How do we prevent the Opportunity Zones program from becoming merely a subsidy for gentrification? How can we instead ensure that opportunity zone investments actually benefit the people who live in the designated zones so that they can participate in any subsequent economic upturn?
Dallas-based entrepreneurial business attorney Gerry Reihsen is out to answer those questions (and more) with his new endeavor — Coasis Coalition, an organization that will offer solutions and create community among those interested in participating in opportunity zone investing.
Click the play button below to listen now to my discussion with Gerry.
- How Gerry’s experience with opening Cristo Rey College Preparatory School in Dallas has shaped his philosophy about creating social benefit businesses.
- A brief review of the tax incentives provided by the opportunity zones initiative.
- Why investors in opportunity zones funds likely won’t require current income, and why any income produced by the investment should be reinvested to take full advantage of the OZ capital gains incentive.
- Gerry’s exit strategies for opportunity zone fund investors in Year 10.
- The pros and cons of different opportunity zone fund structures — LLC vs. C-Corp — and why Gerry prefers a C-Corp structure.
- Why most OZ funds formed to date have been real estate funds even though venture investing may be the best use case for opportunity zone investing.
- The capital base for opportunity zone funds — why wealthy individuals, family offices, and C-corps are likely to invest; and why pension funds, foundations, and non-profits won’t have much interest.
- What investors should look for in an opportunity zone fund, and what a fund sponsor should look at with regard to opportunity zones.
- Details on the upcoming Opportunity Zones SuperConference, coming to Dallas, April 2-4, 2019.
Featured on This Episode
- Gerry Reihsen on LinkedIn
- Coasis Coalition
- Opportunity Zones SuperConference in Dallas — April 2-4, 2019
- Behringer Harvard
- Cristo Rey Network
Industry Spotlight: Coasis Coalition
Coasis Coalition offers a range of services to those participating in or considering participation in opportunity zones — including investors, fund sponsors, real estate developers, startups and traditional businesses, state and city governments, and public institutions. Coasis facilitates economic opportunity and development in disadvantaged geographic areas, creating paradigms of success and matrices for problem solving that have the potential to change the fabrics of low-income communities, such that OZ-driven economic upturn can benefit the communities’ residents.
Learn More About Coasis Coalition
- Visit CoasisCoalition.com
- Email [email protected]
- Call (214) 908-2009
- Follow Coasis Coalition on Facebook
- Buy tickets to Coasis Coalition’s Opportunity Zones SuperConference on EventBrite
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 Gerry Reihsen. Gerry is a Dallas-based entrepreneurial business attorney who has experience across a wide range of industries with extensive involvement in direct participation investment programs, including non-listed REITs, Section 1031 investment structures, and other real asset investment programs.
He also has a passion for businesses that create a positive social impact. His latest endeavor is Coasis Coalition — an organization that builds community and offers a range of services to all participating in, or interested in participating in, Opportunity Zones.
Gerry, thanks for joining me today, and welcome to the show.
Gerry: Thanks, Jimmy. I’m very happy to be here.
Jimmy: Good, very good. So, Gerry, I’m looking at your bio. It seems like you’ve dabbled in a lot of different businesses over the years. Can you tell me a little bit more about your background? How did you get to where you are today? And where did the passion for entrepreneurship come from?
Gerry: I sure would. So I started out as a corporate securities attorney with a large international law firm, but I kind of always had the desire to be a business builder, an entrepreneur. So in the ’90s, in the last kind of tech explosion, I left the big firm, started my own little firm, and started taking equity interesting clients and otherwise serving them. I enjoyed that organic relationship as opposed to an episodic transactional relationship, and, ultimately, partnered with a couple of professionals from Nortel to create my first company, which was a telecom software company.
What I learned was that I have a lot of process, obviously, and legal expertise that is very important to building a company, and if I can partner with persons with similar subject matter expertise as is necessary to build the company in question, we can have a lot of success. So that telecom software company was pretty successful. We sold it to a public company called Zhone Technologies.
