possibly…

Ashley: Yes, I mean, to your point, you can stack all of, kind of, the traditional tax credits and that kind of thing that are available out there in the marketplace. Once again, solar is a really powerful one. So when you’re doing a smaller deal, sometimes it’s tough to hit that substantial improvement piece, and solar can kind of come in to really fill that void and to fill that hole, result in higher returns and also tax, you know, 26% ITC. So, I think that there’s that. What’s also interesting is you can also layer on economic development incentives and, you know, state and local incentives as well. You know, there’s an Ohio 10% tax credit that’s available. I know down in Puerto Rico, there’s a 40% tax credit available for hospitality assets. And so, there’s been some states that has done a really great job on making this thing just really hum. And so I think that to your point as well, it becomes a fulcrum, right? Opportunity zones become a fulcrum of leveraging all of these different elements of incentives and energy and investment ideas into being able to actually make things work and to get private capital off the sidelines doing ESG activity.

Jimmy: And that is free money from the state of Ohio and in Puerto Rico, what they’re offering. If you’re developing in opportunity zones, make sure you take advantage of those credits. I think we’ll leave it there. Thank you to my panelists. Thank you to the audience. Appreciate it. Thanks.

EIG OZ Webinar Series | Investing in Local Opportunity Zones to Drive Main Street Revitalization

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On December 14, the Economic Innovation Group (EIG) hosted a webinar to discuss locally-led Opportunity Zones (OZ) strategies to strengthen Main Street corridors. Guest speakers shared insights on how these efforts were initiated and shared stories about how OZ financing has been used to revitalize historic properties, support small businesses, and expand opportunities for residents.

Key Takeaways

Prior to guest speaker presentations, EIG’s Director of Policy and Coalitions, Catherine Lyons, shared recent stories from MaineOhioSouth Carolina, and Pennsylvania that highlight ways in which the OZ policy is driving economic growth in towns with fewer than 100,000 residents. Rachel Reilly from Aces & Archers then discussed recent OZ transactions in IndianaOhio, and Arkansas that have recently come to fruition due to local leadership and locally-generated investment. These efforts will result in new affordable housing, renovated properties, much-needed retail and restaurant space, as well as investments in small businesses for these communities.

Paul Guderson, Economic Development Director for the City of Harvey, North Dakota, discussed how the OZ policy has supported a small business boom in a town of 1,700 residents.

In 2018, an international railway company decommissioned its terminal in Harvey, eliminating dozens of jobs. At that time, local leaders embraced the town’s recent OZ designation as a way to generate economic growth and create new jobs.

Economic development officials assembled a portfolio of OZ investment opportunities and worked with residents to establish local Opportunity Funds. An uptick in the transfer of agricultural assets has created a pool of hometown investors who have been motivated by the OZ tax benefits to investing in Harvey.

Over the past three years, more than 30 new businesses have opened in Harvey and many of the town’s Main Street buildings have been rehabilitated. This small town renaissance has been supported by OZ investments, and now community leaders are positioned to attract new investment, residents, and economic opportunities.

Jennifer Wilz of Third Place LLC provided insights on how the town of Brookville, Indiana is leveraging its OZ designation to activate local investors to reinvigorate the town’s Main Street corridor, expand economic opportunities tied to tourism, and strengthen the hometown newspaper.

Community leaders in Brookville are leveraging OZ investments to address some of the town’s most pressing issues, including a declining population, untapped tourism potential, aging housing stock, and a blighted downtown lined with historic buildings.

Wilz led the town’s first investment into Valley House Flats, which created much-needed housing and updated storefronts. She then made an investment to recapitalize and modernize Brookville’s local news outlet, and aligned others in Brookville to invest in a new small-scale hotel to help grow the local economy through tourism opportunities.

Brookville’s OZ strategy is anchored in using local investment alongside other sources of public funding. In addition to increased activity along the town’s Main Street,  Brookville’s locally-led OZ efforts have led to increased civic engagement and collaboration.

Resources Discussed

Visit EIG’s OZ Resources webpage for additional information including deal profiles, mapped activity, and recordings of previous webinars. 

Round Trip OZ Investments, With Jeff Feinstein

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What happens to opportunity zone capital if the qualified opportunity zones fund sells? And how does reinvestment of those proceeds from that sale occur before the end of a 10-year holding period? These questions and more present unique opportunities for alternative investment options with significant tax benefits.

Jeff Feinstein is a Managing Partner at Pinnacle Partners, a joint venture equity real estate investment firm investing in opportunity zones.

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

Episode Highlights

  • Who is eligible to benefit from the OZ tax incentives.
  • What gains are eligible for deferral, when investments in Qualified Opportunity Funds (QOF) must be made.
  • How to transact a sale and recycle the original gain within an OZ investment in order to maintain qualified opportunity zone investment status.
  • How qualified opportunity funds can remain an option for deferral of capital gains within noted time frames.
  • Timeline of the tax benefits, operational requirements of the fund, and exit strategies.
  • Multifamily as the largest asset class within the opportunity zone wrapper.
  • How to achieve the full tax benefits in the 10-year hold period.

Featured On This Episode

Industry Spotlight: Pinnacle Partners

Since the inception of the Opportunity Zone legislation, Pinnacle Partners has been actively identifying and participating in qualifying real estate projects in attractive urban designated Opportunity Zones. Pinnacle is a source of strategic relationships for JV Partnerships with actionable opportunities in targeted Opportunity Zone markets.

Learn More About Pinnacle Partners

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. Today we’re gonna be talking about recycling OZ capital, what that means and how reinvestment of proceeds from an OZ investment can still keep its status as a QOF investment not lose any of the associated tax benefits. Joining me today to discuss this topic and more is Jeff Feinstein. Jeff is managing partner at Pinnacle Partners, and he joins me today from Seattle. Jeff, welcome to the show.

 

Jeff: Hello, Jimmy. I’m very pleased to be with you.

Jimmy: Fantastic. Pleased to have you here with us. Jeff, we just did a webinar just a few days ago and that went quite well, I think, and we’ll touch base on that a little bit later in the show today and discuss your new opportunity zone fund. But first, I wanted to talk about the concept of recycling opportunity zone capital. If a deal inside of the qualified opportunity fund ends up getting sold, what does that mean? How does reinvestment of those proceeds from that sale…and in this case, we’re contemplating a sale before the end of a 10-year holding period. What happens next so that those proceeds don’t lose the status as a Qualified Opportunity Zone investment for your LPs?

