OZ Pitch Day - March 23rd
Tips for Creating an Opportunity Zone Fund, with David Sillaman
Today’s guest is opportunity fund consultant David Sillaman, president and fund developer at Eazy Do It Opportunity Funds.
Approximately $6.2 trillion in capital gains is eligible for investment in opportunity zone funds, with the potential to create a huge change across America. Some estimates expect $150-$250 billion to flow into these funds between now and the end of tax season. And for investors, the tax benefits of opportunity zone investing can be quite lucrative — deferred money in; tax-free growth money out.
But creating an opportunity zone fund is not for the faint-hearted. That’s where David comes in. He’s an expert business consultant who knows how to sweat the details when it comes to creating a new opportunity zone fund. He has a ton of tips to share. And while the majority new OZ funds have so far focused on real estate, David sees promise in a variety of sectors — business, franchise investing, residential investing, biotech, cannabis, and solar, just to name a few.
Click the play button below to listen to these topics and more.
- How much money is expected to flow into opportunity zones? (Hint: over $6 trillion in unrecognized capital gains is eligible!)
- Tips for creating an opportunity zone fund, plus the 3 reasons why David prefers a corporate structure versus a partnership structure when creating opportunity zone funds.
- The documentation that all OZ funds should have before opening to investors
- The questions that investors should ask before investing in an OZ fund.
- Similarities and differences between 1031 exchanges vs. opportunity funds.
- How David expects the opportunity zone program to change over time.
- The benefits and dangers of self-certification.
Featured on This Episode
- Follow David on LinkedIn
- Eazy Do It
- Sikari Luxe Opportunity Funds
- Loyalty Opportunity Fund
- Home Affordable Modification Program (HAMP) on Wikipedia
- Home Affordable Refinance Program (HARP) on Wikipedia
- IRS REG-115420-18: Investing in Qualified Opportunity Funds
- ENTREX Capital Market
- Internal Revenue Code Section 1202
- OpportunityDb’s Opportunity Zone Fund Directory
Industry Spotlight: Eazy Do It
Virginia Beach-based Eazy Do It is a consulting firm that works with clients to develop structured turn-key opportunity fund solutions for businesses and real estate development projects. Contact Eazy Do It for a free 1-hour consultation.
Contact Eazy Do It
- Phone: (757) 797-6697
- Website: EazyDoIt.com
- Social Media: Twitter | Facebook | YouTube
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.
Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. And today I’m joined by an opportunity fund consultant. He is president and fund developer at Eazy Do It Opportunity Funds. David Sillaman, thanks for coming on the show.
David: Hey, Jimmy, thanks for having me.
Jimmy: Absolutely. So before we talk about Eazy Do It Opportunity Funds and get into the nitty-gritty, I wanted you to give me a brief overview about Opportunity Zones, and more importantly, what does the program mean to you and why is it so important?
David: Sure. So opportunity zones, they’re relatively new. We had some guidance that came out in April of this past year where the state governors, as part of the updates with the TCJA, the Tax Cuts and Jobs Act, the state governors and CEOs across all 50 states and Puerto Rico put together some census tracts, opportunity zones, to be specific. A lot of it was based off of the CDFA tracks already in place. And they looked for these areas that could be great for investment opportunities. And the IRS had structured this program that allows the self-certification of an opportunity fund.
And the idea behind it is to allow businesses to create an avenue for investor capital to be injected into those businesses to help those businesses grow in those areas. And obviously, as a result of the moment that lines were configured on maps and everything else like that and with the way the language is written and it kind of morphed from not just businesses but now also real estate and that’s a lot of what we’re kind of seeing in the market right now. But in general, the IRS estimates, you know, if this program would have been in existence last year there could have been up to $6.2 trillion potentially invested in opportunity funds.
The estimates this year, according to the assistant secretary of the Treasury Department, they’re estimating anywhere between, on a low end, $150 billion to $250 billion minimum flowing into opportunity funds between now and the end of tax season. I think it personally would be a lot more than that, but it’s a great opportunity to be able to really help inject capital into these low-income areas and to create community revitalization, to put people back to work, to create more jobs, to create stability, larger incomes, ultimately, more tax revenue over the long term for both the government and the municipalities. It will help increase property values. It will help create growth.
There’s gonna be a lot of great opportunity that if these opportunity funds, you know, morph the right way and they get applied the right way, I think will be a huge landscape change across America. They’re tax-deferred money in, they’re tax-free growth money out. So they’re a very, very lucrative investment. A lot of comparison actually even being more lucrative than a Roth or traditional IRA in a lot of cases. There’s some handcuffs to them as far as, you know, who, what, when, where, why, and how. So there’s guidance on, you know, the nature of deployment of the capital of these funds and everything. But all in all, it’s a beautiful mushrooming forest that is kind of happening right now.
