DJ Van Keuren: Opportunity Zone Investing for Family Offices

DJ Van Keuren

Family offices and high net worth individuals: if you have questions about investing in opportunity zones, this is the episode for you. Joining me is DJ Van Keuren — a top 10 U.S. family office real estate professional.

DJ literally wrote the book on family office real estate investing. He is also a member of the Forbes Real Estate Council, founder of the Family Office Real Estate Institute, and vice president of family office capital for the Hayman Family Office.

Click the play button below to listen as DJ and I discuss how family offices can take advantage of the opportunity zone tax incentive.

Episode Highlights

  • How much real estate investing family offices are doing, and what DJ expects in 2019.
  • How the opportunity zone program may (or may not) be beneficial for family offices.
  • Why it may be wise to wait for the final IRS regulations to be published before diving into opportunity zone investing.
  • Why DJ expects the OZ program to drive a lot of capital in the upcoming year.
  • What family office opportunity zone investing will look like in practice — why some funds may be driven by the offices themselves, whereas others will be sponsored by third-party operators.
  • What to look for in opportunity zone investment operators — and why experience in OZ geographies is essential.
  • Real-life examples of opportunity zone geographies that may be well suited for investment, and other factors to consider.
  • What you want to look for and be aware of before investing in opportunity zones, and why market demand analysis is a must-have.
  • Pros and cons of an opportunity zone investment vis a vis a 1031 exchange.

Featured on This Episode

Industry Spotlight: Family Office Real Estate Magazine

For decades, family offices have been investing in real estate. Family Office Real Estate Magazine is meant to be the definitive guide to the diverse challenges of real estate investing for family offices. Published quarterly, each issue equips family offices with the critical information they require to expand their understanding and grow their real estate investments. In each issue, you will find information on the latest real estate investing trends, markets, tax strategies, partnerships, joint ventures and market cycles.

Learn More About Family Office Real Estate Magazine

About the Opportunity Zones Podcast

Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.

Show Transcript

Jimmy Atkinson: Welcome to the Opportunity Zones Podcast. I’m your host Jimmy Atkinson. The Opportunity Zone Incentive offers a unique opportunity for high-net worth individuals and family offices who may be sitting on a lot of capital gains. But should you or your family office invest in Opportunity Zones and what deals are worth pursuing? Joining me today on the podcast is family office real-estate professional DJ Van Keuren.

DJ is a member of the Forbes real estate counsel and founder of The Family Office Real Estate Institute. And, for the last year and a half, he has served as Vice President for the Hayman Family Office. He is also the author of “Real Estate Investing for Family Offices.” DJ, thank you for joining me today. Welcome to the podcast. –

DJ Van Keuren: Thanks for having me, Jimmy.

Jimmy: Absolutely. So today’s episode is really going to be geared toward high-net-worth individuals, and family offices in particular, who may have questions about investing in Opportunity Zones. So DJ, you are the family office real-estate expert and you literally wrote the book on this very topic. So, to start the show off, I’d like you to give us a view of the big picture.

How much real-estate investing or family offices doing, what has 2018 looked like, and what are you expecting in 2019?

DJ: Well, the average allocation of real estate for a family, in the U.S., is about 10.8%, globally, it’s about 18%. And so, it makes up, you know, a good portion of family offices allocation of their investments. And quite a number of families had actually created their wealth through real estate or created their second area of wealth creation through real estate.

So it plays a pretty significant role in that of families, and also in the last year, year and a half, because families haven’t been able to get yield at banks or by buying other types of investments. They’ve actually used real estate in order to generate cash flow.

Jimmy: Very good. So, as I mentioned in the intro, you’re the vice president for the Hayman Family office. Can you give me the background story of the Hayman family and how they made their wealth? And give me a little bit more information about you and how you became the lead of their family office.

DJ: Sure. So Hayman Family Office is a Beverly Hills family, and they actually had two areas of wealth creation. The first was with Giorgio Perfume, and Giorgio Perfume was the number one fragrance in the 80s, and they had actually built a global brand and sold that to Avon, in 1986, for about 165 million.

After about a year, one of their sons, so I presently work for, realized that he was going to take over the family business so him, and a few other people, invested $40,000 into a teeth-whitening product. And he grew that business to 200-million a year in revenues in 100 countries and sold that out to Philips in 2011.