Jeff: Yes, so maybe some context and background. Pinnacle Partners has been an early mover in the execution of the OZ legislation. We seized upon this in ’17, as it was being legislated with support from tax and legal advisors, and OZ compliance experts, we were able to execute as early as 2018. It was 2019 when the regs were finalized, but all ambiguity was removed. But again, we took a little bit of risk but I think it was a calculated risk to get involved and execute early. And so indeed, we are a JV equity investment firm dedicated to OZ investing. We seek the highest quality projects in those zones, working with best-in-class developers. So we become the LP equity, the qualified equity to capitalize an OZ the project.

Having said that, because we represent our investors and we’re, you know, stewards of their capital, we’re desirous of, one, delivering the highest rate of return, two, ensuring that all investors enjoy the associated tax benefits granted by the OZ legislation. And we think, and I think you agree, these are the largest tax benefits to investors that the U.S. government has ever provided. So, the most significant of those benefits include tax elimination, which is accomplished after a 10-year holding period. There are many other compliance requirements that, of course, you’re well aware of that include substantial improvement. But suffice it to say the tax elimination, or qualifying for tax exemption after the 10-year hold, is extraordinarily compelling.

So, with that as background, and again, acting as a steward for our investors, we provide the optionality to exit early from an OZ if our investors provide supermajority consent, and of course, you might imagine this has to be, frankly, a compelling and substantial return opportunity for all of our investors. So, the first project that we partnered and capitalized was a workforce housing project in the Seattle Historic District. It was positioned to be supporting, we call it kind of 60% to 75% area medium-income renters who wanted to live near work and have a multitude of transit options. And we were providing housing in this particular sub-market that’s otherwise sparse. So, the investment thesis had an impact orientation and solid returns for sure. So, we were delivering workforce housing to this important sub-market.

We had permits, we broke ground, we went vertical on the site, and we were nearly completed when we received an unsolicited offer from our county jurisdiction, that is King County, who in an effort to support those that can’t obtain housing so readily if not homeless, they have been acquiring assets to provide transitional housing. And that has included extended stay hotels, other pre-existing apartment buildings. And in our case, a new construction opportunity well located near a variety of services that could also be supporting this community. So, this unsolicited offer was reviewed and evaluated and we presented to our investor base, and again, unanimously approved the sale to the county, and that has since closed.

So, we got to work fast to determine what we could do to recycle the original capital gain, and protect the OZ benefits that our investors fully expected and had begun to enjoy. So, again, with great support from our tax advisors, and OZ experts, we learned the following, that within an OZ investment, you can transact a sale and recycle the original gain. So, the original investment can be to use a kind of another real estate term rolled over and into another opportunity zone investment. And in doing so, you get to retain…in this case, it was a 15% step-up, you get to retain the 10-year clock that had already begun on the investment. And you can still pursue tax exemption or tax elimination after the 10-year holding period.

So, that’s exactly what we did. Pinnacle Partners has been able to source and present to our investor base, on an ongoing basis, a number of very attractive opportunity zone projects. So, we had another project available for consideration. And again, we provided each and every investor the opportunity to do one of two things, they could either roll over the original investment, protect those tax benefits and enjoy participation in another very attractive OZ project, or two, they can cash out. And in doing so they’d be responsible for paying the associated taxes on that investment. That’s called an inclusion event. So, we presented those options to our investors and I would tell you, I think it was 96% decided to roll over into another project and preserve those tax benefits.

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There’s two other things that came with the…you can imagine the return, we generated a return from the sale. A portion of that was considered a capital gain. That happened to be a 2021 capital gain. And so that gain is treated like any other capital gain, it now has 180 days to seek an OZ investment or you could obviously pay the tax on that. So again, our investors had the opportunity and the discretion to reinvest that ’21 gain if they choose. Again, that’s a portion of the return that they enjoyed. There was a small percentage of the total proceeds that were characterized as ordinary income, and that is just taxed at ordinary rates.

So anyway, I think we might be one of the few to go round trip on an OZ investment that is capitalize, construct, and then sell based on, you know, good, compelling economics and return characteristics and yet also protect those OZ benefits by reinvesting the original gain into a new, attractive opportunity. I think this is particularly attractive in the early phases of OZ. As the program continues, I think in later instances, if you were to make a sale, say you’re eight years into your investment, that may or may not be as attractive. But we felt, all things considered, this was an extremely extraordinary return for our investors, we were doing good for the community, at the same time realizing the impact we originally had intended, and we could protect the OZ tax benefits.

Jimmy: That’s tremendous, Jeff, a lot to unpack there. First of all, you did say that this is an incredible tax benefit and you’re absolutely right. I do frequently refer to the opportunity zone incentive as the greatest tax incentive ever created. I wanna pick your brain a little bit more on that round-trip concept. I think you’re right, by the way, we were one of the first, if not the first, who has actually done what I’ve heard hypothetically talked about a lot, which is hey, what if an OZ fund sells one of the assets within the fund, what happens next? You’ve actually done it, you’ve actually helped to protect your investors’ tax status with the gain that was originally deferred, and then invested into your opportunity zone project that you then later sold. Does the 10-year clock continue to tick or does it get reset for your LPs? How does that work exactly?

Jeff: Certainly. The 10-year clock continues to tick.

Jimmy: So, if you’re already a year or 2 in, you don’t reset back to 10, you’re already down to 8 or 9 years.

Jeff: That’s correct. And then as I may have mentioned, in ’18, as you recall, the original step-up was 15%. Today, it’s 10%. Those investors in ’18 enjoyed the 15% of step-up, they retain that as well.

Jimmy: That’s important. That’s really important. You talked a little bit earlier, Jeff, about your early mover advantage, how you guys were doing opportunity zone fundraising, and some deals in 2018, even before the regs were finalized. How important was that for your firm? And what have you learned along the way because of that early mover advantage?

Jeff: Well, we got very, very clear guidance on OZ compliance, you know, substantial improvement tests, other safe harbor tests. And it was incumbent upon us to ensure we had leading expertise on the subject matter to not only guide us through the structuring of our offering, which is important but on an ongoing basis to assist us in the evaluation and in ongoing compliance of the project. So, the decision to retain OZ tax advisory support, not only at the fund formation but an ongoing evaluation of the project. So, each quarter, we are looking at evaluating OZ compliance to ensure that we are fully compliant each step of the way. So, I think that was something we decided upon early and I’m glad that we did. And then, of course, during COVID, in the enactment of the Cares Act, there were a lot of extensions and provisions. And having that counsel retained and ready allowed us to interpret those accommodations so that we could optimize, again, compliance but also, you know, serve as I said, before, kind of stewards of our investors’ investment.