And there’s a lot of people that are sitting on the sidelines. There’s a lot of people that are in the space already as it’s beginning to develop and grow. And a lot of major companies have stepped in big ways. And we’re just really kind of seeing it growing. I think it’s gonna have a huge impact all the way across America in every sector. I’m seeing it across, you know, not just real estate, I’m seeing it with businesses, with franchise investing, with real estate, residential investing, with biotech, with cannabis, with solar, with SkyTran-type transit systems. I mean, we’re seeing it across the board, just, you know, people are really looking at these is just a unique opportunity to grow a business, to keep America kind of going the route that it’s going.
Jimmy: I agree.It has huge potential to economically transform a lot of these most distressed areas in the country. And so the $6 trillion-plus figure you refer to, if I’m correct on that, I believe that is the amount of unrealized capital gains that are sitting in investors’ accounts and corporate accounts at the moment. Is that correct?
David: The $6.2 trillion is based off of an IRS release and then also from the “New York Law Journal.” And they had estimated that the total capital gains, you know, in America last year was approximately, give or take a little bit, $6.2 trillion. Out of that, approximately $4.2 trillion was individual taxpayer gains. And roughly $2 trillion of that would be corporate tax gains.
Jimmy: Right. Right. Obviously, that’s a huge source of capital. That would dwarf the amount of money that’s being invested under some different tax programs it’s being compared to such as the New Market Tax Credit Program, am I right?
David: Yeah. This will replace the New Market Tax Credit Program in the long run.
Jimmy: Right. Before we dive in any further, I wanted to stop briefly and talk about you. I know you have a lot of credentials as a consultant. You’ve set up 17 opportunity zones so far and counting. But I want you to go back to the beginning real quick and talk about you, David. What was the genesis of your passion? How’d you get into this profession?
David: Well, you know, I’ve been doing business consulting now for a number of years. Also, I come from a pastoral and law enforcement background as well. So you kind of mix a little bit of, you know, the toughness and the rigidness of the work ethic from, you know, working on your own as law enforcement officer to the understanding and the importance of team building and vision casting as a pastor, to understanding the importance of, you know, construct and finance and basically putting together and aligning the spine of any business, which is people, process, products.
And so, I’ve been doing consulting for a number of years now and I specialize in helping businesses grow from point A to point B. You know, I kind of come in, I do change management consulting, and then from there, we do private equity raises. So, you know, my background has been in the private equity race world with a background in taxation. As you know, my family is heavily involved in the tax space in the D.C./Northern Virginia area. Worked with taxes, you know, pretty much from the time I can remember. So I was able to kind of look at this being a tax bill and then with the structures of how the bill is written, it was very clear on how to set up funds.
And so I got hired on as a consultant for a company called Sikari Luxe and set up their opportunity funds. Sikari Luxe was the second open opportunity fund in the country. It’s one of a few opportunity funds that are, you know, a stock-based structure type fund. They’ve got great partnerships. You know, as a company, been able to set those relationships up and now we’ve just kind of morphed since May into this, you know, ability through Eazy Do It where we’ve set the right people in alignment and in the right systematic approach to where we build turnkey opportunity funds now, and we do it in 60 days, and it’s literally all-inclusive.
Jimmy: Yeah. So talk to me a little bit more about that. I know, you’ve set up 17 of these opportunity zone funds so far through Eazy Do It. And I know you’re doing something a little bit different with how you’re structuring these funds. So what goes into setting up an opportunity fund? And what are most fund managers missing?
David: Well, first of all, you know, yes, we do believe that a lot of people are missing the forest from the trees right now. There’s two ways that every opportunity fund is gonna be structured. It’s either gonna be structured as a C-corp or it’s gonna be structured as an LLC partnership. And although they’re similar, there’s differences between the two. A lot of people where we see that people are missing the forest from the trees is this program was never originally intended to spur the real estate market. As a matter of fact, we’re seeing artificially inflated prices right now where everybody that’s in these Opportunity Zones, they feel like, you know, their property is sitting on oil.
But it was always intended to help businesses grow in these opportunity zones as a way for businesses to put themselves out there and raise private equity. And so we look at it from that core approach, what was the underlying ideology around opportunity funds. And then when the guidance came out, it was very clear that, okay, you know, one road leads, you know, left and one road leads right, 90%, 95%, 98% of funds that we’re seeing in the marketplace right now, because of the fact that they’re real estate-related, it’s focused around LLCs because that’s the typical structure when you think real estate deals.