It was shortly after that that he really started to take a look at real estate and developing the family’s real-estate portfolio above and beyond any of the legacy assets that they currently own. And that’s really how I came about working for the Hayman Family. Prior to working for the Haymans, I actually worked for a family office out of Boulder, Colorado, for quite a number of years.

And I was head hunted to come aboard, to work with the Haymans, and so, we’ve been really focused primarily on the real-estate portfolio, expanding the current assets that they own, and, you know, disposing of certain assets that they have as well. And so, that’s really been the focus, and we’re actually in the process of developing an office brand, boutique brand, which would be the first in the country under the name VIBE.

Jimmy: VIBE. Very good. Yeah, the Hayman’s family story sounds like a pretty interesting one. Just the fact that they had two different generations have large exits like that, that must be pretty rare to see that in your field.

DJ: Yeah, it is. You know, you’ll see some families that’ll have multiple exits maybe under the same patriarch or matriarch, but to see, you know, another family member, or a generational family member, create a significant amount of wealth themselves…it doesn’t happen very often. And, you know, so that says quite a bit for my current principal who’s the first generation.

Jimmy: Very good. That’s a neat story. Well this is The Opportunity Zones podcast so I want to shift gears and dive into Opportunity Zones here. So my regular listeners already have a pretty good understanding of the opportunity-zone tax incentives but I’m expecting that this episode is likely being listened to by a lot of family offices who may just be beginning to learn about the program.

So, for them, could you give a brief explanation of how the opportunity-zone program works and why it might make sense, or maybe it doesn’t make sense right now, for family offices with real-estate investing experience?

DJ: Sure. Well, it’s also for families that don’t have real-estate experience as well, which I’ll explain to you here in a minute, but basically what happened, toward the end of last year, there was an incentive and a program that was put together, that got pushed through Congress, and was called The Opportunity Zone.

And this was made up of 8,700 different areas, throughout the country, that were actually picked, hand-picked by the local people that are in charge of those areas. And the objective was to try to take some of these areas that were maybe a little depressed or, you know, up-and-coming, or they’re hoping to have them up-and-coming, to really add to the economic benefits of that area.

And so, for that to happen they came up with the opportunity zones fund which, from 50,000-foot view, it allows you to sell an asset of some sort, whether that’s a piece of real estate, whether that’s to sell a stock, to sell a company. And rather than pay capital gains on that sale, you can actually roll all of your games, as an investment, into an opportunity within one of these opportunities zones.

So let’s say that you had $3 million that you had coming back that were profit and let’s say you had to pay a million dollars worth of capital gains. Well, instead of only being able to invest 2 million into the opportunity-zone investment, you can actually invest a full $3 million. So, in a sense, you really use Uncle Sam’s dollars in order to benefit from that.

And if you hold that for 10 years, any additional gains that’d you have on that investment would be tax-free. So that really provides quite an incentive for families and high-net-worth individuals to take some money off the table, per se, in some of their other investments and invest that into an opportunity zone, whether it’s in real estate, private equity, or say you started a manufacturing facility.

So it is really something that can truly allow families and high-net-worth to benefit.

Jimmy: Yeah, I think the program offers a fantastic tax benefit. It’s tax-deferred money going in, and it’s tax-free growth when you’re exiting. And it really does have the power to possibly transform the country, if it’s deployed the right way. There’s no limits as to how big the program can go. So we’ll have to wait and see what it looks like, over the coming years and decades to come.

But it has a lot of potential, that’s for sure. So DJ, is Hayman Properties considering investing in Opportunity Zones right now or are you guys still in wait-and-see mode? Where are you guys at in the process?

DJ: Well, there have been a couple different regulations, stages of regulations, that come out. However, we still don’t have all the final regs, and that’s supposed to be coming in the first quarter of next year. So, you know, we’re being cautiously optimistic, I guess you can say, we’re waiting for the dust to settle because we want to make sure that we understand all the specifics of the opportunity-zone investments.

And, you know, although a lot of that is already flushed out, there’s still quite a bit of questions that actually have to be answered. And when you talk to people that have dove into this information and are quite knowledgeable, you still hear some different viewpoints or different levels of understanding.

