Real Estate of Things
Real Estate of Things

Episode 12 · 5 months ago

Opportunity Zones: What You Need to Know About Opportunity Zone Tax Breaks

ABOUT THIS EPISODE

When you want to encourage doing good in the world, how do you incentivize it?

For the government, incentives usually come in the form of tax breaks…

And when it comes to Opportunity Zones, the incentives are too good to ignore.

If you need help navigating the opportunity in Opportunity Zones, you turn to today’s guest, the Wizard of OZ investing — Chris Knoppe, Partner at CBUS OZ Funds, who returns to the show to dive deeper into the topic.

In this episode, we discuss:

  • The history of Opportunity Zones
  • The 3 incentives for investing in them
  • How to get started investing in them

To stay up to date on The Real Estate of Things, check us out onApple Podcasts,Spotify, or on our website.

Listening on a desktop & can’t see the links? Just search for The Real Estate of Things in your favorite podcast player.

Death and taxes, the good old truism laying out the two certainties in life. I promise we only talk about the taxes part. Chris notpy joined me for his second appearance on the podcast. Number two to unpack opportunity zones, really dive into the naty grady of the benefits, timelines and Gotcha's of the program and now already spoiled it. But taxes play a huge role in the incentive part of the opportunity zone program I feel like every real estate investor has at least heard about opportunity zones, but I really think the real benefits are the best kept secret and real estate. Thanks for listening. You're listening to the real estate of things podcast. Welcome to the real estate of things podcast. I'm your host, Dalton Elliott. I am joined today by our first repeat guest. Very excited we have Chris Knoppi of Sea Bus Oz funds. Chris, great to see you again. Hey, Dalton, thanks so much for asking me back. Good to see you absolutely I just could not get enough. And for those watching, you and I are just catching up beforehand. I don't know if my lighting has gotten more white or if I have gotten more casper the friendly ghost. I look absolutely pasty white in this video. You're over here looking like a Greek God santaneal Mount Olympus. It's not a good look for me. So hopefully everybody's just listening and not hitting up the Youtube video this week. That's okay, just it's this Balmy Ohio weather we have here. Here you go, the South Beach of the north. That's right. Well stay. Speaking of Ohio, the last time I was on you were trying to hit me up for some Ohio football tips for your fantasy football league. So how's that going? Yeah, it was going well. That was being operative where there. So I eked out a win last week. I had kind of a first loss in a while. I'm going to make the playoffs for the League, which is good. You have a ticket to the game, which is the important thing. Anything can happen at playoff time, so I'm not stressing. But I had derrick henry and Aaron Rodgers. The week that Aaron Rodgers was out, Derek was out. I've had I've had some trials and tribulations this this season. So I'm happy that I'm making it to the playoffs, but I don't know, I don't. I don't have that gut feeling I did years ago when I ran the tables. It's dicey. I did make it up to Ohio for the first time. The conference center that we were at was directly across from the Brown stadium, which is beautiful right there on the water. So when they open the blunts go. Was it at the Hilton? Yeah, the what's the name of the Huntington Convention Center? Oh, okay, I was up in Cleveland, not not, just a few weeks ago for a nevergradic opportunities own conference and it was at the Hilton, which overlooks late eary and the Brown stadium there. made it to a browns game. So yeah, pretty decent venue. They have their yeah, this is really pretty one of the few stadiums where the stadium's actually downtown in the city that it's named right. Like my I'm a cowboys fan. I visited the stadium. I've seen them play a bit. Not at the new cowboys stadium, I guess it's not that new at this point, but my sisters in Dallas. So in last August we went on the tour and right Dallas cowboys. But the stadium is like an Arlington, which is, you know, on a good day, of forty five minute drive away. So it was cool to see the stadium that was in the actual city, downtown. That's just a rarity. So yeah, definitely. We just in Columbus we just built a new MLS stadium right and in downtown and it's it's a game changer. It's pretty cool. It's right next to the the hockey arena as well the NHL team, the blue jackets. We got the crew in the blue jackets downtown. That's one thing. I played soccer for one year when I was a kid, maybe third grade or something. I was like that's too much running. And we have the Atlanta Atlanta United Right two and a half hours away from where I'm sitting now in Greenville, South Carolina, and it's at the they play at the Mercedes Benz zonome and I've heard nothing but great things about kind of like a there are a couple of MLS games that like, you don't need to know look about soccer, just go there and it's always a party. I need to make it to an MLS game. They're fun. Yeah, they're fun. It's even if you're not a soccer fan. It's like the one thing about soccer is they never stop the clock and there's just constant, the actions continuous. So it's yeah, it's pretty neat like it. I have to get up to your neck of the woods go to a game, you show me the way. Beautiful. So last time you were home we really dove into your investing background and business and after the episode we kicked around the idea of you coming back to really do a deep dive on Opportunity Zones. What does the strategy behind that look like? Taxes, right, that's a huge benefit of opportunities on a lack la thereof is a huge benefit on the opportunity zones.