And then a long-time friend of mine in the real estate space came and asked me to help him build a real estate investment fund company. That company, which was called Behringer Harvard, grew from 0 to almost $12 billion in assets under management across the world, mostly real estate. That cycled through the 10, 15-year period, including through the boom and bust cycle. After that, I went back to practicing law for a bit. And now I’m building businesses again, both in technology and now using opportunity zone concepts to build a platform, which extends my current interests, which now includes both building businesses and being very intentional about having positive social impact with my businesses.
Jimmy: Good. So who are the types of clients and partners that you’ve worked with over the years? I don’t need any specific names, if you don’t want to share them. But just the types of people that you typically find on the phone with you and in your office, who are they typically?
Gerry: That’s a good question. Since I’ve been everything from a big international firm business lawyer to a solo lawyer, they’ve been everybody you could possibly imagine, which is pretty liberating, actually, to know that you belong wherever. The largest client I think was probably American Airlines. I did a lot of transactional work with them. I still have great friends over there, all the way to tiny startups with wonderful people trying to find their path in life and build things for themselves and their families. So everything from industries of all types to financial people. At one point in the past, Rick Scott, a recent Governor of Florida and now, I believe, that runoff for the counting of the votes ended up with him being a senator, was a client. He was actually a lawyer in Dallas who partnered with Richard Rainwater.
So, it’s just about any kind of client that has a business interest and wants to build businesses and protect those businesses have been the kind of client that I’ve worked with. As far as my partners in entrepreneurship, again, I’m very much focused on high-quality people, high-ethos, and high ethics as partners, and those whose subject matter expertise, it is extremely high and where our mutual expertise dynamics can blend together to create the success that we want to achieve.
Jimmy: Very good. That’s a good philosophy. And it sounds like you’ve cast quite the wide net there working with everyone from tiny startups to governors, senators, to multi-billion-dollar corporations. You’ve done quite a bit over the course of your career. You mentioned a few minutes ago that you’re looking for social benefit projects these days. Why is that?
Gerry: You know, a few years ago, and this is about five or six years ago now, I became aware of a school dedicated to enhancing the lives of low-income students in low-income communities. It’s a school called Cristo Rey, and I thought their business model was amazing. So their business model is to have a very rigorous college prep school, which is hard to maintain in a low-income community because those are expensive, and to combine that with a work-study program where the students share a job. Four students will share one job as an entry-level employee at a white collar firm, a law firm, accounting firm, business firm, whatever. And that effort funds most of the cost of the school. And it focuses its students to understand more completely why they’re undertaking this rigorous course to study to get into college. And it builds character, and a sense of accomplishment, and confidence, and relationships.
So I believe that every community has the same kind of genetic blend of persons who want to do things, or not do things, or be successful in their own way. It’s just that some communities don’t have the same access to paradigms of success, and accomplishment, and problem-solving. So I thought this school was amazing as a type of school that creates those kinds of opportunities to see paradigms for self-improvement, for accomplishment, for self-optimization. So I wrote the people who run this type of school who are based in Chicago a letter and asked if I could bring a school like this to Dallas. And that experience, which is continuing to this day… I led the founding of the school with an amazing group of incredibly talented, and giving, and selfless persons. And I still am with the school today as a board member. It’s just been a very fulfilling experience.
So that has now colored everything I do. And I don’t create businesses anymore that do not have explicit social benefits. In fact, there is something out there called a social benefit corporation, which I didn’t find appealing, because of corporate structure limitations. So I created, what I think, are the first social benefit limited liability companies here in Texas. And that’s how I establish and that’s how I structured my new group of companies called the Coasis Coalition companies.
Jimmy: Very good. Yeah, I’ll ask you about Coasis Coalition a little bit further down the road here. I have some experience with Cristo Rey. My wife actually used to live in Chicago. And she worked in the recruiting department at a large law firm there. And a lot of their summer interns were Cristo Rey students. We live in Fort Worth, Texas now and she’s on Junior League. And Junior League helped set up a Cristo Rey school here in Fort Worth back last year. So I have some experience with the school. I agree it’s a great organization. It’s a great social benefit that they provide to those low-income students. Absolutely.
Gerry: And what I love about it is that…we have an awful lot of charities in this country. And the charities are important and they fulfill a role. We may be a little bit over-charitied, if that’s the right word, because, really, what people need, they need chances to exercise their own success and problem-solving muscles and to live their lives and solve their problems and achieve their successes their own way. And that’s really what I took away from Cristo Rey. Yes, it is a non-profit, and I’m not as focused on non-profits as I am on social benefit companies.