So because of that, we’re in a wait-and-see mode, you know, until all the final regulations come out.

Jimmy: Very good, that’s probably a wise thing to do. I know a lot of people are in wait-and-see mode all over the country still, still waiting to hear some more from the IRS. I’ll ask you a little bit more about that later, but first, I want to ask you about what you’re hearing from other colleagues. You’re a leader in the family-office industry, I know you speak at a lot of conferences and you have different media properties.

How much interest have you heard from other family offices in this opportunity-zone program? What have you been hearing from your other colleagues and how have you been advising them to proceed?

DJ: Well, you know, as a whole, there’s been a tremendous amount of interest from family offices. And, in fact, there are some, you know, opportunity-zone funds that have started to market and they’ve had quite a bit of interest from family offices as well. You know, so I think it’s going to be something that you will see quite a bit of money flowing to, and one of the main reasons is because one of the biggest issues that families have to deal with is from a tax perspective.

So if they’re able to shield some of their taxes or, in this case, actually, you know, have some DB tax-free on the other side of the coin, it’s something that’s of great interest. You know, when I talk to other families about this, and I’ll get phone calls, you know, with my thoughts and everything else, the biggest thing that I continue to emphasize, and I wrote about this in a couple different board articles as well, is that it still comes down to the investment.

You still have to look at the fundamentals, you have to say, “Who is the operator? What have they done?Do they have experience in this area?” Because it will be a different type of…if it’s a real-estate investment, it’ll be a different type of an investment because it’s a different kind of an area, right?

It’s typically a lower-income area or an area, you know, that they’re really trying to bring out of a low-economic hardship. And so, you know, I mentioned that you’ve got to look at the fundamentals, you got to look at the investment itself and does the investment stand on its own.

Because if it doesn’t stand on its own, then the tax component of that is basically the tail’s wagging the dog and the tax benefits are being sold and being discussed rather than the investment itself. And that’s the other thing too that I mentioned, the families, is that, yes, there’s a tax benefit but, you know, don’t let that determine your interest or involvement in an opportunity zone.

And that’s not only for real estate but there’s also I think even potentially greater opportunities, investing as a private-equity deal or, you know, a manufacturing facility. So the good thing about family-office capital is that it’s patient capital, and so, they don’t have to write a check.

And, you know, that’ll be something that I think will be definitely a benefit here for those families that, like us, wait till the dust settles and, you know, get very specific on what those opportunities are, what’s the underlining investment and the operator are.

Jimmy: Yeah, I agree. The underlying investment is key to this whole thing. I mean as it always is. With any investment, you need to look at the underlying fundamentals and make sure that makes sense. The tax benefit could possibly push you in one direction or another, maybe, if you’re on the fence, the tax benefit gets the project going whereas, otherwise, it wouldn’t.

But yeah, the underlying investment is key and I understand that you kind of have to be in wait-and-see mode here, for a little while, to see how the dust settles and what these regulations look like. But, you know, with that said, do you expect this program to drive a lot of capital from family offices in the upcoming year?

DJ: You know, I do. I do. I think that it’s definitely going to drive investment dollars that are going into the program. And I mean my understanding too is that, even if you invested after-tax dollars, you’re still going to be able to benefit from any gains, be it tax-free, at the end of the 10th year as well.

You know, that’s quite an incentive. And so, I do think that there’s going to be quite a bit of money that’s coming. And I also heard you, I think that there will be insurance companies, who pay tax, will have quite an interest in this as well.

Jimmy: Well, that’s interesting. What do you think the family-office opportunity-zone investments are going to look like in practice? Do you anticipate that family offices may create and manage their own opportunity-zone funds or perhaps partner with other family offices to manage opportunity-zone funds? Or are they more likely to leave the management of these funds to other operators?

Or maybe it’ll depend on whether or not they are holding any real estate currently inside of Opportunity Zones? Who do you think is really going to drive these funds?

DJ: Yeah. Well, for one clarification, which is…you know, one of the things that was brought up within this legislation is some of the vernacular. An opportunity-zone fund can either mean a single project, so a single building, or it could mean multiple buildings. So, you know, it’s using the same word, but yet, it has two different meanings.