And the the normal disclaimer. Neither of us are our attorneys, so nothing in here should be construed, as you know, official ironclad legal or tax advice. You know, consult your attorney, our accountant for that. That piece out of the way. Talk to me about the tactical, actionable piece, about if I'm a real estate investor, and you know I have some experience, but I hear about this opportunity zone, opportunity and all of the benefits around it. But like, where do I start and and what are the biggest differentiators between just doing a normal transaction and doing something that's classified in the opportunity zone. Yeah, that's right. It's the last time. Like you mentioned, we just really talked about the evolution of my real estate journey, which the more recent years has been spent doing urban redevelopment projects and in a lot of opportunities own neighborhoods. And of course we have our opportunities zone funds, Buso Z funds, as actively raising raising our third fund right now. So I think you're right. We just we just scratch the surface last time on the topic and that is really what I what I've seen the general public's understanding of opportunity zones is very surface level. So I would love to spend some time today really going into a deep dive on opportunity zones, what they are, how they were created, what the purpose was and and really the mechanics of how one goes about investing with to receive the tax and centives that's really meant to drive investment into low income communities that have been starved of really investment capital for four decades. So yeah, without further ado, I think just for some general background and, like you said, we will touch on a lot of tax stuff, some accounting stuff and some legal as far as fun formation and fund raising and how those mechanics work. So, like you said, not an attorney, not a CPA, consult your advisors. This is informational only, but we've been doing this for several years now and have a pretty good knowledge base. That that I'm excited to share today. So where does one start? Like opportunities zone? Do I go to opportunity zonecom and see a map of you know, where these zones are? How do I figure out where the opportunity zones are? Yet there's two easy resources for that. The Hud, Hud Dot Gov, does having an opportunity zone map, and I'll probably say O Z a bunch of times today. So that's the abbreviation one and the Hud map is sufficient. The I like a map. It's Esri is the company in the website. They do all kinds of maps and they have an opportunity zone map and that one, to me, is a little more functional. So on a very basic level, yep, Google Opportunity Zone Map, you'll find one of those sites. You can plug most of them are searchable, so you can plug in an address and see if you're in a zone. Zones are usually highlighted some color. So what the opportunity zones are? It's their sensus tracks and there they this all came about in December of two thousand and seventeen there was a piece of legislation called the TAT tax cut and jobs act, which was a very thorough piece of legislation, several hundred pages, and really the small section, I think it's only a few paragraphs, introduced the concept of opportunity zones and that's all it was and it it was. It had bipartisans support, so it made it in that final final bill and it was signed into law and then in but it was. It was to the concept of it and that laid out next steps. The next step was for each state governor to actually select the census tracks that would be become opportunity zones. So that's what happened in two thousand and eighteen and in our state, I know it was governor John Kasik at the time, had all the all the zones selected in that first quarter of the year and they published there the State Opportunity Zone Map. In April of two thousand and eighteen, and that's really where I first took notice, because before it was just theory and without really knowing where the zones are and how you could apply them to your investment strategy, there wasn't much to pay attention to. So two thousand and eighteen these zones started being rolled out state by state, and the way that they're selected is first they have to qualify as low income census tracks and then, out of each state's low income census tracks, they can designate up to twenty five percent of them as opportunity zones. So it's fairly selective in because if it wasn't it really if it was spread too thin across too many census tracks, it wouldn't direct the concentrated type of investment that it was intended to do. So nationwide it's about eleven percent of all census tracks are opportunity zones. So that number may seem insignificant...