You got, you know, passthrough tax benefits as an LLC. Well, we looked at this and said, “Okay, let’s look at it from the corporate standpoint.” And so we structured ours as C-corps and we issue stock. And our approach solves a number of things. Number one, right out of the gate, it solves the investor exit strategy. Whereas that is a critical piece to the partnerships, the side of the structure of these opportunity finds. And the big differences is how does a partner exit in the event that, let’s say, that they’ve got some sort of life-changing event year three. And even though they had full intentions of holding it for the 10-year benefit, they’ve got an exit and get liquid by year 3.
Well, how do they do that? With the stock-based approach, the way that we’ve got set up, we’ve got a relationship set up with Entrex Capital Index Market where we’re listing the opportunity funds on the marketplace. It’s an SEC-regulated secondary private equity index market, and it’s an actively-traded marketplace. And an investor can invest into the opportunity fund as well as sell their position out of the opportunity fund by simply selling their stock. So it makes an easy exit strategy for an investor to get liquid.
Whereas in an LLC-based model, the investor either has to sell his position to another investor that’s willing to kind of assume his spot in the partnership, and that’s gonna take, you know, the operating agreement to allow that to happen on the partners or the partners are gonna have to come up with the capital. And if the capital is not capital from gains, then it creates a negative tax event for the partners. Or if the partners aren’t liquid to be able to put the capital in to buy out the other partner that’s looking to exit, then they’re gonna have to do something with whatever the investment is, whether it’s a leverage or whether it’s a liquidation.
And that looks like, in a partnership, that it could be a significant amount of time for a partner to exit when they may have something going on and they need that liquidity. And that’s where we looked at it from a stock-based approach. It allows us ultimately in the future to potentially look at, you know, going opportunity funds to ETFs, to REITS, to going public, plus the valuation models on stocks versus real estate are slightly different. And so, you know, that’s our approach.
And doing that gives the investors also, let’s say, a fiduciary blanket to be able to go to in the event of, you know, fraud or anything like that. They’ve got the SEC to go to because any opportunity fund that is actually open and saying, “Hey, you know, any investor out there who wants to…you know, we’re open to these investments, they’re gonna fall. It doesn’t matter whether it’s a corporation or whether it’s an LLC, they’re both gonna have some sort of SEC reg offering.
And, you know, we looked at the path of least resistance and it allowed us to enter funds into the market space versus waiting on the sidelines, the way that a lot of opportunity funds have, and it allowed us to be able to kind of come in, create the relationships, create these amazing Opportunity Funds, and they get them listed and get them out there. And our funds are already getting investor capital coming in.
Jimmy: That’s great. That’s a lot to unpack there. You obviously advocate for a corporate structure. There’s a lot of benefits to it. The main one being the liquidity that it provides. Why are so many funds set up as partnerships, though? Is it just inertia? Is that just the way it’s always been done it? And are there any drawbacks to setting up under a corporate structure as opposed to a partnership?
David: Okay, so both structures have their drawbacks and benefits, okay? When you look at most businesses, let’s use somebody like an Uber, for example, a business, okay? The reason why businesses are set up as corporations is to be able to allow multiple investor rounds, to be able to help the business grow, and then ultimately, to put the business in a position at some later date and time do like what Facebook did and go public or to do something to where they stay private and maybe they go into a marketplace the way that overstock.com did by going from an IPO to a blockchain event, and then creating an outlet to exit their stock.
You know, so they both are gonna have their benefits and their drawbacks. The LLC place right now is…right now the emphasis is on the real estate play. Everybody is looking at this from, you know, what’s the next hotel, what’s the next condo, what’s the next resort, or whatever the development construction is gonna be to go on it in the way of real estate. And although that has its place and its benefit, at some point in time, the marketplace becomes saturated where you’ve got more than enough deals and more than of construction going on. But you still have this yearly wave of opportunity fund investors rolling money into opportunity funds, and it’s gonna have to grow that into the business.
So what we think is gonna happen is that, you know, a lot of these are starting off as LLCs. We’re gonna see probably in the next 24 to 36 months, you’ll see the corporate side of this stuff also grow as more attention starts to get put on the businesses in these Opportunity Zones. The benefits of the LLC is that, you know, you’ve got tradeoffs from a taxation standpoint, you know, you’ve got a lower tax rate for an LLC, you’ve got passthrough benefits, depreciation benefits. You get a number of benefits that from a real estate standpoint, you know, from the individual investor, helps them.