So, you know, one of the things that a lot of attorneys are doing, and accountants, they’re going to their family offices and they’re saying, “Hey, do you have any properties that are in the opportunity zone?” So they’re making them aware and taking a look to see if there’s a way that they can capitalize on the Opportunity Zones themselves.

Real-estate families, families that made their capital in real estate, or money in real estate, they’re more likely to actually take on a project themselves. In fact, they’ll typically do any type of real-estate investments on their own rather than going to somebody else. The families that have an allocation toward real estate but didn’t create their wealth in real estate will most likely, you know, work with a local operator, or a sponsor, to invest into these different areas, and rely on their expertise.

They do that with their typical real-estate investments, and that’ll be the same case and these opportunity-zone areas.

Jimmy: Okay, so I guess it’s going to be a little bit of both, depending on your experience. So, you know, if the family office has a lot of real-estate investment, they may have the appetite to set up their own funds and projects. But otherwise, there will be avenues for family offices who are not as comfortable with real-estate investing, they’ll be able to take advantage of other fun sponsors who may be able to help them.

Is that basically what you’re saying?

DJ: It is. And the one thing that I’d want to emphasize too, off of something that I said earlier, is that, you know, there’s a lot of people that are gonna be offering these investment opportunities that may not have any experience in real estate but they’re trying to capitalize on the program itself. Family offices do want to be aware of that or high-net-worth individuals really want to be aware of that.

And, you know, investing into some of these areas are totally different or outside even what some of the real-estate families have done. Because they might have been investing into hotels in, you know, the most expensive area in every part of every city that they have a property in. And if these areas are economically depressed, that’s a different type of a product that’s going to have to be built.

So I think that one of the big things, you know, once again, that families want to take a look at is does the sponsor or the operator have experience of actually doing development in one of these opportunity-zone areas? And, you know, I think one of the best operators to work with would actually be someone that has worked in these areas before, maybe they’ve used New Market Tax Credits, which is another tax incentive, or maybe they’ve been in Enterprise Zones, which is another, you know, tax incentive for real-estate investors.

And, you know, all they’re doing is what they have been doing, for the last 20 years, but now you’ve got, you know, this extra benefit of being within an opportunity zone. To me, that would be the most solid decision to invest into an operator that has that type of experience.

And I think you’d mitigate a tremendous amount of risk if you did that.

Jimmy: Yeah, that’s very good advice. Yeah, so if you’re a family office with real-estate investment experience, that doesn’t necessarily mean you might have the appetite for an opportunity-zone investment if, in the past, you’ve only developed property and already developed economies, or already developed areas or class-A type buildings, this is a little bit of a different wrinkle you might want to rely on, an operator with more experience in that area.

DJ: Yeah, correct. And once again, I mean it depends because there are some opportunity-zones that are in, you know, New York City, for example, that is just already going through the gentrification process. Or there’s also the old area of Las Vegas where the owner of Zappos has been gentrifying that area for years now.

You know, you look at some of those areas…and that’s not really a blighted area, those are areas that are already started that gentrification and change that’s been happening. And so, you want to really have a good understanding of the area that’s being proposed for investment.

Jimmy: Yeah, that’s a good point. It’s worth noting that when these Opportunity Zones were designated, they were able to designate the Opportunity Zones based on several years-old census data. I think some of the census data went back, you know, more than 4 or 5 years even in some cases. And that’s a lot of time sometimes in certain areas that have transformed rather quickly.

And another point to that end is that these opportunity-zones are intended to be low-income areas but the Treasury actually allowed certain areas that were not classified as low-income, so long as that they met some certain other criteria and were adjacent to low-income neighborhoods.

So there’s a few opportunity-zones out there, if you look at the map, you’ll see, “Hey, you know what? This area isn’t really that blighted. This neighborhood isn’t that economically distressed, it’s already on the upswing. Maybe this could be somewhere where I could focus my money, focus my investment, we’re a little bit more comfortable investing here?” I don’t know if that was the intent of the program to give tax benefits to areas that were already on the upswing but I think that’s going to end up being what’s most comfortable for a lot of investors for sure, at least at the outset.

DJ: Yeah. And I think that, you know, one of the things that family offices…you know, not only what is the experience of the operator but one of the biggest things we’re going to be looking for, and I suggest the families to look forward to, is ask if they’ve got any type of market-demand analysis.