...to some people, or it actually may seem significant because it's ten percent of our total countries and opportunity zone. And when you get when you get into your local detail, you'll see that there's some rural opportunity zones and and a lot of urban opportunity zones and everything in between. So each governor tried, I think, their best to spread it out between urban and rural. In some cases it's just the communities that have been starved for investment. In other cases it might be areas that are primed for investment and they want to encourage it because they maybe there's there's certain infrastructure projects that are coming coming through and they want to encourage and ancillary investment around those areas. So I think most of the governors were pretty tactical about it and they also worked with local municipalities to get down into the details when deciding what's zone and what is so that's how they came about. And then the the Treasury Department is actually responsible for interpreting how the IRS will will regulate the rules. And so when these zones came out the the Treasury Department and all they're going off of, in all investors and attorneys and accountants were going off of, was where these few paragraphs that described opportunity zones and what they were that were within the tax cutting jobs act. So in the Treasury Department had to actually draft the regulations, and the regulations is the basis for how people can act and invest within the zones and the true mechanics of it and how the IRS would then enforce it. So those, those first set of regulations were published in October of two thousand and eighteen. So really nobody was actually taking action investing an opportunity zones until those regulations were proposed and they answered a lot of the questions while the low hanging fruit out there. But in some cases it was really just the tip of the iceberg because there was additional questions that remained and they had a lot of public common commentary period. So a lot of trade groups submitted feedback and they went on to publish a second set of proposed regs and that was in April of nineteen and then the final set of regulations for opportunities zones wasn't wasn't published until December of two thousand and nineteen. So for people that were operating kind of playing vanilla straight down the fairway, they could start investing after the first set of regulations and certainly after the second set in early two thousand and nineteen. And then for some people that were operating more in the gray area or looking to do something more creative, they may have wanted to wait until the final set of rags in December two thousand and nineteen were published and actually even after that they amended them later on. So that's kind of the legislative side of things. So what if people haven't heard a lot about them? That's why. Because really two thousand and nineteen was the first year you could start investing and we formed our first fund. We started forming that, we started conceptualizing it as soon as the first set of regs came out and then, you know, we were doing an internal fund with our own capital gains to test out the mechanics of how this would all work and make sure we could apply it to our business model of doing a whole out of small projects, because this is this is as we'll get into today. I mean it, it's set up as a fund structure. You can't Joe Smith can't go buy one property in his name and call it an opportunities own investment. It has to be a fund which is a multi member entity and then there's rules for how the assets are deployed, and so we wanted to work all that out before we invite it outside capital, and so we did that in nineteen and then our second fund which was the first with outside investors, formed in two thousand and twenty. So that fund's been operating for it's been buying property for about eighteen months now and we're on two fund three. Let's a lot of progress in a really short period a time on the fund side of the fence. I want to talk about that for a minute. So if first fund was kind of you and very close acquaintances, right, and then this second fund was, was it still kind of a you know, call it friends and family, or was it? Was it beyond that in terms of your relationship to the investors? Yeah, so it was. It was mostly word of mouth. So we certainly had folks investing that had known as for a long time. There was secondary introductions and then people that may have been familiar with us just from being in business for a long time, but we didn't know and they they caught wind of what we were doing and they wanted to be a part of it and they join and so it kind of grew organically from there, you know, to where you get referrals and introductions or somebody hears about you. And in the last few years I've I've attended a lot of conferences all over the country, specific to opportunity zones, and so your network grows and you become known. For us, we were fairly early operators in the opportunities on space and also what we do is fairly unique in...

...that we are accumulating a lot of smaller assets within our funds as opposed to the more traditional development model of having one fund for one large project. So I think people like that factor of us. And really the intent of the program is to revitalize neighborhoods, and so you don't revitalized neighborhoods by building a twenty story tower. You usually need to go in and buy board up properties and clear out the blight and bring residence back into the neighborhoods and then bring some retail business back into the neighborhoods and really go grass roots with it. And and that's what I love about what we do. Yeah, so on the fun side of the fence, what are some of the biggest stressor's pain points differences? However, you want to attack it from really an extended relationship fund model. So you said you know a lot of secondary introductions well above and beyond the friends and family model versus kind of fund one and that set up. What were some of the biggest things that stick out between the two? Yeah, and I'm happy to go into that and talk about our fun. But I do also want to you know, this is I want to provide some educational material for people listening so that if they decide to go form their own fund, you know they can do that, or if they want to go invest in someone else's fun, they can do that, or if they just want to work within their their business model with opportunities own funds, they understand how they work, what they're what their incentives are, what their priorities are and how how they could be worked into everybody's business. So with that I think I'll you know, I want to first say that these aren't just the tax break. The tax break is meant to drive investment dollars and in order to do that you have to incentivize it. And so the whole point is to some communities out there have been starved of investment and have suffered for four decades and private capital and want to touch it, because that's once you once you on that kind of that train of downward decline and a lot of blight, it snowballs. It kind of gets worse and it's hard to turn that train around unless you get a whole lot of capital committed to that mission. So that's what os he's trying to accomplish. So that's the purpose of it. And in order to get that much capital excited to reverse those trends, you have to dangle out some pretty nice carrots. So that's where the tax and centers come into play. So specific quickly, their geared towards capital gains and the thought process behind that is all at the stock market has been on a ten or twelve year boom. The certain real estate markets have also been on a boom. What do we need to do to have people take some of that off the table? And you know which is a gain? So some of those appreciated assets. How do we motivate somebody to sell their stocks or to sell the building in the in the Nice neighborhood and reinvest those proceeds into a community that hasn't fared so well? And so the only way, real way to do that is to is to require capital gain investment. So it and it's a very interesting as I talked to investors or potential investors for our fun some of them have a gain and they're just trying to decide what to do with it and they've heard about opportunity zones and they decide to invest it in an Oz fund rather than whatever else they may have done. So it's capture an investment that way with people who who already had the gain regardless, but now just want to decide what to do with it. But then there's also people who intentionally realize their gain and so they can invest in opportunities own funds and and that to me means that it's a powerful incent event. It's working because if you if you've got appreciated Apple Stock and normally you would just let it sit there because, for one, you don't want to sell it and have to pay tax on it and to you got to figure out what else to do with that money. But here you have this program that can offer you some nice and centives encourage you to sell that stock and reinvested into a low income community. That's pretty powerful. And so, specifically, the incentives are threefold. The first is if you have a capital gain and you invested into a fund, you can defer your tax on that game and the deferral period, as it's written now goes through the end of two thousand and twenty six. So instead of realizing a gain on your two thousand and twenty one tax return, you invested in a fund and you don't have to realize your gain until tax your two thousand and twenty six, which means you file your return sometimes in calendar your two thousand and twenty seven and...