Whereas a corporation is gonna pay its corporate taxes and then the investor themselves are gonna turn around and pay some sort of tax as well. Let’s say it could be subject to tax as well. And the corporate is gonna pay at a higher tax bracket. Now, what you’ve got to be able to look at is say, “Okay, what is today, what is 5 years from now, and what is 10 years from now are gonna look like in this fund?” You can’t just be focused on, oh, you know, because there’s a mad rush of money and you’ve got a lopsided supply and demand yield curve right now in the marketplace, “Oh, we just gonna focus on the here and now.”
We look at it and said that, “Okay, when you when you take these benefits and you look at the corporation structure, a lot of the TCJA was written and structured and designed to benefit corporations. You know, we saw the corporate tax cut also go into effect. And we’re still seeing a lot of other benefits that are still rolling out. There’s more bills in front of Congress, so this isn’t done. And when you put everything in the context with our president, love him or hate him, this isn’t being political but just context and understanding, you know, background is king. I used to preach that from the pulpit that you got to understand the context around something. Look at his background.
You know, he’s a business guy. He’s a corporation guy. He’s a real estate guy. This all makes sense, you know, and we took the intended structure. It gave him more straight line to walk. There’s tax tradeoffs both ways, but, you know, it’s really just kind of dependent upon what the vision is. The vision is gonna be a big thing on these funds moving forward. And the visions that we create for the funds are looking at can we create a buyout opportunity for the fund in of itself? Can we create investor liquidity easier? Yes, we realize there’s tax, you know, potential double taxation stuff. But as a C-corp, does it open up to the tradeoffs outweigh? And in our mind, the answer is yes.
Jimmy: No, that’s a good thing to think about when you’re setting up a fund. And it’s worth noting, as you mentioned, that the gap has narrowed considerably between, you know, an LLC structure versus corporate taxes due to some of the provisions in the Tax Cuts and Jobs Act that was passed last year. It seems like it’s kind of like the Wild West out there right now setting up these opportunity zone funds. I know there’s a lot of funds that are getting started and it’s kind of hard to tell sometimes which ones are real and which ones may not be doing things quite the right way. What are some of these funds missing in terms of documentation? And what’s the right way to go about setting up an opportunity zone fund? What are some of the things you need to have?
David: That’s the million-dollar question. And a lot of people are kind of scratching their heads on right now saying, “I want to into this space. How do I set it up right?” The updated guidance that came out a couple weeks ago, two weeks ago from the IRS, the 70-page update, really kind of stressed the importance of certain documentation. Any opportunity fund that is…the easiest way to look at opportunity funds, first of all, from a setup standpoint is remove the title opportunity fund from it for a second, okay? That’s just a pretty red little ribbon that’s around the package.
At the end of the day, it’s still business. That’s the first and foremost. So anybody who’s looking at setting up an opportunity fund has to think about, “Okay, I’m setting up a business.” Now with that then comes, you know, documentation such as PPMs. Operating agreements, if it is a partnership. If it’s a corporation, bylaws, articles, charters, constitutions, things like that. All of that should be included. Financial statements, estimates, forecasts, community impact statements, you know, project impact statements. Let me give you an example of what I mean by project impact statements.
How many jobs is a project gonna create? How long is it gonna take? What’s the potential revenue coming into the county? Will it meet the 31-month timeline? Does it meet the proper capitalization from original use compared to substantial improvement? So, you know, all of that is stuff that is gonna be required documentation, you know, for these things, including construction timelines on these projects that are real estate related. So anybody who is looking at setting up an opportunity fund, you got to understand it’s not just saying, “Hey, we’re an open opportunity fund and invest in us.”
And I’ve come across a lot of those type of funds. A lot of people looked at that “self-certification” and took it one way and posture and position themselves. And that’s what we don’t wanna see in the market space. We wanna see these things done right. Any investor should be able to look at a private placement memorandum.
Jimmy: Right. Just because it’s a self-certification doesn’t mean that you can get away with having zero documentation. And if you’re an investor, you should probably demand documentation anyway, right?
Jimmy: That just seems like it’s common sense.
David: You would, but you’ve got a very lopsided supply and demand yield curve right now in the marketplace. You’ve got a very, very heavy demand and not enough supply to meet that demand. And so as a fund just kind of pops up, you’ve got demand that’s like, “Oh, let me just…” you know, wanna throw money at it. And the demand that’s out there right now, a lot of the thought processes is that, “Okay, this is a long-term investment.” So they’re investing and not really thinking about it for 10 years. And that’s the wrong mentality to be looking at with these.
Jimmy: Yes. So that’s interesting. Obviously, the sizzle of the tax benefit is very impressive when you’re looking at any of these funds. I mean, just seeing the tax benefits that the program grants to these funds. But what about the fundamentals of the underlying investment? I mean, obviously, that is what investors of these funds should be looking at. What exactly should they be looking at? Or what should they be wary of, investors, when they’re looking at opportunity zone funds?