And that is something that really should be asked for any type of investment that you invest into because there could be, you know, a tremendous amount of supply coming to market, you know, that’s really going to have an effect on how you’re able to lease up maybe a property that you’re looking to buy or you’re looking to invest into.

You know, or conversely, there could be a greater demand than what’s available. And I think that that’s something that really needs to be discussed with that operator or a sponsor about, you know, “What type of research have you done?” Because ideally, if it is an area that’s in the path of progress, which means, you know, it’s sort of like a wave where you’ve got development and gentrification that’s happening and it sort of just is going down the way, if that opportunity-zone area happens to be, you know, part of that path, or the progression, then that’s an ideal area to invest into because all that growth and all that development is coming your way.

Jimmy: Absolutely. So I wanted to talk with you a little bit now about…I have a couple questions about the IRS regulations. The IRS, back in October, published some proposed guidelines. As a potential investor, are you still looking for more guidance from the IRS? I know there’s a lot of conflicting information out there.

What unanswered questions are you still waiting to get clarification on?

DJ: Yeah, that’s a good question. I had a chance to sit down, last week, with somebody that spent a significant amount of time, up on Capitol Hill, and talking to, you know, the people that are part of these decisions. And what they’re finding is that there’s additional questions that are continuing to come up.

In fact, the person I was talking with was a sponsor trying to, you know, raise money for a fund that he’s put together. And I told them that, you know, we still need to let the dust settle per say. And after the conversation with him, I even felt that that was more of the case.

For example, one of the things that they bring up is that, when you go to sell, if you’ve got multiple properties in an Opportunity Zone that’s part of the investment, you’ve got to sell them all at the same time. And so, does that mean you have to convert it into a REIT, which, if somebody’s got three or four properties within a fund, they’re not going to do that.

You know, and can you sell them all at the same time? Now they may say, “Best efforts,” but, you know, what’s the clarification for that? So it’s those type of questions that we’re waiting for. And if they’re still making changes, then, you know, it’d be very hard to really pull the trigger on anything until you know exactly what some of those changes may be.

So, you know, I think, as a whole, to answer your question, there’s not anything specific that we’re looking for. It’s just overall, you know, we want to know what the last guidelines are.

Jimmy: Right. And, as we mentioned earlier, those are expected to come out sometime in the new year, in 2019, hopefully, by the first quarter. Yeah, so there’s a lot that we’re still waiting to see there. I think one of the biggest issues, in the proposed regulations that came out a couple months back, in October, is that the tax payer must exit his investment before the end of 2047 if he wants to be able to exclude gains from the investment.

Or in other words, if he wants to actually take advantage of the biggest tax break, which is the tax-free growth in the opportunity-zone fund, what do you make of that? I mean the fact that you have to sell, by the end of 2047, I just see like there’s going to be a huge rush to the exits in the mid 2040s. Is that problematic?

Would you like to see, you know, a longer time horizon there?

DJ: Well, you know, this goes back to clarification because I think that you have to sell, you have to have an exit after the 10 years. And then, you know, the other question is as well can you sell the property, within 5 years, in the opportunity zone, you reinvest it, do you start up another 10 years for it? You know?

So I think that it’s not necessarily saying that it’s one investment that’s just going to go the full time because there may be iterations. And I also believe that that’s when the program ends, so it’s more of a, you know, this is where the finish line is for people to know. Because you don’t have to invest next year, I mean you can invest the year after, and then, your 10 years is going to start.

So, you know, it depends on when you’re making your investment. And I don’t necessarily think there’s going to be, you know, a rush. I mean, to some extent, there may be but, you know, that’s a long time from now. An awful long time from now.

Jimmy: It is. It is a long time from now. It’s just something that’s on my mind though is the fact the program does end eventually and, in order to take advantage of that tax-free growth, the IRS, at least as of their most-current proposed regulations, in October, they say that you do have to exit to get those gains on the books that you can exclude.

But yeah, that’s right what you said. You don’t have to invest next year. Although, 2019 is a big year for this program because it’s the last year that you can take a full advantage of the step-up in basis. One of the provisions in the opportunity-zone legislation is that you’re able to step up your tax or step up your cost basis, from your initial capital gains, 15% if you hold for 7 years.