...you your tax would be owed at that time. So right now we're looking at a five to six year deferral of that tax, and that that part of it. That's not the best incentive, but it's a big one and it's probably unappreciated because not only are you delaying the tax, but in the meantime the money you would pay in tax is being invested in growing for that five or six year period and if you're investing that at a decent rate to return, call it eight to twelve percent, you're basically doubling your money over that period of time if you're if you're getting a compact annually compounded return. So if you look at it that way, the tax you would pay today, when invested in the fund, grows and doubles in a five or six year period. It pays for itself because you've doubled your money and you pay your tax and you still have everything you put in. So the deferrals powerful. The second benefit, which is particularly timely right now, is that when you do pay your tax in tax your two thousand and twenty six, instead of paying your full tax, you get a reduction in tax. And the tax jargon with it is actually you get a step up in basis. But what that results in is essentially a discount on the tax you pay, and that discount is ten percent. So if you're in the twenty percent capital gains bracket and you have a hundred thousand dollar gain today, rather than paying twenty thousand in tax, five years from now your you would pay eighteen thousand in tax. So it's not huge but it's something. And actually that started out is not a ten percent discount but a fifteen percent discount, and they're tearing it down as time goes on. The reason for that was they wanted to put an extra carrot out there to get people to take action early when the program was first introduced, so real to reward the early adopters. And the way it actually is written is that if you were invested for seven years before the deferral period ends you get a fifteen percent discount and if you were invested for five years before the deferral period ends, you get a ten percent discount. So if you do the math from the end of tax your two thousand and twenty six, take back up five years, that's the end of this year. You have to be invested by to get that benefit. So those are the first two and the third one, which is the most powerful, is it doesn't have to do with your current tax but it has to do with your new investment in the fund. And if you hold that investment in the Fund for ten years, when you exit that fund, your capital gain at that time is one hundred percent tax free. So again the power of compounded investing over a ten year period. If you're earning a reasonable return, your money can triple and that gain is tax free. So that's that's a huge incenter for people. It's kind of similar to a one thousand and thirty one exchange, except instead of having to exchange things in perpetuity to avoid tax, you're just holding for ten years to avoid the tax. So ten years is better than forever in any book. That math adds up one hundred percent tax free. Those are words that just you don't hear about anything ever. And as your I love the one, two, three break out that you gave in any one of those is a material incentive. and to stack all three of those together really the first two on a medium term horizon and you know, Short medium term horizon, and then the third one on a slightly longer but not really that long term horizon makes it incredibly compelling to me. This is the opportunities zone program is a prime example of kind of a government incentive and program that has run exceptionally well by by most relative standards. It's really tough to properly incentivize activity around investment in dollars and there's so you know now, to literally today, more than ever before, you have more options, no matter how much money you have to invest that money, whether it's real estate, Crypto, fractional real estate, they're all different kinds of things, even within the real estate space. But above and beyond that, limitless options and this program, the Opportunity Zone program it's just one of the few things that I look at like the the nail was hit on the head with with the incentive structure around this. It's compelling. Cell. Yeah, yeah, definitely. And there was a just a second study release. That was commissioned by Congress back in two thousand and nineteen and and the point it was to measure. It's a new program right, so nobody really knows what's going to happen. If it was perfectly designed and they wanted there certain checkpoints and really the results were a the incentives are working. There's been twenty nine billion...