But the thesis is all about creating a matrix and a paradigm within which these students can develop and grow individually and achieve their own individual success. And I want to point out about this school that almost 100% of the graduating seniors from all of the Cristo Rey schools around the country… Dallas was the 30th and I think they’re going to be 35 now, are accepted to college. And they have a higher college persistence ratio than the average population. And, by the way, the young people from their communities generally are accepted to college at a rate of less than 15% of those students. So it’s an amazing, amazing school.
Jimmy: It is. Yeah, that school makes a big impact in a lot of communities around the country. Segueing now into opportunity zones, the opportunity zones program helps subsidize social benefit projects in a way. What does The opportunity zones program mean to you, though, and why do you feel it’s so important?
Gerry: Well, the Opportunity Zone Program is a program focused on some of our nation’s low-income communities. And it’s the latest in a series of tax-benefited type programs, which kind of began in the Clinton administration, which is intended to drive investment and economic opportunity and activity in these low-income communities. And that’s a great place to start because, again, if you can do that kind of thing, you have the potential to create paradigms of success that can change the very fabric of those communities and the fabric of the lives within those communities.
To date, prior to The Opportunity Zone Program, prior programs have not been all that successful in that fabric-type changing dynamic. They’ve mostly ended up building the facilities, and low-income housing, and things like that, which, frankly, are okay and nice to have in those communities but don’t really get to the heart of existential dynamics in those communities. The Opportunity Zone Program is extremely broad and flexible. And I believe it has the potential to be the most powerful agent of change in these low-income communities that we’ve yet to have through these types of programs.
Jimmy: I agree. It’s one of the reasons why I put together this website and this podcast because I have the same belief that you do, that this program can transform a lot of these communities all across the country that so desperately need that change. Gerry, you have a lot of…
Gerry: And I’d say, Jimmy, that one of the things that’s very fulfilling about this type of thing is, by definition, we’re putting ourselves in an environment with people like you who care about these kinds of things just because you’re involved in the program. So it’s, like, increasing your odds of that dynamic of being able to be doing business with those kind of people just by being part of this type of a program.
Jimmy: You know, the fact that it’s private capital coming in and it seems a lot more…it is a lot more open and flexible than some of the previous programs, the New Market Tax Credit Program, the Low-Income Housing Program, to name a couple there. I agree with you. Gerry, you have a lot of investment fund experience. For retail investors now who are learning about opportunity zones and the tax benefits, they’re starting to catch wind of this, and they want to learn more about how to invest in opportunity zone funds, can you explain the differences between more traditional listed securities like stocks, bonds, mutual funds, ETFs, etc., versus these opportunity zone funds? How do the capital channels differ?
Gerry: That’s a really good question. And, really, since the JOBS Act that created more flexibility in how people raise money, things have changed a lot. When I was raising money at Behringer Harvard, that became a large real estate investment fund company with multiple non-listed REITs and 1031 programs, and we had some institutional programs, as well, you really had two ways of raising money. That was through private offerings, which you had to keep confidential and could raise very little, or registered offerings. At the end of the day, whether you invest in a qualified opportunity zone fund enterprise or a listed company, as you say, it’s really, from a corporate perspective, the same. The difference is that the listed company is on an exchange. The company publicly reports to the public at large, and it’s very liquid.
The targets of the retail side for opportunity zone funds are generally going to be non-listed. But the flexibility to raise money is such that unlike when I was raising money… And we raised about $5.5 billion through the retail channel from 2004 to 2008, 2009, 2010 at $27,000 per investment, so, you know, we had several hundred thousand investors. The difference is that now, it’s much easier for fund sponsors like myself to go direct to retail investors. In the past, I would have to have my own broker-dealers, my wholesaling broker-dealer, and I would have to go through retail broker-dealers like Merrill Lynch or Ameriprise or LPL etc., which is a fine dynamic but it’s a bit cumbersome, expensive, etc.