But the drop-dead date for that is the end of 2026, which would mean that you have to get your money in by 2019. That said, there are still a lot of other benefits to the program if you aren’t able to get in by 2019. If you want to wait till 2020 or 2021, you’re still good, you’re still going to get a lot of tax benefits, a lot of preferential tax treatment if you happen to miss out on 2019.

But, that said, 2019 is expected to be a very big year for this program.

DJ: Yeah. You know, they also have some additional tax incentives that if you were to invest before the end of this year, but, you know, that would be next to impossible I think to do. However, it’s very very easy to form an opportunity-zone fund, I believe it’s a one-page document that you put in with your taxes at the end of the year.

And so, anybody can create, you know, this vehicle very very easily, you know, which is something else I think that is a cause for caution. However, with what you’re saying, everything having to get in, by the end of the year, I think that that momentum of investment is going to pick up considerably the closer you get to December of next year.

And so, you’ll see quite a bit of money, you know, that are flowing into these areas which, hopefully, you know, a lot of families that are investing aren’t just doing it haphazardly, but still, going back to the fundamentals, like I talked about before.

Jimmy: Yeah, I think you’re right. I think we’re on the cusp of a big wave of momentum. We’re recording this episode and we’re going to release this episode in December of 2018. And I expect, the next 12 or 12 and a half months, are going to be a pretty wild ride. We’ll see what happens though. Geographically, where do you see good opportunity-zone deals?

I know we spoke a little bit about that earlier but I wanted to get some more thoughts on you in terms of geography. And also, what are some of the factors that investors should look at when determining which Opportunity Zones to invest in?

DJ: Yeah, I think that, you know, some of the areas that immediately come to mind is, like I mentioned, I mean New York City. There’s some areas, just because the whole island of Manhattan is…at some point in time, you know, it’s just going to be totally gentrified throughout. So I think that New York leads itself to some opportunities.

I mentioned the old part of Las Vegas, which I’ve seen, you know, is a very good opportunity. You know, I would go back and first say, “Okay, where are the primary and secondary markets? And then, I would look into the Opportunity Zones within those areas. Because if you’ve got a lot of growth happening, like I’m here, in Denver, and, you know, we’re expected to double in the next, you know, 10 years or so, population wise.

And that’s going to be pretty significant. So many of these opportunity-zone areas here could very well be in that path of progress that I mentioned before. And you look at, you know, one of the areas, here in Denver, which is interesting is the Broncos Stadium and their parking lot is part of the opportunity zone.

So, you know, I would go from top down. I would say, first, look at the main cities, see what’s supposed to happen, take a look at some of the economical information about the city itself and, you know, quality of life, cost of living, where there’s jobs going, etc. And then, within those cities, you can go online and actually look at an interactive map to see where the opportunity-zones are.

But once again, I think you’ve got to come back to that market-demand analysis, I think you need to make sure that the operator has some of that information. And if they don’t, that would be a red flag, you know, off the get-go because then there is, you know, the tail wagging the dog per se and they’re really just focused on the tact component as a way to raise money for projects.

So, you know, you want to make sure that it’s an area that’s growing or the growth is coming toward, in one of these markets that are doing, you know, quite well or have some good promise in the future. And, you know, the markets that’s been really growing, outside of Seattle, is Portland and Salt Lake and, you know, Denver is another one.

The number one state for growth, in general, is Texas, number two is Florida. And then, the Southeast is going to have a tremendous amount of growth, from a real-estate perspective, in the future as well. So I think you just have to, you know, really dig into what that market information is.

Jimmy: Yeah, a lot of great advice there, a lot of good areas to invest in. I think you’re right, you know, looking at areas that are already showing a trend for growth. I think Amazon HQ2 is a good example, with New York City being one of your examples, I mean that happens to have been put been put in an Opportunity Zone and in an area that was already kind of on an upswing.

You mentioned the Denver Broncos parking lot, I know that they already had plans to develop a stadium-district neighborhood in that parking lot, so that’ll benefit them I’m sure. Yeah, basically, look for areas that are already on an upswing, or adjacent areas on an upswing, and that’s a good place to start. Absolutely.