...dollars invested in opportunity zones and to the zones that were selected are low income zones that need the money and three that there are the local, local municipalities. They overwhelmingly rated the program from good to neutral. You know, it's it was either yes, this is driving investment in projects that really matter, or this is looks like it's working but it's still await and see thing. There was very few that responded saying no, this isn't doing what it was intended to do. So that was good news. The other good news is, I mentioned earlier, it had bipartisans support. So whenever there's a new program particularly that involves tax reporting and you know the federal support, people are a little weary of getting involved until they know it's going to be around. But this was passed originally under the trump administration, but it had congressional leaders on both sides of the aisle. It supported it and early on Biden Express support of the opportunities on program, as have other Democratic leaders. So that is a real positive thing for you. If you're going to get involved in something, you want to make sure it has lasting power or staying power. The study that was released, the one thing is it's that there's some challenges from an Irus perspective on compliance and how to enforce that and make sure people are following the rules, and so any calls for change to the program thus far have been around that. How do we make sure we're measuring investment into the communities and into the projects and what's that what's that trans leading into so that it's not just a tax break for for people with a lot of capital gains, that it's actually doing what it was intended to do. So I think eventually we can expect to see at the fund level some more detailed reporting requirements. But that's a good thing because if you're involved in a program that's doing positive things, you want you want people to see that and be able to measure it. And if you can't measure it then people will become skeptical. So having the reporting tools in place to show those results will ultimately be a positive thing for everybody. Yeah, last time you were on the podcast, you know, you mentioned that you live and work in the area that you invest right. What have you seen just over the few years that you've been in opportortunities one side of the fence? What have you seen tangibly in your neck of the woods? Yeah, and so for us we were doing projects pre opportunities own fund with our own money, with bank financing, with institutional private Rehab Lenders, and we were able to make an impact. But the introduction of the OZ program and outside capital has allowed us to just exponentially increase that impact that we're making. And so from that perspective, I think that any given investor can make a small drop in the lake when it comes to neighborhood revitalization, but if you align larger amounts of capital with these incentives, you're driving a lot more dollars of investment into more concentrated areas and so the results are quickly tangible. So for US specifically, the area we located our office into what is now an opportunity zone back in two thousand and eighteen. I moved into that same neighborhood in two thousand and nineteen and I've seen after every season that goes by there's noticeable change. There's less boarded up houses, there's more homeowners, there's more residents, there's more renterers and now new businesses are popping up as well, and so even though it's a short period of time, it is helping change the tide that neighborhood in particular, was it peaked. Population peaked in the s. It was once a vibrant neighborhood outside of downtown Columbus, but ever since then, for six decades, the population has declined and the most recent census numbers that came out this past year that we're measuring from two thousand and ten to two thousand and twenty, showed that it had declined some more. But my guess was that, yeah, from two thousand ten to two thousand and twenty there's a net decline, but I think the decline hit rock bottom and started turning the tide in that right at the end of that measurement period. So the two thousand and twenty measurement. I think that we're now turning the corner in that neighborhood in particular, and I think when the next census numbers come out ten years later, so that's whow you've had a full fund cycle of investment here, it'll tell a different story. So there's just there was a lot of vacant properties, there was a lot of torn down properties. Those are all coming back to productive use and then that fuels other economic activity in the neighborhoods. So yeah,...

...just in a few years I think we're seeing tangible results. Beautiful. The program working as intended. Nice thing to see. Yeah, I think it's worth mentioning too. So the three, the three benefits that I highlighted, those are federal tax benefits and then it's up to the states whether they want to mirror those benefits, modify them or not offer them at all. Most states have gone the mirror route, where they have adopted the same tax treatment or a close variation of that. Certain states, namely California New York, said, you know what, we're not going to give the tax break. So that's something for investors to be aware of. Ohio and some states went above and beyond to try to attract the capital. So Ohio not only mirrors the federal benefits but also added a state tax credit, and that's for investors that invest in funds that exclusively invest in Ohio opportunities and projects. So so our five investors in our fund our beneficiaries of that and it's interesting to see that work as well, because we do work with some investors out of state who just they love that tax credit. They get that and if they can't use it, they can sell it. They sell it to another I have taxpayer and we help them do that and it's a it's a nice incentive it gives them, especially for a ten year investment timeline. So rather than waiting ten years to get everything back, that tax credit allows them to get some liquidity back within the first year of investment. It's great. What what do we miss on the fund side of the fence? Anything there? Well, so I think we talked about how they were formed, what they are, what the incentives are, and you know that's how they drive investment. But as far as who can invest in how you invest, I think is is what should be. What should we should cover next. So any any end of any taxpayer can invest in an Opportunity Zwn Fund, and that's a individual or a bit or an entity. So nonprofits and and other entities that don't pay tax aren't the best candidate because the whole thing is a tax incentives. But any tax pain individual or entity is eligible. There aren't any there are no income restrictions, so no matter how much you make or how little you make, you can still invest, which is nice. And there's also no minimum or maximum investment to participate in the program. I will say, though, that at the Fund level, due to SEC rules primarily, most funds have a minimum investment amount. But from the program overall there is no minimum or maximum, so that's nice too. But there are there are some Gotchas. You know there's some some this is great, but so it's always it's always nice to say these are all the great things. You can triple your money over ten years and not pay tax on it. You can defer, you can discount. That gets people interested so that then they can stomach the GOTCHA's. So a couple of the Gotchas are that. The it was written, I said, in more of a venture capital or private equity model, where it must be a fund. Dalton Elliott cannot go buy a house in his name and say this is my opportunity zone investment. Dalton needs to invest in a multi member entity in order to get that Oz qualified OZ investment incentive. And so what that means is, from a small investor perspective, you can form your own fund, just has to be a multi member entity. And and then there's other rules, though, that you have to follow. And the rules, you know, one might think they're cumbersome or irritating, but we also have to understand why they're in place and there in place so that the programs not abused. So if I can't just form a fund, put all my capital gains in there and then not do anything with it, that doesn't that doesn't create the intent of the program of making making positive change in the neighborhoods. So one of the rules is a fund needs to deploy ninety percent of its assets within six months. So you got to get moving on it, you know, if you're if you're forming a Noz Fund, you've got to put that money to work in a quick period of time. One of the other one of the other rules is that in order to in order for your investment to be a qualified ozy investment, you have to be significantly improving it. So you can't buy a beautiful building that happens to be in a Noz and just rent it out forever turnkey. There has to be a significant improvement aspect of it. So again the intent is to drive investment into improving communities. So the way they measure significant improvement is that whatever your cost basis is to buy that asset, you you really essentially have to double it. So whatever you paid for, you have to add that into improvements...