Jimmy: Terrific. And clearly, you, Jeff, and your organization, Pinnacle Partners are very experienced and experts in opportunity zones at this point, in the life of the opportunity zone incentive. Let’s spend some time talking about what you have done in the past and the experience you have and how you were able to successfully accomplish this round trip OZ investment, so to speak, or recycling OZ capital. I wanted to shift gears now and look to the future with you and the new fund that you are launching, or I think you’ve just launched actually, we did a webinar on it just the other day. This is Pinnacle Partners OZ Fund VIII, it’s your first multi-asset fund, your first several funds that you had previously issued were single-asset deals. This is now a multi-asset fund. It’s a curated portfolio of multifamily opportunity zone assets. What can you tell our listeners about that particular fund and why you decided to shift from single-asset to multi-asset?

Jeff: Yeah, a very good question. So, again, our experience is an early mover, we began in ’18 with the one project we just discussed. We continued to source and ultimately capitalize seven additional projects. We’ve been very focused on supporting multifamily housing. We’ve done…in the category of multifamily, we’ve sought and partnered to deliver senior housing, workforce housing, truly affordable solutions, and what we call market rate. Within the portfolio, we even supported the first mass timber development, affordable housing development in Seattle. And, by the way, these projects are generally in the Western states. And so, we felt, number one, that multifamily was the optimum product type to pursue for OZ investing.

Second, opportunistically we were seeking any additional tax credits and programs that we could leverage in addition to OZ. And we got very fortunate with a particular partner of ours that has had two projects with historic buildings that we’re pursuing adaptive reuse. That generated historic tax credits, HTC, which can be offsetting to passiving for certain investors. So, in one case with a partner, we took an existing historic office building and we are now converting it to multifamily in an up-and-coming market in Tacoma, Washington. And then a second project is a mid-rise office building that was in need of modernization. And again, in an OZ, we can capitalize that, get the OZ benefit plus historic tax credits.

With all that said, you know, we’ve got a lot of experience to optimize the tax shield. We’ve been particularly focused on multifamily. And our investors most recently have been providing very, very significant feedback that they have appreciated our deal-by-deal approach, the institutional quality underwriting we pursue for each and every deal. And we provide all that diligence for the benefit of the investor. They wanted to retain that approach to underwriting and, in addition, obtain diversification. So they asked for a fund format, they also requested exposure into some emerging markets that have been benefiting from population migration, strong economic growth. These are cities such as Denver, Nashville to name two.

And so, what we decided to do is deliver on that request. We’ve got this highly curated portfolio of four projects, each multifamily ground up, we partnered with a leader in both OZ compliance and extensive development capability in Jill Holman and Javelin 19 Real Estate. So, together, we are sourcing the highest quality projects in those targeted cities working with blue-chip developers, and presenting that as this curated portfolio for our investors to participate in. So, we think it’s the right type of fund at the right time. It’s not a billion-dollar fund, it’s not a dozen properties, it’s very focused, not to overuse the term, highly curated, and we think it’s got the most competitive return objectives in the OZ marketplace.

Jimmy: I think it’s a compelling offer, multifamily being by far the largest asset class within the opportunity zone wrapper and probably the asset class. That’s most in-demand among investors. You mentioned Jill Holman a moment ago, I know she’s helping you with deal-sourcing and underwriting. Can you go into a little bit more detail on how she’s underwriting a lot of your deals and which target markets she likes?

Jeff: Yes, so she, you know, routine speaker at OZ conferences, quite expert on the execution of legislation. She’s been a sponsor of half a billion of projects, development projects, and some notable OZ projects. She has a great team of analysts that help with the underwriting. And so we have joined forces, that’s clear. And we are focused in Denver, Nashville, Salt Lake, Scottsdale. And we’re seeing a lot of deals and, I think you would agree, we’ve heard others applying the same that the tax benefits are compelling, you, though require a high-quality real estate project underlying any investment decision, and finding high-quality projects has been sparse, it’s challenging, and yet we’re able to derive, we think, that the best projects in those submarkets. So, great collaboration, and already we’ve got line of sight on what we call a half-look two of the four projects. And we’re really excited to be launching and have launched and now taking subscriptions before you’re in for those that seek the 10% step-up, which, you know, is expiring at year-end.

Jimmy: Right, right. I mentioned a few minutes ago through the webinar we did, Jill Holman participated on that webinar with us as well as John Shreddy at Novogradic. It was a webinar on multifamily opportunity zones strategies and essentially characterizing the strategies that your fund is deploying, Jeff. So I just wanted to let our listeners know that we are going to link to that webinar in the show notes for today’s episode, and you can find the show notes at opportunitydb.com/podcast. So, you did just mention that 10% basis step-up that benefit is expiring at year-end, and we’re very close to your end by the time this episode airs. Is the program still compelling after that benefit expires? Is it still worthwhile for investors to deploy their gains into OZs? Are they missing out on something huge if they let the end of year tick by without making their investment? What are your thoughts there?

Jeff: Well, there are three tax benefits associated with OZ investing. To use your term, you know, are they missing out on something huge? The most significant, compelling, wealth-building benefit is tax elimination. And that is obtained after the 10-year holding period, which is in full force. That, to me, is why you do an OZ deal. Now, you get a couple of other benefits that come with that. The first is deferral. So you transact, harvest a gain of some kind, short or long. A lot of people forget that you can also qualify for short-term gains, and you then qualify for deferral, and therefore you do not pay the associated capital gains tax on that gain until April 15th of 2027. So, we look at that as like an interest-free loan from the IRS to use those funds to invest in an OZ project and get, you know, a return on that investment.

The third benefit is the one that you identified here as expiring and that provides a 10% step-up. What that means, in other words, is at the time when the deferred tax is due in April 15th of ’27, you would then pay 90% of the tax, so you get a 10% step-up or 10% discount. That, to me, is nice. It’s de minimis in comparison to the other two benefits. So, you know, the program continues to be quite active attracting more and more capital to the program, for now, deferral and, most importantly, tax exemption. So, I think the program is still very, very attractive for all investors.