DJ: You know, I know we’re here talking about real estate and whatnot but, you know, one of the things that…this doesn’t lead itself just to real estate. And I think one of the potentially great opportunities are on the private equity side. For example, I had someone give me a call out of southern Cal, they had sold their technology company for 3.5 million and he was starting up three other companies.

And, you know, he was asking me what I thought and I said, “Well, you should definitely do this within an Opportunity Zone because, if it holds true that, you know, you go 10 years from now and you sell that business for 300 million, after you put 3 million into it, well, that should be tax-free.” And so, I think that, you know, family offices and high-net-worth need to be aware of those potential opportunities too because, you know, there could be really some great upside having one of those companies start up and develop itself within an opportunity zone.

Jimmy: Oh absolutely, I agree with you. I actually think, you know, the main benefit of this program is being able to eliminate capital gains taxes when you exit after a 10 year holding period. I really think like the best use case for that is having a huge return from a venture-capital investment or a business that really strikes it big.

There are some hiccups with business, it’s not clearly defined which businesses are eligible to be in an Opportunity Zone because businesses, oftentimes, grow outside of their geographies and this is a place-based policy. Real estate is a lot more cut-and-dry, that’s why we’re seeing a lot more real-estate investment at the outset. But I completely agree, I think there’s a big case for business and venture-capital and private-equity investment down the road for sure.

DJ: Yeah, you know, once again, coming back to getting the final information on these regs, you know, I think that’s a big area of question that does need clarity, what percentage and…and not to say that you have an internet-based company and you’re doing sales all around the world, but yet, everyone works out of that one facility.

Does that qualify? You know, those are the things that I think we need to, you know, get some more specifics on. But I think the more important component is to be aware of it and, you know, have it on your radar in case, you know, something comes up, so that you can dig deeper.

Jimmy: Absolutely. For family offices, they may be familiar with other tax-advantage programs that they’ve used in the past. Probably the most commonly used tax-advantage program for family-office real-estate investing is the 1031 exchange. Can you compare the opportunity-zone incentive to the 1031 exchange and highlight some of the differences?

DJ: Yeah. So, you know, with the 1031 exchange, which was maintained just for real estate with the new tax changes that happened, you know, that allows you to defer your capital gains indefinitely until you sell or until you die.

So what happens is that, instead of paying taxes, you go through, what’s called, a qualified intermediary, need a third party. And then, you invest into another property, which is considered like-kind, which is the same amount or greater. So you have certain guidelines that you have to invest but the premise is that you’re using that capital-gains capital in order to reinvest.

My old patriarch actually had deferred $150 million worth of capital gains, you know, which is a considerable amount. And, you know, based upon today’s tax laws, when you die, there should be a step-up basis. So it can be quite beneficial and create a significant amount of wealth, the opportunity-zone fund is that, if you’re rolling money over, you have the ability to, you know, only pay a very very very small amount of those capital gains after a certain period of time.

But any growth from that investment would be tax-free if you held that for 10 years. So if you decided, after 10 years, to sell, any of the gains is going to be tax-free and you’ll have a step up from your other monies. Whereas the 1031, if you decided to sell after 10 years, you are going to have to pay capital-gain tax on that money.

Jimmy: Yeah, the opportunity-zone incentive offers a few advantages over the 1031 exchange. You don’t have to wait until death, you don’t have to go through a qualified intermediary, there’s just fewer hurdles to clear. And the capital gains can come from any type of sale. Right? It doesn’t just have to be real estate. So a lot more flexibility, a lot more flexibility in some regards.

There’re some hang-ups with the opportunity-zone program, most notably that the investment has to occur within certain geographies, of course, but…so there’s some pros and cons to each tax advantage.

DJ: Yeah I think that, you know, going back to what we talked about a few times before, is that it still comes down to the opportunity, right, and the investment opportunity and what does that look like. With the 1031 exchange, you’re not limited to any area, so you’ve really got more choices. And you can also go and to stabilize that, so you could buy an apartment building that’s already built at least, you could buy a single-tenant property, like a Walgreens, and, you know, clip coupons and derive an income from that.

Whereas the properties that you’re going to be investing into in an Opportunity Zone are primarily going to be development or it’s going to be a significant, you know, value add to where, you know, you’ve got four walls and you’re redoing that whole property internally. And that’s because of some of the requirements that the Opportunity Zone has, you know, which one of which is if you pay a dollar for it, after the cost of land, you’ve got to, at least, put that same amount into the property itself.