...you do get. You now you do get credit for the land value. So like a real simple example, you buy a low cost house Fiftyzero and maybe you allocate ten percent of that to land value. Most accounts would say somewhere in the ten to twenty range is acceptable. Or you look at you get an appraisal or you look at the auditor assessment value. But let's just say fiftyzero purchase, so five thousand is land value. That leaves forty Fivezero of your basis and the actual house itself. So you have to invest forty five Tho in repairs in that property in order to for it to be a qualified opportunities own investment. So there's some strategy there and you have to be selective. You can't buy a home that doesn't need much repairs. That would be a bad asset. You are allowed to have a certain number of bad assets in your fund, but you have to monitor that and measure that and be aware of it. So those are those are two of the bigger ones. You can also invest in businesses, so it's not just real estate. A fund can invest in an opportunities own business, and then that comes with its own set of rules. The business, of course, has to be located in an opportunity zone, it has to have a certain percentage of revenues derived from Opportunity Zones, employees have to primarily work in opportunity zones and things like that. So start up entrepreneurs can locate their business in an opportunity zone and offer, it was, the incentives to their venture capital investors or their angel investors or friends and family, whoever is investing in their company. So even if you're not a real estate investor, there's other ways to work with opportunities, the opportunities on industry lenders. Lenders are a great partner for opportunities own funds and if lenders understand that opportunities own funds because of some of the tax detail behind it, the investors themselves, the limited partners, the passive investors, they don't necessarily have basis in the fund, so things like depreciation and other pass through losses can only be allocated to them if they estab published basis in that fund. One way of doing that is to use nonrecourse financing. So there's a huge need for nonrecourse financing within opportunities own funds so that the fund can establish basis for its investors and then can pass through benefits like passive losses from depreciation. And will touch on depreciation because that's a huge benefit with those he's because the appreciation does not have to be recaptured after ten years. So you can take all that depreciation you want and then there's never a recapture event at the end. So anyone whose own rental property for a long time and sold it can appreciate that, because sometimes that tax bill is surprising when you have to recapture pay tax on all that depreciation you took. That's all in all, the the GATCHA's don't seem too terrible. Or at the biggest things that stand out in my mind are, you know, if you're first time investor sitting on a good, good cash pile looking to really run the operations of an Oz fund, that sounds like a little, little rich to buy it off, right, especially the fact that you have to put in the property value or improve it by at least the initial acquisition costs. Right. That means that none of these projects are going to be light rehabs, right. They're all going to be relatively intensive overhauls and the timeline of six months. Ninety percent to cloyment within six months. That's you have to know what you're doing. This should not be your first Rodeo, in my mind. So yeah, all in all, the the benefits definitely sound like they heavily outweigh the, you know, call it operational stressors, that that are the Gotchas of the programs that it does, that it's that kind of encapsulate your feelings and other folks, you know, who are in the opportunities on the world. That the kind of the take on it. Yeah, well, we obviously feel it's worthwhile because we're doing it. So yes, we think that if properly structured and monitored and managed right. The Oz Fund is is well worth the effort. was there anything at the outset that kind of knocked you in the teeth unexpectedly, or were you, you know, kind of regimented ner due diligence and everything? You know, all the ducks were in a row and everything panned out how you expected? Well, we were. I think we knew what we were we knew what to expect to some extent, but it was a brand new program so everyone was feeling their way through it with us. Or now, I would say, in retrospect, of someone's going to form the fun today. You just you really have to. There's two things that you should evaluate. One is how much is your gain that you would invest in your own fund, and is that worth...