Jimmy: I agree. And my listeners will have to forgive me that was a bit of a softball question for you. So, I agree that the main benefit of the program is primarily that 10-year exclusion and certainly the deferral period. Although it becomes less valuable with each passing day, it’s still very valuable. I mean, at this point in time, you’re still getting essentially a five-year interest-free loan from Uncle Sam, which is nothing to sneeze at. And there is a possibility of the program potentially getting extended at some point, which may reopen up that 10% basis step-up window again, a matter of speculation at this point in time whether it gets extended or another that window reopens. For now, we can assume that it’s going to close on December 31, 2021.

But just to be very clear, because I do get these questions a lot, gains that are eligible for deferral into opportunity zone investments carry out all the way through the end of 2026. So you can have a gain as late as the end of the year 2026 and that gain would still be eligible for that final benefit, that 10-year benefit, as long as you get it invested within 180 days of that event. So about the middle of 2027 is really kind of your last chance to invest in opportunity zones and an asterisk there actually, if you realize the gain through a partnership, Schedule K1, you actually have a little bit more time even, I think it’s close to mid-September 2027 is the real drop-dead date. All that is to say, without getting too technical, is that there are still many, many years remaining on this great tax incentive program, despite the fact that one of the benefits is expiring at the end of this year. Jeff, anything else to add there, or did I cover all right for you?

Jeff: You covered it completely. Thank you.

Jimmy: Excellent. Jeff, it’s been a pleasure catching up with you again today and to speak with you. Before you go, where can our listeners go to learn more about you and Pinnacle Partners?

Jeff: Yes, well, come to our website, www.pinnacleoz.com. And you can see details on the OZ fund. It is available for subscription before year-end and continuing through 2022, likely closing the second quarter of ’22.

Jimmy: Terrific. That’s pinnacleoz.com. And for our listeners out there, as always, and as I just mentioned a minute ago, I will have show notes for today’s episode on the Opportunity Zones Database website, you can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that Jeff and I discussed on today’s show. I’ll be sure to link to pinnacleoz.com as well as the webinar about the new fund launch of Pinnacle Partners OZ Fund VIII that I discussed a few moments ago. Jeff, a pleasure as always. Thanks for joining me today.

Jeff: Well, thank you, Jimmy, always enjoy speaking with you.

How to Evaluate Opportunity Zone Deals, An OZ Pitch Day Panel

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What are the investment due diligence considerations when evaluating opportunity zone business and real estate deals?

This episode is the audio version of an OZ Pitch Day panel titled, “How to Evaluate Opportunity Zone Deals.” The panel was moderated by OpportunityDb founder Jimmy Atkinson. Panelists: Greg Genovese, Gordon Goldie, and Jill Homan. Recorded live on November 3, 2021.

Click the play button above to listen to the audio recording of the panel.

Or, for the video recording, click here.

Episode Highlights

  • Current trends in opportunity zone deals and what’s to come in the near future.
  • Key factors to consider with investing in OZ projects including unique risks and benefits associated with non-traditional investment strategies.
  • Opportunity zone investments as a useful tool to improve the risk-return characteristics of an investment portfolio.
  • Developing an opportunity zone investment strategy how to apply it to a portfolio.
  • Financing opportunity zones projects and other cost considerations.
  • How to retain the tax benefits of OZ investments within estate planning and asset protection.
  • Multifamily OZ investments and the key elements to assess when analyzing an opportunity.
  • Opportunity zone regulations and policies to consider in relation to asset protection.

Featured On This Episode

Video Recording

Industry Spotlight: OZ Pitch Day

The OZ Pitch Day Fall 2021 was a live, two-day online event geared toward matching investors who have capital gains with Qualified Opportunity Funds that are seeking capital. The live event took place on November 3-4, 2021 and featured pitches from 16 Qualified Opportunity Fund issuers, several educational sessions, and a post-event group networking session.

Learn More About OZ Pitch Day:

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 How to Evaluate Opportunity Zone Deals panel. Real quick. We could just go around the room here. We could just go in an alphabetical order. So, Greg, I’ll start with you. If you could just quickly introduce yourself.

Greg: G is at the top of the list for once.

Jimmy: It is.

Greg: Yeah. Yeah. Thanks, Jimmy. Nice to see you again. And real quick so we can jump right into this, my name is Greg Genovese. I’m the CEO of USG Realty Capital and the CEO of our fund, Investors Choice Opportunity Zone Fund. This is our fourth fund since 2018 and I’m happy to be here to help out any way I can. So, thank you.

Jimmy: Fantastic. And Gordon at Plante Moran, please.

Gordon: Yeah. Great. Appreciate you inviting me here, Jimmy. My name’s Gordon Goldie. I’m a partner with Plante Moran. We’re a top 13 or so CPA firm with regional offices, mostly in the Midwest, The Great Lake states, and also Colorado. I work with my practice basically helping clients that are putting together real estate projects or business expansions utilizing incentives. I probably spend about half my time with Opportunity Zones the last several years, and still work a lot with the new markets tax credit and federal historic tax credits, and other incentives.

Jimmy: Fantastic. And Jill.

Jill: Great to be with you here this afternoon. So, Jimmy, appreciate all the work that you do. I know you’re on the forefront with OpportunityDB. And Greg and Gordon, good to be with you. So, Jill Homan, I run Javelin 19 Investments. My background is really 15-plus years of real estate acquisitions and development focused on emerging neighborhoods. Spent the last three-plus years, I guess it’s four maybe, but really as soon as the legislation passed with Opportunity Zones focus on utilizing this tax incentive. We work in three verticals. The first of which is we are doing some development in Opportunity Zones. So, for example, we partnered, a co-development partner on a student housing project where we raised $20 million of OZ equity with our partner, RISE, and the project delivered this summer. Where we spend a lot of our time is actually we’re a registered investment advisor representative. So, we work with investors who’ve had very significant capital events and we help them allocate their capital.

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So, we underwrite individual assets for those investors who would like to go into a single-asset fund, and then we also cover the market in terms of multi-asset funds. So, we cover about 15 of the largest funds and help investors determine which is the most appropriate fund for what they’re trying to achieve for their goals. And then thirdly, we work with two opportunity funds. One is a fund based out of the West Coast called Pinnacle. And the other is Fortuitous Partners, which is a sports anchored opportunity fund. So, they’re both doing some really exciting things on the fund side, and then we’re providing really underwriting and team help for the projects and the funds.