Now, I can also have a direct channel because there’s so many platforms out there for what are now called public exempt offerings under Rule 506(c) under Reg D where everybody can see the offering, but you can only take, as actual investors, accredited investors. So the flexibility is massive right now.
Now, so far as the channels go, retail investors generally love tax-benefited programs. And the flexibility around The Opportunity Zone Program enables an awful lot of those retail investors to take advantage of the tax benefits that the Opportunity Zone Program provides. In general, they also like kind of an income stream from their investments. Somewhere between 5% and 7% is usually what they like, with some capital gains upside. I don’t know that in the case of opportunity zone funds they will be as interested in or as much require that current income or not. I suspect, if it’s positioned that, “Look, the current income should be reinvested so that you get the full benefit of the tax advantages of opportunity zone investing,” that perhaps that might be a more preferred option for retail investors in this case.
Jimmy: Yeah, I think you’re right. And I’ve heard similar takes from other people, from other fund sponsors, saying that the current income requirement isn’t as high just simply because of what you said. The tax benefit on the back end is so great it kind of makes up for the potential shortcoming in current income during the holding period. I think you’re right.
Gerry: Maybe we should briefly…I know you got a podcast that is recurring and so this has probably been discussed. But maybe in that regard, we should briefly discuss the benefits of opportunity zone investing and then why it might be that myself and others are thinking that current income is not really something you should focus on. So as you know, and as a refresher for those who are listening, under the opportunity zone program you can take gains from any other investment that produces those capital gains and could invest it, generally within 180 days. And you don’t have to invest those actual gains. You just have to invest an equivalent amount within 180 days into a qualified opportunity fund.
That fund invests those investor’s gains in low-income communities called opportunity zones. And those investments can be in any kind of tangible property, real estate, copy machines, servers, whatever tangible properties located in those zones that meet the qualifications, or they could invest in businesses that have that kind of property. So once that happens, if the investor who invests in that fund does so with their gains, those gains then are not taxed in the year those gains were incurred. Instead, that tax is deferred by up to seven years. During that seven years, the amount of tax exposure on those gains can be reduced by up to 15%. So if you had $100 in gains, if you sold Apple stock, that you had $100 basis and $100 gains and you put that $100 of gains into a qualified opportunity fund, you don’t pay taxes on that for up to seven years. You have to hold that interest in the fund to do that.
And you get a basis increase from 10% to 15%, if you hold for from five to seven years. So now, in the seventh year, you’d be taxed on $85, 85% of that $100 gain. In the meantime, you now have a interest in that fund with $100 basis. If you continue to hold that interest in the fund for another three years, that is for 10 years or longer, then when you sell that interest or otherwise dispose of it, your basis is written up the fair market value at the time of that disposition. So if that interest in the fund is sold for $10,000, then when you sell it, it’ll have a $10,000 basis, assuming that equals fair market value, and you have no tax. So that gets us to why it’s not perhaps all that relevant that current income be passed on to investors.
Instead, if you can keep building the value of that fund bigger and bigger by reinvesting any current income you had along the way, then the amount of the value of your interest in the fund at the end of 10 years is higher and your tax savings is potentially much higher. At the same time, the fund may be paying some tax on those current incomes, but corporate tax rate is lower than personal tax rate. So if you think of it more like a 401(k) or an IRA, you just allow the pie to be built over the 10-year hold, so that after the 10-year hold, you can look at disposing of your access with a written-up basis to fair market value, meaning you can either sell it and have no tax or you can donate it to a charity and get the charitable value of that basis.
Jimmy: That’s a great summary of the program. So, yeah, three clear tax benefits, a deferral period, 2 basis step-ups in year five and seven, and then tax-free appreciation within the qualified opportunity zone fund, assuming you hold for at least 10 years. That’s the main benefit right there is that last one, the exclusion of all capital gains from the opportunity zone fund investment.
Gerry: That’s right. And a great strategy is going to be to build the value of these funds, and then after the 10th year, list those funds on a national exchange, so that investors then can dispose of their shares in any way they like and take advantage of their tax-free dynamic upon such disposition. And I’ve done that several times in past funds. I took many REITs, which they called non-listed REITs, built them into many billions of dollars in size, and then simply listed them as an exit for investors on the New York Stock Exchange. So this is a paradigm I’ve not only seen, but I’ve experienced and I’ve effected. So I think this is the perfect way to create the most advantageous paradigm for your investors in the opportunity zone dynamic.