David: Well, I think, number one, hit the nail on the head. It is about the underlying investment that the fund is gonna be making. First of all, you know, common sense would dictate has the fund actually done the due diligence to ensure that the property is actually an OZ-eligible investment? I think that would be, you know, just right off the get-go.
Jimmy: Yeah, that’s probably step zero, right?
David: Step zero. But, you know, where’s the project at in a timeline? Some projects, you know, are just simply been identified and there’s no real timeline on it. And then when you start figuring timelines and you look at the 31-month deployment without, you know, taking a penalty, you know, some of these projects might not actually be able to get done in that time frame. That is something that, as an investor, I think I would wanna know. I think I wanna know if it’s property-related, you know, what is the IRR on the individual investments?
And then if it’s a stock-related fund, the way that ours is, what does the DCF look like? What does the VC evaluation model look like? If it’s a multiplier, what would the estimated future cash look like? Those are type of things I wanna know. I wanna know who the team is. What’s the background on the team? With the fact that everybody and their brother can self-certify, technically speaking, you’re gonna have a lot of unknown teams. So, you know, fund credibility, how about this, how is the fund actually being managed? The fund administration, investor relations, am I relying on the company to do it or is it being professionally third-party managed?
Is it being third-party audited? Do I know that the banking and the structures, is their, you know, investor due diligence being done the right way? Those are all things. You know, stock-related funds like ours, you know, both our funds go through multiple due diligence processes to not only get listed with NES but through Entrex and then through other partners as well. When they’re looking at deciding whether to partner with the fund, who’s connected to it? Are there legal firms, tax firms associated with it? Those are the type of details that as a fund investor that I would really wanna know and look at and be able to have, you know, my team or whoever do due diligence and analyze on.
Jimmy: And, again, if you’re an opportunity zone fund taking this seriously, you would have all of this documented in a PPM or in your financial documents. So that’s always good to look for. Who is investing in these zones right now? Are these primarily large institutional investors or real estate developers? High net worth individuals? Family offices? What’s the breakdown exactly? Who is the target capital base for these funds?
David: Yeah, it’s all of the above. You know, what we’re seeing is, you know, a lot of very high net worth individual investors. We’re starting to see more institutional interest. And what I mean by that is like, you know, mutual funds, 401(k) pension plans, those type of things. Because of the nature of, you know, these Opportunity Zone Funds being a long-term growth fund, they’re getting a lot of interest and inquiries. We’re seeing a lot of family, you know, interest in it right now.
We’re seeing broker-dealer interest in the form that these are being looked at as alternative investment vehicles right now. You know, it’s really just a very equally-yoked blend of interest. I’ll tell you a very, very surprising little tidbit that we’ve actually have noticed trending with Sikari Luxe, one of our first opportunity funds that we had set up, that our demographic, the age makeup of our demographic is predominantly between 25 and 35.
Jimmy: So it’s skewing much younger then than most might think?
David: Younger than actually anticipated. And I think a lot of that has to do also with there’s a lot of new young money in the market, a lot of new young money in the market that I don’t think is really fully being looked at. You have a lot of people that exited the crypto at the right time. You have a lot of new money in the market that’s, you know, reinvested in other areas that have created gains and it’s young money. I mean, we’re still seeing that 35 to 56 age range as being our second area of demographic, which would be to be expected, but it was definitely neat to see that our primary was between the ages of 25 and 35.
Jimmy: That’s very interesting. You can speak to your client specifically or the industry in general. I’m just curious how are fund managers marketing their funds and how are they raising the money basically and who are they going after?
David: That’s a great question because technically speaking, the fund marketing, that’s a fine line. The structure of the fund and the nature of the offering as far as marketing saying, “Hey, we’re an open fund accepting outside investment money,” a reg C offering allows you to market, a reg D offering doesn’t. So that’s really where the PPM is important because a lot of funds might just say, “Hey, we’re gonna buy Google ad space. We’re going to do this. We’re gonna do that.” Then you read the documentation in the PPM and technically, legally, they’re not supposed to be doing what they’re doing.
Jimmy: Right. Okay, so shifting gears a little bit now, I know the IRS released their initial guidelines last month. Were there any surprises from that publication on your end or anything that you liked seeing?
David: Yeah, there’s actually a few things that I think that was surprising and a few things I think were planned. One of the ones that I that we were all kind of anticipating and the expectation was that 180-day fund spend rule, you know, has been extended to 31 months via safe harbor and proper written plans and schedules. So that’s where the documentation now is critical from that fund development standpoint. One of the things that I thought was very surprising, especially considering that there’s actually a bill in front of Congress…Now with the changes in the election and, you know, yet to be determined if it’s gonna make it through now.