Jimmy: Yeah, that’s great. I’m familiar with both those funds. Jeff and Brett, both those guys do an incredible work with those two funds there. So, I think the vast majority of the attendees in the audience today are likely, I might describe them as high-net-worth, self-directed, accredited investors. I don’t know, maybe we’ve got a couple of advisors on the call. Maybe we’ve got one or two-family office reps. But primarily, they’re folks who are interested in probably investing in a third-party qualified opportunity fund. We may also have some ladies and gentlemen on the call who may have enough capital that they’re interested in structuring their own captive QOF, but whatever the case may be, I really wanna focus today on how to evaluate Opportunity Zone deals and how to evaluate Opportunity Zone funds. Gordon, I wanna turn to you first just for some really high-level advice that you might give to such taxpayers, investors, potential investors who are considering investing in Opportunity Zones. What should they be looking at, what type of advice would you give them at a high level, and what sort of questions should they be asking?

Gordon: That’s a great question. I think everybody would agree that the most important thing is that you really need to look at the investment itself. You can’t let the tax tail wag dog, and hate to say that as a tax person because I love the tax side of things, but the benefits themselves are not gonna make a bad deal a good deal. And everybody’s probably heard that a million times. So, I apologize for saying that again. But I think it’s really most important that you make sure whatever deal you’re investing in is gonna be a good deal, at least to the extent that you can. Obviously, there’s a lot of deal due diligence and such that goes into that. And Jill and Greg are way more suited to address those types of things than I am, but I’d be remiss if I didn’t mention them.

The other thing too is to look at it in the perspective of your entire portfolio, you sell a business and have a liquidity event. And there’s a lot of appeal to being able to defer the taxes from that entire liquidity event by investing into an opportunity fund. But it doesn’t make sense to put all your eggs in opportunity fund baskets, and particularly if it’s all real estate, for example, having all your wealth or vast majority of it tied up into real estate may not make sense. So, it’s important to look at how much of your wealth makes sense to put into these types of assets. Those are kind of the high-level things, but from a more tax-oriented side of things, part of it depends on whether or not the fund you’re looking to invest in is kind of building in the tax benefits into the rate of return that they’re pitching to you. So, to the extent that you are really accepting a lower rate of return from the real estate itself because it’s gonna be enhanced by the Opportunity Zone tax benefits.

Then I think it gets to be important to really understand those benefits. And hopefully, either be able to get information from the fund that you’re looking to invest in as to benefits including things like the effects of the depreciation, deductions, and real estate deal, when you might be able to take those deductions, you know, which gets into technical things like when you’re gonna end up having basis from debt and things like that. So, I’ll avoid getting too technical there, but if you’re happy with the cash returns projected from the opportunity fund and you don’t feel like you’re necessarily taking a discount, you know, because you’re expecting to get benefit it’s from the Opportunity Zone and the Opportunity Zone is really gravy on top, then maybe you don’t need to spend as much time focusing on those tax aspects. But to the extent that you really are needing to get those Opportunity Zone tax benefits in order to make the return that you really make it worth your while to invest in this project, then you really need to spend the time understanding a lot of the technical nuances of the fund and how it’s structured and making sure that they fit your particular situation in terms of being able to, you know, realize those benefits.

Jimmy: Fantastic. Well, Gordon, you mentioned returns briefly. So, I wanted to share this slide, which I shared yesterday during my OZ 101 presentation at the beginning of day one. Jill, you may recognize this slide.

Jill: Yeah. Look at that.

Jimmy: I stole it from you. I did cite you though at the bottom of that. Walk us through this and tell us a little bit more about how the Opportunity Zone benefit can help juice after-tax returns.

Jill: Yeah. And I think, Gordon, hit on a lot of fantastic points. Really the takeaway with the slide is that when an investor, if they were to think about what the benefits are to them, it has between about 40% to 50% higher aftertax returns by investing in an opportunity…using the Opportunity Zone structure versus not using the Opportunity Zone structure. And so that’s the difference between the blue line and the red line are these higher aftertax benefits. But the next question is, is an investor taking a commensurate increase in risk in order to get these additional benefits? And that’s where I would say it depends. And that’s where you get into the evaluation of the opportunities. And so when we work with investors who’ve had gains, you know, call it from $1 million to a couple hundred million, what we really work on, I think, a great point is fundamentally, an Opportunity Zone investment is a tax incentivized real estate private equity investment. And I’m only focusing on the real estate side of it, you know?

And so it is traditionally an illiquid investment. And so we have a lot of conversations about, you know, there is a tax bill coming due in tax year 2026. And so an investor needs to anticipate that and then needs to look at this investment in terms of the overall portfolio construction of what they’re trying to do. So, some of what we work with investors is looking at what is the experience of the funds? What are the fees? So, how is everybody being compensated? And I would just, for example, just describe the marketplace as you have a choice between investing in a multi-asset fund vehicle with an allocator fund or investing in a developer-led fund or a single-asset fund. So, there’s pros and cons with the choices. If you would invest it in a multi-asset fund where that fund manager takes those dollars and invests it into multiple deals, you’re paying two layers of fees. You’re paying the fund manager and then you’re paying the developers, their promote.

The pro is that you’re investing with an institutional fund manager who should optimize the point at which they’re making an investment into the deal. And that should reduce some of the risk associated with investing in a development deal because, you know, they’re able to bring in all of the capital into a development deal. They also have rights in these operating agreements, which allow them to optimize when they come in. So, that’s the pro, but the con is two layers of fees. The alternative is to invest in either a single-asset fund or invest in a developer-led. The pro of that is you’re paying one layer of fund fees. The con of that is you’re investing with a developer, and so there’s not an institution overseeing the investor and really on top of the developers. So, say, cost go up by 25% and the deal no longer works. There’s not that kind of control in place.

And so it really is, you know, there’s not a perfect solution, but it’s about understanding the fees that people are making along the way so investors can really make an informed decision. And, you know, while most…a lot of institutions are trying to solve for that deal gross return of call it 14% or 15% IRR, and then you look at where, you know, after the feed load is taking away, you know, maybe an investor is at a 10% net IRR and just understanding, you know, are these 400 to 500 basis points that the investor’s paying is that provide for risk mitigation, is that appropriate? And so those are the things that we talk a lot about is understanding the fees and then understanding the underlying deals and the returns as well.