...pain tax and legal advisors to set it up for you? And then is it worth you have enough in there to make material investments to you know you're going to be filing these tax returns, you're going to be following these rules in the timelines. Is that all? Is the juice worth the squeeze? If it is, then then go for it. If it's not, then you may want to consider investing passively in someone else's fun sounds wise. What do we miss? Like we think we hit the nail on the head with this one. Yeah, let me think. I mean I'm sure I breathe this stuff day in and day out, so I don't even remember what was said and what wasn't, but I feel, I feel exponentially more educated on opportunities zones. I remember, for some reason, I remember gay by the day of Josh Woodward, who's our chief financial officer, years ago, whenever we first heard the word opportunity zone at my day job at Leone capital, and he sent around this three page pdf that was this ultra high level. Here's this thing that's coming out. So it's interesting in my seven years in the real estate investment space on the landing side, interesting to see something go from concept to really execution and hearing from you, someone who is really all in on on this concept, being able to see soup denots start to finish it all the way through, the program get launched, rolled out, you put dollars to work in opportunity zones and see the intent pan out into reality. It's really a really great, ingenious way that has seems to be making headway towards accomplishing the goal overall. So that's a really interesting program and something that is is not just, you know, a quirk in the tax code, it is something that is providing, you know, fair incentives to incentivize investors to bolster up these neighborhoods. So it's it's an incredible program I'm really glad to hear your story from it. Yeah, and I think everyone wants to do good when possible and but the definition of investment is you're looking to make a return on your capital and so and we're capitalists first and foremost. So, in my opinion, the beauty of this program is that it cares or levels of the plane field or even enhances the plane field to do both. So you're you're able to to achieve your investment goals and at the same time, your investment is improving communities. And you're not taking a haircut for that, you know you're not. You're not battling up hill, you're not going against the wind, you're getting incentivized to do it. So I think a lot of our investors they want to make a return, but then they also like to feel that it's great to feel good about what the projects are doing too. So it's not one or the other, it's pairing those two concepts together, which is great, and I think I'll to wrap things up, I would I would say two things. I'll go over a quick timeline of important dates the people should consider, and then also talk about, as far as funds go, considerations, whether you're starting your own or investing in someone else's. So for fun considerations, there's all kinds of fun sponsors out there and so you want to look at track record. You want to make sure that whatever they're doing, they've done it before, and opportunity zones being a new concept, nobody's been running an opportunities own fund for twenty years. But what they're doing with that fun have they been doing that successfully for a while? So that's first thing to look at. And then secondly is what is the Investment Strategy? And again is this is if you're starting to fund or if you're looking to invest in another one, what's that investment strategy going to be? What asset classes it it and you know, what types of projects are they doing? So is it going to be a more of a commercial fund, doing office buildings or hotels or retail properties, or is it a multifamily fund or is it single families, etc. And similar to that, is the fun going to invest in a single asset meaning one big project, or is it a multi asset fund? It's going to do several medium sized projects? Or maybe they're doing several big projects, or are they doing a whole lot of smaller projects? And the reason that's important to understand is...

...because they have different risk profiles. A large product, a single asset fund doing one large project. That could turn out amazing or it could turn out not so great and it hinges on the success of that one project. So if you really believe in their investment strategy and their asset class and you really believe in that one project, that might be a great fund for you to invest in, because if it goes well, you could see an out oversize return. But the opposites true, is that if it if it if it's something that it's not going to farewell and an economic downturn or there's some risk involved in how that project is executed, then it could be a higher risk project for you. I prefer the the multi asset strategy, so we spread our risk over a whole lot of smaller projects and that gives us some diversification of geography, gives us diversification of there's contractor risk and there's tenant risk and lender risk. It just it spreads it all out. So just neither one is good or bad, but they're just different and you have to understand to be comfortable with that. And then when you when you when you find a fund that you think you're interested in, you want to obtain their offering documents and review those carefully so that you understand exactly what what the terms are. So an offering document typically be what's called a PPM or a private placement memorandum. That usually comes within operating agreement of the fundentity and describes the business plan. Describe it usually will include disclosures or any conflicts of interest, along with risks. A lot of that's driven by the sec they require that you make all those disclosures and it's a good thing for the investor to read through those and understand fully what's going on. It also should spell out the fees being charged by the fund managers and also the returns and how proceeds are distributed. Typically there's what's called a waterfall where there's a prioritization of how money's distributed. There might be a preferred return that goes to the outside investors, along with the return of capital, and then after that some kind of profit split. So it's important, how to how to understand how that's happening so that you can compare apples to apples when you look at different funds. And then there's, of course, minimum investment amounts that may be required and a lot of funds will be restricted to accredited investors only, and that's because of SEC rules. And what that means, just briefly, is that accredited investors are considered sophisticated financial individuals that have money that they can afford to lose. So the rules are restrictive to a lot of the population. Unfortunately. The reason for the rules is supposed to be to protect individuals who can't afford to lose their savings on a discretionary investment. That's the reason for it, but it ought ultimately keeps some investors on the sidelines. So it's good to understand that. Typically, an accreditable the most too common types of accredited investors are folks with a net worth greater than one million. After you exclude the primary residence or high income earners, which are defined as single tax payers with income over two hundred thou or joint tax payers with income combined income over three hundred thousand. And then certain people that have securities licenses, for example, or different licenses, are also considered accredited because they're educated on financial instruments, regardless of their net worth or their income. And then employees, of course, of the operators are also allowed to invest in the fund. So and then bigger institutions, and there's like a list of ten others that are considered accredited categories, but those are the most common. So that's a little bit about investments, selecting funds, and then I'll if you got a question, shoot Dalton. Otherwise I'll just cover some important deadlines or timelines and then we'll call it a day. Hey, Bey, up with the calendar or do we looking at all? Right? Well, so we're recording this in November. I think it's going to air sometime early December, so timely. We wanted to get it in because your end is always a big for tax considerations. So if anyone has capital gains in two thousand and twenty one, they want to consider getting their investment in by the end of the year for a couple reasons. I don't know that we talked about a specifically, but when you sell something and incur a gain, you have a hundred and eighty days to invest into an opportunity zone fund. And then if your asset sale or your gain is within an entity that passes through to you. That can actually buy you some additional time. So if you sold something today, you don't have to invest it by the end of the year. You have a hundred eighty days or maybe even longer if it's in an entity. But there's some incentives to invested by the end of the year, the first being you get that extra benefit of the ten percent discount on your tax once you pay it after the deferral. The other benefit is locally, at least in Ohio. If you get it in by the end of the year, you qualify for the next round...