But it was interesting in that they updated the timeframe that you have to invest into an opportunity fund has been extended to June of 2037. So, you know, that means that, you know, you can have…this is gonna now be a yearly wave of opportunity fund money. So that was surprising. It was definitely good to see a lot of examples related to original use, a lot of examples related to substantial improvements to LLC-related questions. There’s still some, you know…and then they also defined exactly what was, you know, capital gains, who qualified for capital gains. It was nice to see that they also counted corporate capital gains in that as well.
So companies like Apple and things like that, even though the corporate capital gains only makes up, you know, approximately $2 trillion out of the $6.2 trillion, it’s still nice to be able to see that in there. But overall, I mean, it was pretty much what was needed. Obviously, they still have their 60-day waiting period on that. So we’re probably gonna see more definitive guidance come out in December. And then we’ll probably see another wave of guidance come out. I’m gonna anticipate probably towards middle late end of next year once they’ve had an opportunity to kind of let the dust kind of settle a little bit and see how this program is gonna settle in.
Historically speaking, you know, if we look back to the Reagan tax cuts, it took the IRS about three years to get that program, you know, fully kind of ironed out. If you fast forward from right into Bush, Obama under the HAMP Heart Program, the same type of thing. That program took about two-and-a-half years before changes really were in play. And when those changes happened, a lot of it caused a lot of players to get out of that space. But there’s a history. Same thing with new market tax credits. So there’s a history where we get one set of guidance that comes out. The very first set was extremely appealing yet a lot of gray area with a lot of questions. Second set, 70 pages is a huge update. You know, it’s a lot of read, a lot of material to go through, but we’ll see more guidance come out along the way.
Jimmy: Right. And what are some of the biggest questions that the IRS has still not answered that you would expect to see in the next release at the end of the year?
David: I think we’re just gonna see some a little bit more clarification towards the LLC structure side of stuff and more related towards tax-related that is normal tax stuff that applies along with some additional…I think we’re gonna see additional updates regarding stacking of these benefits.
Jimmy: Gotcha. I actually wanna talk with you about tax credit stacking. I know that’s something you have your eye on. And I know that you’re attempting to stack a lot of different tax benefits for the funds that you’re setting up. So what credits are you going after in addition to just the opportunity zone tax benefits? And what type of impact does that have for the investors when their taxes come due?
David: I’ll tell you the biggest tax benefit that I see that I don’t feel like is getting any real attention is the updates to section 1202 in the TCJA. The biggest benefit around opportunity funds, the investor gets the step-up the fair market value at time of sale so long as they’ve held it for 10 years or more, effectively making the gains on the investment tax-free at 10 years.
1202 cuts that timeline in half and does it in five years. And, you know, so when we set up funds like this Sikari funds, for example, in Tampa, you’re looking at stacking not only section 1202 on top of historic tax credits, on top of opportunity zone tax benefits to the investors. And our strategy is to create…have a market space where our investors can exit at five years through Entrex and take the 1202 benefit and cut our timeline in half for our investors.
Jimmy: Could you dive into that a little bit more? And I’m not sure all of our listeners are familiar with section 1202. Can you go over the basic details?
David: Section 1202 deals with hospitality, okay? So for those Opportunity Zone Funds that are in that hospitality, that type of space, if the investment from the opportunity fund into whatever that…let’s say, in Sikari’s case, the hotel. If the investment is structured as a C-corp investment, it falls under a 1202 tax rule, okay? As such, it states that that investment made, if held for five years, any gains on that investment beyond five years are tax-free gains, which means that our investors were using…they’re deferring the money by investing into an opportunity fund, which is a C-corp, which is then connected with Entrex so now you’ve got that marketplace to buy and sell.
And then our fund looks for projects. So I’ll use an example. Let’s say that our Tampa project, let’s say, it’s a $5 million buy. Let’s say we get a $2 million historic tax credit, effectively putting our basis at $3 million for that. And then we turn around and because its hospitality, it’s a hotel, we make it as a hospitality 1202 investment from the fund. And now our fund investors, they get that benefit of the five-year mark.
Jimmy: Instead of the 10-year mark.
David: Instead of having to wait the full 10 years.
Jimmy: Right. So that’s a huge impact, obviously. It shortens that time horizon considerably. Are you doing anything, stacking the New Market Tax Credit Program on top of opportunity zones?
David: I know that I’ve got clients that are, yes. Same with employment tax credits as well.