Jimmy: Fantastic. Greg, I’m gonna bring you in here in a second, but first, I wanna just interrupt real quick to say that we are gonna leave some time at the end of this segment for some live Q&A. So, if you have any questions, please do use the Q&A tool in your Zoom toolbar. And by the way, we have Gordon Goldie here, he’s a CPA partner at Plante Moran. Most CPAs don’t really get Opportunity Zones, or they might not fully understand it. Gordon does. So, if you wanna play…Gordon, sorry, I’m kind of putting you on the spot here, but we may get a chance to play stump the accountant. If you have any really tough accounting questions, Gordon’s here to save the day potentially. So, please don’t hesitate to ask any questions. I’d love to do some Q&A toward the end of this segment.

So, anyways, back to How to Evaluate Opportunity Zone Deals. Greg, I wanna bring you in now, turn to you. One of the reasons why I invited you on this panel, Greg, is because your fund, the Investors Choice fund has an investment thesis of really investing in different real estate projects all over the country. So, you know, I’m curious, how do you evaluate the different real projects that you decide to go into? Also curious to know, what does your pipeline look like? How many projects do you turn down versus how many projects you accept? And what’s the process for getting involved? Just tell us everything you can about your evaluation process.

Greg: Sure. And I’ll try to be succinct and right on cue…

Jimmy: I don’t know you to be succinct, but go ahead.

Greg: This happens on every podcast. Of course, my phone start starts ringing right about the time I have to start talking here, but the ringers off, the vibrator is going. So, it’s bothering me. But listen anyways, pleasure to be here. Thanks again. Gordon and Jill made some great points, and they actually made a lot of points. So, I can’t really address each one, but one I wanna hone in on before I get into how to evaluate, at least in our opinion, is something Jill said about oversight. Because we’re not the same as we were three or four years ago in the sense of I’ve always been a big proponent, you know, our first three funds were single-asset projects. I’ve always believed in single-asset, let the investor evaluate the program. You can get a tax opinion. You can get all kinds of studies. They can kick the time. What we found during COVID, in fact, as you know, our first program outside of Seattle was named the top fund in the country by GlobeSt and Real Assets Adviser. So, we’re really proud of that not strictly because of the project.

And so Gordon had said…aptly said it was about the project. I like to go a step above that because in 32 years of being in real estate securities, I can tell you that I’ve seen deals that have gone wrong. And in about 80% of the deals that go wrong, it’s because of the sponsor not because of the project. So, who you’re investing with, our first pillar as far as evaluating is really who are you investing with? Because when things work out, everybody goes, “I love that deal in Downtown Sacramento.” When it goes bad, all of a sudden they’re gonna go, and I’ll just use your name, Jimmy, because I don’t wanna call anybody else out. But they’ll go, “Hey, that deal that Jimmy Atkinson did.”

So, first and foremost, number one is who are you investing with? And doing your homework there, their track record, their expertise in the industry. The second part is what we found during COVID was the vast majority of these opportunity funds were developer-driven. And so we had a situation where a lot of larger projects, $120 million, $130 million, $140 million projects, they need $50 million, $60 million to build them, they’re now tied off for a long period of time. And what a lot of people don’t know and I’m sure, Jill, does because she does consulting work, just because a project’s tied off because the state won’t let you work on it doesn’t mean you’re not paying every month for either developer fees or insurance and all these other things that go on. So, it doesn’t have to be COVID, but it’s all about mitigating the client’s risk or the investors’ risk for a long period of time building a portfolio that can withstand one, two, maybe even three recessions or as I like to call them tie-off points.

And so, we were doing larger projects, and the reason we came up with this Consultative National, a platform with Investors Choice, and it’s not to pitch that necessarily, it’s to say, “Look, we have a limited amount of time now, between now and the end of 2026.” You go to the local developers who have expertise. You go to the Opportunity Zones that have the best risk mitigated returns that are accretive to the local community. You co-partner, which is another term that Jill used, which I love, because by co-partner you eliminate the conflict of interest risk that could come with something that is purely developer-driven.

So one, you had asked, who you’re investing with. Our second pillar is what is the actual fund structure and what is the investor asset management focus and the fees associated with that. You hear a lot about vertical integration in industries because just saying the word is supposed to be just a good thing. Sometimes vertical integration’s good and sometimes it isn’t. We’re not a huge fan of pure vertical integration because I don’t give my money to my asset manager, my wealth advisor, and go, “Please just put it in your own bank account and then tell me how good you do with it.” So, we’re big believers in co-managing with the developer partner and then we get paid and our job is to be the advocate for the investor. That’s the second pillar.

The third is the project. Now you’re into the project. Is it a local developer that has expertise? What’s the timeline? How quickly is the cash flow, which is another thing I think Gordon had talked about? How quickly does that cash flow get turned on? And are you baking out not baking in the returns that come strictly because it is in an Opportunity Zone evaluated strictly on the project itself? And then lastly, our fourth pillar as far as evaluation is execution of the proforma in the business plan with third-party oversight. And that’s what we advocate for is we advocate…We’re not just about ourselves, we advocate for any project, any fund out there that is willing to segregate their compensation, co-manage with the developer partners so there’s checks and balances, and thirdly, making sure there’s some sort of third-party oversight. And then I’ll just throw another one in there because we’re big on that is doing social impact studies in each and every one of these projects so that the investors can see quantitatively how well the projects are doing.

So, we wrap that all up, and that’s why we structured our new platform to look at smaller projects, the $20 million, and $30 million, and $40 million projects, they only need $5 million, $8 million, $9 million, maybe up to $10 million of equity, quicker timelines. You can manage the process better. And if you ever do get into a situation of either recession or tie-off again, you now have the ability to mitigate that risk. And I think Gordon or Jill, I forget who said, cost go up by 20% or 25%. You also wanna work it out where your developers, because you’re bringing the money, the developers are taking on the risk of any cost overruns and the developers are actually putting out the guarantees for the financing. Third, financing needs to be in place before the investors make their investment not, “Hey, we’re gonna go out and find the permanent financing sometime later.” I think the programs that people need to look at are the ones that can bake out as much inherent risk as possible in as far as they can in a development deal and do the evaluation based on those four pillars. I didn’t know if I’d get another chance to talk. So, I thought I’d throw it all out. So, thank you.