...of tax credits. That our process in the spring and can be applied instantly or sold for cash to to your next tax return. So your ends always important. Also, if you're thinking about realizing a gain, you want to do it before your taxi your ends, and then to play that money within a hundred eighty days. So you might want to think about selling something before the end of the year. So that's your end to see what else we have. The deferral date. So the timeline for deferral. We mentioned the end of two thousand and twenty six, so that's important to know. In tact at the end of two thousand and twenty eight is when they're actually going to reevaluate what's an opportunity zone. So if the program was successful and some zones are doing great, they may remove the status and reallocated to other zones that aren't doing well. Important to note that the current zones get grandfathered in for the life of the program. So you if you have an investment in those zones and then they're no longer designated after two thousand and twenty eight, you don't get penalized, you don't have to sell them, you don't have to pay tax, you can still hold those you just can't buy anything new after that date in that zone if that designation's changed. And then way way out January first of two thousand and forty eight, that's when you have to sell your opportunity zone profit in order to get the tax free exit you can't. It's currently set to expire after that date. So you could conceivably hold an asset and fully depreciate it up until the end of two thousand and forty seven. And you know, who knows what the value would be in that time. It would probably be a lot more than it is today. You get a huge gain tax brief in you've can hold it all that year, but if you sold it the next year you'd have to pay tax. So that's something to be aware of to so that's it, I'd say. And next year, you know there's there's timeline is involved with your tax filings. So you claim your Oz investment on your tax return. So when you file your two thousand and twenty one return, whether you're in April file or partnerships file in March, or if you file an extension and you file later in the year, you want to just be aware that you want to consummate any O Z investments prior to file and your return so that that could be claimed on your tax return. And if you accidentally file before, you can always make your investment within a hundred and eighty eight period and then amenda return and get that credit later. A handful of dates, but pretty pretty straightforward, self explanatory. You are two for two, one hit wonder both times. We don't need to do any editing and just press upload on this one. Another lovable episode. Thanks for carving out some time to really dive into the nitty gritty of the opportunities one side of the fence. I think our first episode really good background on to you and I'm really glad that we have this follow up to dive into opportunity zones. I genuinely learned to ton and hope and know our listeners will as well. So thank you so much for joining a game, Chris. Yep, great too, great to be with the Adultin thanks for having me. And tax talk is not always the most exciting, but hopefully are the listeners picked up on some good nuggets here. But it may not be the most exciting, but everybody loves money, especially, I assume, if you're listening to this, podcasts, so very captive audience, I think, so important things with the old dollars and sense in the tax man so beautiful. Thank you for sharing your wealth and knowledge with us and I will see you out in Arizona at a conference in a couple weeks by friend. That's right. Thank you, Dalton. See you soon. Are you a real estate investor looking for the right lender that can finance all your deals and help you scale? Lima one capital has the best suite of loan products in the industry. Barnet. Whether that's fix and flips, fix and holds, built a new construction or buying rental properties, they have incredible financing solutions for it all. A reliable common since Linder is one of the most important parts of your investment team, and that's exactly what you get with Lima one. Let Lima one capital show you how they've helped thousands of real estate investor scale and increase their wealth. Check out Lima onecom or call eight hundred two five nine, zero five ninety five to speak with the consultant and preparation for your next project. Thank you for joining us today on the real estate of things podcast. Subscribe and tune in weekly for new content from the industry's best while we continue to unpack the nuances of this dynamic market. Follow US across social media for additional insights and analysis on the topics covered in each episode, and remember to rate, review and share the show.

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