Jimmy: Okay. So how does an Opportunity Zone investment compare to a 1031 exchange? I’ve seen lots of comparisons between these two programs. I know that the biggest difference, obviously, maybe that the benefit of a 1031 exchange only really kicks in when you die. Could you discuss some of the similarities and differences between these two programs?
David: Definitely, definitely. And you are right, the biggest benefit for 1031 is that it doesn’t kick in your life, it kicks in whoever inherits the property’s life for a step-up and basis at time of death. In this particular case, the biggest differences with the way the opportunity funds work, as you can do a rollover from a 1031 exchange into an opportunity fund, you defer the gain, you keep the principal. The principal, it becomes liquid to you the investor. There is depreciation recapture that has to be considered when looking at the tax on that. But there’s a huge market shift where we think that a lot of the 1031 exchanges are gonna flow more into opportunity funds.
Jimmy: And why is that?
David: Just because of the fact that, number one, you know, you’re not paying a 1031 intermediary fee. You’ve got more flexibility with access to your principal where that’s not locked up. You’ve got your tax-free gains, which effectively alleviates the need for the step-up in basis at time of death, so you can actually capitalize on that while you’re still alive. So there’s a lot of stark benefits to the opportunity fund versus the 1031s.
Jimmy: Right now, and I know that 1031 are pretty much solely for real estate investment. They have to be like-kind exchanges and I know that the opportunity zones and the funds that have been created so far and a lot of the buzz has been focused on real estate investment. But what about business? It seems to me like the best use case for Opportunity Zone investing is reaping large capital gains and I think that’s more likely gonna come from startup ventures than real estate development. Am I right there in saying that? And how are you guys focused on business as opposed to real estate with some of your clients?
David: Well, we’ve got one client in particular that really is, I think, gonna be probably one of the bigger shining stars in the business sector right now. That’s called the Loyalty Opportunity Fund. It officially launches on November 15th. That fund is focused on investing in franchises, in opportunity zones franchises, and also developing the loyalty brand franchise model as well. The nice thing about this particular fund that really kinda, I think, sets it apart and being that shining star, that beacon of example, is that in this particular case there’s a 50-year track record of proven franchise history with this particular fund. Probably the single biggest recognized name in taxes as well.
The fund is spearheaded by John Hewitt, probably one of the most recognizable names between Jackson Hewitt and Liberty Tax. Him and Gordon Jackson, they co-founded Jackson Hewitt. Went public, sold it. He started Liberty Tax, exited that, and now is in the opportunity fund space and has an amazingly strong team of experts that have just strong, strong, strong history in the franchise and the business space. And, you know, that’s an $80 million fund. You know, you talk about an opportunity that’s unique, it’s the only opportunity fund that I’m aware of that’s actually focused on businesses and these opportunity zones.
Right now, like we’ve kinda talked to about, you know, we’ve said it, I’ve said it, and I’ll continue to say it until the cows come home, I think that a lot of people right now are missing the forest from the trees in the grand scheme of things. Yeah, there’s a hot market, commodity market on the real estate play just because of the fact that it’s easy and, you know, that’s the first access that people are thinking when looking at this. Long term, like we talked about earlier, you know, I do think that there will be that that 24 to 36 months from now, maybe even a little sooner than that, I think that a lot of the marketplace shift will then focus towards looking at businesses in opportunity zones and finding good deals.
Entrex, I think, will be a good starting point for a lot of that as well as, as that private equity index market, we’ve got 4000 businesses on there already. So, you know, they’re already working with the states developing out there. Their platform for these opportunity funds while at the same time identifying quality businesses that are in zone areas that are looking for investors and making that connection between the investors and the businesses. That’s what we see. And I think that as we grow, I think, you know, we were to look out and guesstimate five years from now, I think it’ll probably be a pretty healthy blend moving forward.
Jimmy: Yes. How else do you expect the program to change over time?
David: Well, a lot of my opinion is centered around this ideology of self-certification. I love it and hate it at the same time. I love it because it really allows and opens up anybody to be able to set up an opportunity fund. But the reality of it is that anybody who is a partnership or a corporation, nothing stops them from raising private equity now. The only thing that makes this a little easier from a private equity base for both partnerships and corporations is the fact that there’s this tax benefit that makes it enticing for investors to now want to invest in those type of businesses versus investing in ETFs, REITs, or in the marketplace or someplace else. So I love that aspect of it.