Jimmy: That was great, Greg, not succinct, but very thorough.

Greg: That was me succinct.

Jimmy: Yeah. It was you succinct. I’ve heard you go on much longer than that before. All good stuff all the time, but you know? So, we’ve probably got another 9 or 10 minutes before we need to wrap this up. Oh man, Gordon, we got a ton of stump the accountant-type questions in the Q&A. So, I’m gonna get to that in a minute. But first, I wanted to ask Jill one more question. Jill, part of the services you provide at Javelin 19 Investments is that you do underwriting on a lot of different Opportunity Zone deals. I think primarily real estate, correct me if I’m wrong.

Jill: Mm-hmm.

Jimmy: What does your process look like? At least at a high level, can you describe how do you determine how good or bad a deal is? What does that underwriting process look like, particularly for an Opportunity Zone project?

Jill: Yeah. And so when we’re underwriting individual deals, you know, I’ve spent my career over the last 15-plus years underwriting individual assets. And then when I was at my previous company, a real estate development, I managed all the underwriting and acquisitions of all of our development projects in emerging neighborhoods. And I said it was a firm where we ate what we killed, which was basically there was no hiding. So, once we turned the underwriting over to the folks who were building the building, I still had to live with the underwriting because I was involved with the development project. So, you know, really you have two components, a proforma, you have what it cost to build and then you have what you think you can make in terms of rent. And so what we’re looking at is, you know, we’ve been able to pull together some great data about the cost of construction.

We’re really focused heavily on multifamily. We think it’s a great asset class about where we are, you know, at this point in this economic expansion, even including COVID. And so we look at the multifamily, we try to peel back where the fees are, you know, whether a land value is up…increased in value that the developers added some value there. So, we try to just unpack that. Was there a land lift? You know, where’s all the fees? We look at the costs and look at it across projects. Does it make sense? And then we also look on the revenue and operating statement side in terms of comparing it across competitive properties. And then also, you know, the expenses as well, we’ve pulled together great databases across all the different markets that we’re underwriting to. And then, you know, we’re looking at the cap rates in the current marketplace. We’re escalating those by 5 to 10 basis points per year. And that’s generally what a lot of the institutions are doing as well.

But fundamentally, what we’re trying to is solve between 100 to 150 basis points spread over current cap rates. And so if you imagine if the building was sitting here today, what would the building trade for? And that’s the untrended return on cost? What would be the NOI, and then what would be the total cost to build it? And that gives you your untrended return on cost, and then you compare it to the current cap rate. So, meaning if your untrended return on cost is a 5.5% in the market, you have new construction that are trading in comparable locations of a full cap, that’s 150 basis points spread. And that’s really what we think is adequate compensation for the development risk. If a project is yielding, say, a 5.25% cap rate and new construction trends for 5%, then I would much rather go buy new construction. You wouldn’t get the OZ benefits, sure. But from strictly a risk standpoint, we don’t think the capital is being compensated well enough for the development risk if you’re only getting, you know, 25 basis points. So, that’s really one of the things we look at.

We look at from a gross deal return standpoint, you know, between a 14% and 15% IRR. And then we also look at, you know, the equity multiple. You know, I joke you can’t spend IRR, and so you can end up with like a fancy IRR of an 18%. And then if your deal’s, like 1.5, I’m just using an extreme equity multiple, then I’d rather have a deal that’s a 12% IRR and a 3 equity multiple because, you know, that’s really what you spend.

And then there’s stuff that we see that comes up. Some folks trend rents at 3 and expenses at 2. And it’s just our view is look, if this is an inflationary marketplace and we think expenses are going to go up. And we think it’s a hard argument to make the one that you want to go up is gonna go up more than the one you don’t wanna go up. And so we think it’s either you trend them both or you, you know, hold rents and then trend expenses and then trend them both. So, those are things that we look at. And then we also just try to think on that interest rates are gonna go up, so we do model refinance, but we are adding basis points to what the refinance looks like as well. So, those are things that we really look at.

And then we stress models because we’re looking at what are their returns really driven by? And what we want are projects where the value creation comes from building a building and creating the cash flow instead of the value creation coming from assuming a great cap rate sale. Because if the whole deal is assumed, its hinges on super low-interest rates at refinance and a super aggressive cap rate, then the value creation did not come from building a building and operating it. And that’s really what we’re fundamentally looking for is great assets in good locations that the value creation comes from building great buildings and operating that cash flow. So, a few thoughts.

Greg: Before you get over to Gordon, I just wanna echo something that Jill just said. Couldn’t agree more. These valuations need to be based on NOI. In fact, even decompressing the cap rate in your proformas over that 10-year hold is really an important element. Don’t count on cap rate compression over the next 10 years. So, I just wanna echo that. What Jill just said, there was very, very valuable information. So, I just wanted to put that out there. So I agree with you.

Jill: Well, and I’ve been saying cap rates are gonna go up for the last 10 years, but at some point, I’m gonna be right.

Greg: You’re gonna be right. Exactly, exactly. But that’s an excellent point. You can’t just look at an executive summary and see a number and go, great. It’s how did you get to the number?

Jill: And ultimately, these investors have harvested capital gains. So, they’ve sold their company, you know, sold their business, and the last thing they wanna do is just invest in a deal that is just not rooted in the fundamentals. And that’s what we try to do is kind of tease through what are the fundamental elements of what makes this deal work.

Greg: Couldn’t agree more.

Jill: And now Gordon, you get all the hard questions. So, just start quoting, you know, Section 752 and all these tax code sections.

Jimmy: Yeah. It does look like all the questions that came in are for Gordon. We’ll get to those in a second. So, I did just get word that the Caliber Funds breakout session just closed down. So, I think we have a lot of people rejoining us from that. And we’re gonna get going with the Hall Venture Partners Fund pitch in just a few more minutes here. We might go over a little bit this segment. We’ve got a little bit of buffer though, so that’s fine. So, Gordon, I’ll start you off with an easy one. We had a couple of questions about the 180-day deadline. When does that start? When does it end, depending on what type of entity you received the gain through? So, I’ll ask Frank’s version of the question here. He says he has a number of hedge fund investments which report on a calendar fiscal year. He’s heard two different versions of when the window closes for OZ investments to offset the capital gains in those investments. One is that it’s 180 days after the end of the fiscal year, i.e., around June 30th. The second is it’s 180 days after the tax filing deadline, i.e., around September 15th. I think it’s September 11th to be specific, which is correct?