Jimmy: Yeah, that’s an interesting strategy. I was going to ask you about your exit strategy toward the end of the podcast. I’m glad you addressed that now, though. So if you’ve got a non-listed REIT that your investors are in, and then at year 10 and they can get liquidity and they can get out, they can exit because they have to exit, actually. In order to take advantage of the tax rate exclusion, they have to exit at some point. And, at that point, you list it on the exchange. That’s an interesting idea. Interesting strategy.
Gerry: Yeah. And I don’t think you’ll actually need to be a non-listed REIT as you’re raising the money during the program because, again, you’re not going to want to pass through the ordinary income, which gets no benefits from this program. Instead, you’ll probably be a C corp throughout the length of the period of time of the opportunity zone investing dynamic, which is until December 31, 2026. And then, as for the real estate fund investments, then you might convert to a REIT and then list. But in the meantime, again, I think that the best thing to do is not to pay out distributions but instead view it as a 401(k) or an RIA and keep those distributions internal and reinvest and build the size of the enterprise.
Jimmy: Can we talk briefly about the different types of opportunity zone fund structures? You mentioned that you want to build these up as C corps, but there are other options. You can do an LLC or is there an S corp possibility, as well? I’m not even sure. Can you go into the specifics for a minute or so about the pros and cons of each different type of structure that these funds will be setting up?
Gerry: Sure. Yeah, I can try to address that. I don’t think S corp is probably anything that will work, at least not for broadly-invested enterprises because, as you know, an S corp is simply a C corp where the owners make an election to be taxed in a pass-through way, like a partnership would be. The problem with that dynamic is that S corp rules have limitations as to who can be owners. So the S corp is probably not a dynamic that will be used.
I see two main approaches. For a very broadly-held fund, I expect that they will be taxed as C corps, or at least mostly will come around to understanding that they probably are optimally taxed as C corps. The benefit of that to the broadly-held fund investors is they’re not having to receive complicated K-1s for their tax reporting. They’ll receive simplified 1099s. And they can just sit back and allow the fund to get bigger and bigger over time as they hold.
The other dynamic may be, and this is actually what I’m seeing more of than anything, which I think is probably not fully thought out in many cases, is the traditional pass-through entities, whether they be limited partnerships or limited liability companies or joint ventures, for that matter. But I tend to see those more with institutional investors who are used to those paradigms. But I think as those institutional investors start to think a little more… And, again, there will be fewer investors than the retail investment funds that I’m looking at.
But I think if they think about that a little bit, they might ask themselves why they’re bothering to do pass-through dynamics again. But those will be kind of individualized bespoke funds for a limited number of investors that may want to go ahead and have that current income coming through for whatever purposes they have, which is then you avoid tax at the fund level because your tax is a partnership. So those are the paradigms I see going forward.
There will also be some interesting paradigms around ’40 Act funds, the Investment Company Act of 1940 mutual fund type dynamics, interval funds, because the Opportunity Zone Program can be used to invest in businesses. That’s like being a venture investor or even an investment banker. So I think you’re going to start to see some real creative venture investing vehicles established. And, again, the question is whether you will establish them as pass-through entities or as C corps, and then make them pass-through entities later in connection with the type of exit I mentioned before.
Jimmy: So how would this work for a mutual funder for an ETF?
Gerry: Well, it wouldn’t work for an ETF, right? An ETF relies upon a traded market to work, but you could do sort of a mutual fund that invests in non-public enterprises. It’s kind of a blend between a mutual fund and a venture capital fund. And it’s one that, again, you build value in it over time. The beautiful thing about it is that the potential to have your gains highly advantaged from a tax perspective in a venture-type investing dynamic means that your gains are all that much more valuable to you. As you know, when you’re venture investing, you expect some percentage of those ventures to not turn out so great. So the ones that do turn out great, if they have a higher return result because of the tax advantage, that makes that kind of probabilistic investment approach more viable. So I do expect to see some very creative funds in this regard, and, frankly, we’re looking at some right now.