I hate it because of the fact that I’m fearful that because it is so loose that there’s room for bad actors to come into the marketplace and set something up that really looks and feels like it might be legitimate but really not be upon putting it under a microscope. And my fear and concern is that when we saw the changes with the HAMP Heart Program, that was that home loan modification program, and I realize that this isn’t that. But I think that what we saw happen with that with a lot of bad actors that charge people fees upfront and then they ended up not doing anything, it changed ultimately about 24 months into the program. It changed and put a lot of people out of business.
When you look at the reporting requirements, the self-certification, the ideology that the IRS combined with the Department of Treasury, you know, it’s gonna somehow record, manage, keep track of what investments are zone investments, what funds are legitimate funds, what funds have documentation, it’s an immense amount of reporting that goes into that. I think that the idea of self-certification will change over time to where I think it’ll be a more structured form of certification, not just a tax form but that maybe a tax form with accompanying A through Z to validate and verify that you are legitimate fund. I can see that happening. I can see them, you know, very well potentially, if this works out well because of how wide-reaching that this can be, not just from real estate but from hospitals to schools, to tech, to manufacturing, to A to Z, this can be widespread. If this goes well, I could actually see this being extended well beyond 2037, 2047.
Jimmy: That’s great. Shifting gears a little bit now. I actually wanna look at this program from an investor’s point of view just for a minute, just a regular investor. Let’s say individual investor reads an article in the “Wall Street Journal” about opportunity zones, sees a segment on CNBC about opportunity zones, he goes ahead and sells his Facebook stock or house or whatever, realizes a gain. But what’s his next step? How does he invest in opportunity zones? How does he find a fund to invest in? What are his options?
David: That’s a great question. So, you know, a lot of those type of investors, right now there’s few real marketplaces for funds. Our anticipation is that by the end of the month, one of the very first places that he could go to is go to Entrex, E-N-T-R-E-X. You can Google that and get on there and take a look at funds and create an account and go through that process and invest in those funds that are there. There’s a number of places that have fund directories lists. Novogradac’s got one. The National Council for State Housing agencies has one. Opportunity-funds.com has one. The National REIA has one.
So there’s a lot of places that are setting up these fund directories. Hopefully here pretty soon, you’ll start to see more funds that start to kinda get into that alt investment space with broker-dealers. And so they very well may be able to just go right through whoever they’re doing investments with now and say, “I wanna invest in opportunity funds.” The other thing that they can do also is they can just simply google. A lot of these opportunity funds, just by sheer nature and design of them not being publicly traded and being private, they set up, you know, their own web pages, they set up their own processes, systems, things like that where you can kind of request more information.
You can just google “opportunity funds now open, opportunity funds, you know, now accepting investors, opportunity funds open to investors,” you know, stuff like that. You know, for a list of opportunity funds that we’ve gone through Eazy Do It, they can visit our website, eazydoit.com, and that’s eazydoit.com. If they wanna find the Sikari funds, they can do it two ways. They can just go to Sikari, sikariluxe.com or just google the word “qualified opportunity funds,” we’re page one on Google. So it’s very easy to kinda see but they’re out there. Right now my advice would be most investors are probably gonna have to do a little digging.
Jimmy: Yeah they’re not all out there out in the open.
David: There’s not, and the ones that are open, you know, there’s really roughly 18, maybe 20 funds now that are legitimately “open” to the point to where an investor can actually invest. You have a lot of funds that have made announcements. A lot of press releases. A lot, a lot of that. But legitimate funds that are investor-ready where that investor’s on that 180-day time clock now…
Jimmy: And have the right documentation that you’re looking for that we discussed earlier.
Jimmy: Right. But you forgot one resource though, Dave, and you forgot OpportunityDb.com. We also have a list of…
David: Absolutely. Absolutely. OpportunityDb… You guys, you know, considering your history and your background and what you’ve done in the past with other directory-based sites in the funding spaces. I have no doubt that that OpportunityDb is gonna be an absolute go-to resource.
Jimmy: Well, thanks for that, Dave. I appreciate it. So, hey, thank you for joining me today, Dave. For our listeners out there, please check out this guy’s website, Dave Sillaman. He’s got a lot of great resources, eazydoit.com, with a Z. And for more, you can check out the show notes on OpportunityDb.com. I’m gonna have links to all of the resources that we discussed on today’s show. So again, OpportunityDb.com/podcast, and you’ll find the show notes for today’s show. Dave, again, thanks for joining me.
David: Jimmy, I gotta say thank you. It’s a real pleasure. I love what you’re doing in this space. I love how you’ve got your website laid out. I went through it with great detail. Extremely impressed with the amount of content that you’ve already produced on the subject matter. And it’s been an honor and a privilege. I wanna say thank you to anybody that’s listening. And, again, just thank you to you.
Jimmy: Oh thank you, Dave. I appreciate the kind words.