Jill: Yes.

Gordon: Although, they’re both correct. Yes. There’s actually a third option too, which is a 180 days from the dates of the sale that the passthrough entity is reporting the gain to you or realize the gain. And so you have to pick one of those three. I guess the important thing I’d say is that for any particular gain, you can only pick one of those three. And so I don’t think you have the flexibility to put some of your investment in during 180-day period starting the date of the sale, and another within the 180-day period starting on the due date of the return. It’s one or the other. And so you’ve gotta figure out what’s best for you. And that could also result in a blackout period because, you know, you could have…let’s say if you had a sale occurred on, let’s say, March 1 of 2021, so you could pick 180 days from that, you know, which would end somewhere before the end of the year, right? But then your next 180-day period that you could pick wouldn’t start until December 31st. So, there’s gonna be some period during the last couple of months of the year where it’s, I guess I’d call it a blackout period where you can’t invest during that period. But then after that, now you can basically up until, you know, September, like you mentioned, September 11th

Jimmy: And that’s available for taxpayers who recognize the gain via a Schedule K-1?

Gordon: Right. Exactly. Yeah. If the gain is from an asset you sold yourself, then you only have one choice, which is the date of the sale that you recognize the gain.

Jimmy: Right. Gotcha. Question from Joseph here, “Can OZ investments be moved into a trust and retain the tax benefits? What if it’s a marital trust?”

Gordon: Really the root of that answer is that, you know, there are certain situations where a transfer of an opportunity fund investment triggers what’s called an inclusion event, which would require you basically to recognize the deferred gain and lose all the Opportunity Zone benefits. There are quite a few exceptions to that rule that a transfer triggers an inclusion event, and a transfer to a trust could be one of those exceptions. It really depends on the structure. You know, it’s probably, you know, I don’t have time to go into all the details there, but the general kind of estate planning type of transfers are generally okay. But, you know, obviously, you’ll wanna verify that before you actually make such a transfer, but generally speaking, you can do that sort of thing.

Jimmy: I have, by the way, posted links to Greg’s, and Jill’s, and Gordon’s websites where you can find out more about them and get in touch with them and their teams if you have any follow-up questions you’d like to ask any of the panelists today if we don’t get to your question. I’ve got two questions that I see here that I remember seeing yesterday, and we didn’t really get a chance to answer them, or maybe we didn’t answer them well enough. Hafey asks, “If you move states between now and 2026, in which state do you pay the deferred state tax to in the tax year 2026 when you recognize that gain, is it one, or both, or what?”

Gordon: Good question too. And, you know, I guess the first thing is you have to look and see what the state that you’re involved in and whether it’s the state that the gain was recognized in or the state you live in, how do they recognize the Opportunity Zone statute. Because some states have decoupled from the Opportunity Zone statute and they don’t follow that. And so, you know, that’s one thing you need to pay attention to is, you know, what does your state do? So, for example, California is one of the more infamous ones that don’t follow the Opportunity Zone statute. But I guess to specifically answer that question, I think it depends on the state, but certainly, you could end up paying tax. I mean, most, the default tends to be that you pay tax in the state of your residence and then you get a credit in that state’s tax for any tax you pay to a different state. And so different state taxes you for that gain because it was related to let’s say, real estate investment in that state and you end up paying tax in that state where the property was located, then you get a credit against your home state’s tax. So, you know, technically, you have to pick up that gain on your personal return in your state of residence, but then you might get a credit against the tax for that. So, it really depends on the state and what their rules are, but that’s kind of generally speaking how it would work.

Jill: And this is why you really wanna hire an accountant like Gordon. So, I mean, if nothing else, ’cause it’s so important to understand the character of gain and the timing and then these questions. So yeah, absolutely.

Jimmy: And we’re happy to have you here today, Gordon. I think we got time for one or two more questions. What happens if the Opportunity Zone investor dies before the end of the 10-year holding period?

Gordon: Generally speaking, the estate planning documents are gonna kick in and the investments gonna transfer according to those or probate, whatever, you know, if there’s not estate planning document in place. But generally speaking, as long as, you know, the heirs take, you know, step in the shoes of the person who died, they would become responsible for the deferred gain and would be entitled to the Opportunity Zone benefit. If they were to transfer the asset, that would be an inclusion event and it would trigger the acceleration of the gain and a loss of the remaining Opportunity Zone benefits. So, it really kinda depends on what happens with the asset after the death, but generally speaking, the death itself won’t trigger a loss of the benefits, but a transfer after that.

Greg: Jimmy, do you mind if I just…I’m just gonna take 25 seconds to dovetail on this, although I’m not a CPA. But I think the question regarding somebody dies, this is a big one because part of evaluating a program really has to do with the exit strategies designed in the program itself. So, you have the legal and the tax side of it, which is what happens when someone dies, the heirs are gonna get that at a stepped-up basis. But now you have to look at what sort of liquidity provisions does the fund actually have during that time period. So, you really wanna look for a fund that has advantageous liquidity provisions for the investor during that time period. Also, some people wanna get out right at 10 years, some people wanna stay in, and so you need to look at what’s their exit strategy structure and what’s their liquidity. And I think that’s an important element on top of just looking at from a tax standpoint with step-up in basis.

Jimmy: All right. Well, thank you to my panelists. I do have to wrap things up now and move along, but I wanted to thank each one of you, Greg, Gordon, Jill. Thank you so much for being here with us today and participating on this panel. Once again, I posted links to contact information and websites for our three panelists today if you have any follow-up questions you’d like to ask. I didn’t get to all of the questions for Gordon. I’m gonna try to address some of those in the Q&A and in the chat over the next few minutes. And I’ll try to forward on any really tough ones that stump me on to Gordon. And hopefully, we can get those questions answered down the road here. Appreciate all three of you for joining me today. Thank you.

Greg: Thanks, Jimmy.

Jimmy: That’s it for our show today. A huge thank you to you, our listener. If you liked this episode, please rate and review us on iTunes. The Opportunity Zones podcast is produced by the Opportunity Database. Visit opportunitydb.com to learn more about Opportunity Zones and Opportunity Zone fund investing. You can learn how to subscribe to this podcast and read more about today’s guest in the show notes by visiting opportunitydb.com/podcast. And we’ll be back soon with another episode.