And so, you know, you’ve got to make sure that those numbers are going to work. In an area like San Francisco, that’s not a problem because, usually, I think the cost of construction is four times that what you paid for that, you know, for, you know, the property per se. So that’s one of those hurdles, once again, you got to make sure that’s going to be cleared.

But you do have a little bit more flexibility on the 1031.

Jimmy: Yeah, that’s a good point. The substantial-improvement provision of purchasing real estate in an opportunity zone, if you purchase a piece of real estate for a million dollars…and, let’s say, that’s the building value…you need to improve that building by at least a million dollars. So that’s definitely worth consideration.

DJ, how are you promoting education of Opportunity Zones and real estate investment for family offices and other private-wealth management firms? I know you’re one of the leaders in the industry. What are you doing to promote education within this space?

DJ: Well, I’ve written a number of articles on this. And it’s more of an investor be-aware-of type. I also speak on panels, throughout the U.S., where we’re talking about opportunities on funds. And, you know, not only talking about my thoughts but also, you know, families and what they should be aware of and whatnot.

Also, you know, we do have information, on the website, and I’ve done a number of podcasts where we’ve talked about opportunity-zones. And, in the magazine, in The Family Office Real Estate Magazine, we’ve also had an article, in our last issue, about opportunity-zone funds…or about Opportunity Zones.

And we’ve got another one coming up. Because one of the people that I asked to write about, which was very interesting, was down in Puerto Rico. Well, Puerto Rico had the big problem with the storm, and I don’t know if you knew this, Jimmy, but that whole area is an opportunity zone.

Jimmy: Yeah, the entire island is an opportunity essentially.

DJ: The entire island is an opportunity-zone which is crazy. You know, it’s unfortunate but, you know, it’s good that they’re going to have that incentive for development to happen, and stuff, down there. So we’re trying to do that. And then, you know, actually, quite honestly, you brought up an idea, yesterday when we were chatting, about putting together some type of a white paper or, you know, a mini-book per se about opportunity-zone funds for family offices, which I think is a fantastic idea and something we’re going to move forward with.

Because a lot of the information on Opportunity Zones are more about what they are and how great they are, whereas I think it’s really important to also discuss, you know, what you want to look for. Right? And what you want to be aware of because that’s as important, if not more important, and I think that’s something that could be helpful for families.

Jimmy: Very good. Well, DJ, I think this has been a great episode for family offices and others who are interested in opportunity-zone investing. And I really appreciate your time today coming on the show. Thank you for chatting with me. Before we go, can you tell our listeners where they can go to learn more about you and your work and, possibly, that upcoming white paper? Where can they find out more about you?

DJ: Sure. So the best place to go is actually my name for a website, which is djvankeuren.com. My phone number is there and my email address is there, so anybody can get in touch with me.

Also, on Twitter, it’s @DJVanKeuren where I’ll constantly send out some information and helpful useful thoughts, you know, which go out to families, in regards to real estate. And, you know, that’s the best place for myself. And then, you know, we’ve got this for families, this magazine that’s coming out quarterly, at familyofficerem.com.

So between those areas, or you could just Google my name, you’ll be able to track them down.

Jimmy: Very good. And for our listeners, I will have links to all of these resources, that we’ve discussed on the show today, in our show notes. You can find our show notes at opportunitydb.com/podcast. You can go there and learn more about DJ, and all of his work, and the resources that we’ve discussed today.

DJ, again, thanks for coming on the show. I really appreciate it and I hope to chat with you again soon.

DJ: Thanks, Jimmy. Keep up the good work.

Jimmy: You bet. Thanks.

Jimmy Atkinson

Jimmy Atkinson

Hi, I'm Jimmy Atkinson... I founded OpportunityDb in August 2018. I'm a veteran Internet entrepreneur with a background in economics and Web marketing. I previously founded ETFdb.com. These days, I am passionate about impact investing and tax-advantaged investment opportunities. At the crossroads of these two ideals is the opportunity zones program, a place-based tax policy intended to economically transform some of the poorest areas of the United States with new real estate and business development.

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