Jimmy: Very good. Yeah, I was about to ask you about that, actually. I am a believer that…I think the best use case for Opportunity Zone investing may be venture capital because, just as you said, the gains from that are potentially enormous more so than real estate. But, at this point, most of these funds are real estate-focused. I think that just speaks to how complex an issue it is for determining venture eligibility when it comes to opportunity zones, where they’re located, and if the business starts growing outside the zone, if it starts doing e-commerce. I think the IRS hasn’t cleared up a lot of these issues yet. But do you expect that to change as the final regs come out with more guidance on opportunity zone business eligibility? Do you think we’ll see more funds focused on ventures?
Gerry: Jimmy, I think that you’re really hitting on some very important issues and you’re being very perceptive here. There’s a couple reasons why I think to date the real estate side is substantially predominating what’s going on in the opportunity zone space. One is that prior programs like the opportunity zone funds, they’re really based substantially on real estate investors and real estate developers, etc.
And as a result, there’s already an existing industry that kind of understands this kind of ecosystem and is adapting to it really quickly. There’s never really been a popular and well-accessed venture investing dynamic around these kinds of incentive programs, these low-income community-focused incentive programs, in the past. So those in that community, you know, if they know of the opportunity zone investment program at all, don’t have kind of existing paradigms of how to approach it, number one.
Number two, in a way, that’s also true of the IRS. So their first set of rules, which came out in October of last year, I should say their proposed rules, really almost entirely focused on real estate type investing in opportunity zones. So those rules are not final yet. And the fact that the government has been not working full speed, means that they’re going to be even delayed even longer. But further, everyone expects, within this space, at least two more rounds of proposed rules.
And it’s very much hoped by myself and others that the IRS spend a lot more time thinking about how this can work well for venture investing because, again, as we said, how would you change the fabric of these communities and the way people live in the…the way they can achieve optimization of themselves and their lives? Well, buildings don’t do that so great. If we can make this program work for venture investing so that persons in these communities can see and participate in paradigms of entrepreneurial success, that’s going to make the big difference to these communities.
So, yes, I think there’s going to have to be a lot more rule-making of clarification from the IRS and a good deal of creativity among venture-type investors. And, yes, you’re right. When you think of the fact that the benefits are almost entirely focused on capital gains, that is, the capital gains you invest and the upside capital gains that are tax-free, focusing on investments in the opportunity zone, which are weighted toward capital gains and less weighted toward current income, makes a lot of sense and that is very characteristic of venture investing.
Jimmy: Yeah, absolutely. Well, when do you think the IRS is going to come out with those final regulations? We’re in the middle of a government shutdown right now. Maybe we’re toward the end, I don’t know, but do you have any idea when they might get back to work? And when are we expecting these final regs to arrive?
Gerry: Well, I’m extremely disheartened by what’s going on among the administration and the legislature in Washington, D.C. It’s hard to believe that it’s come to the point that they believe the most optimal thing for themselves, regardless of the benefit of the country, is to just stand up there and pop each other in the jaw and let the government grind to a halt. And for this extended period of time, literally, it blows my mind the level of irresponsibility of all of the parties up there. So I don’t know what to say because it seems like they’re willing to let the country really suffer because they don’t like each other very much. I don’t get it.
So I don’t know when the IRS will be back at work on this. I had expected, absent this kind of circumstance, that we would have another set of rules by the end of January and that the proposed rules from October would be finalized by the end of January or February. And I had expected that the whole rule-making process, which has been going on since November of 2017 when the law was passed, would be completed by mid-year this year.
Now, I suspect they won’t be completed until the third quarter or the fourth quarter. That’s a terrible waste because this is a time-limited program. And, frankly, to get the full benefits of the program, the investments in these opportunity funds need to be made this year. And without clarity, a responsible fund manager such as myself, and I do want to be and I have always been a responsible fund manager, we’re going to have a lot of gaps in what we’re out there offering to our investors. I don’t like that.
Jimmy: Yeah. It’s very frustrating and the timing is critical, as you mentioned, in order to take full advantage of the step-up and basis. You have to recognize your original investments gain by the end of 2026, so seven years before then is the end of 2019 and that’s the…basically, December 31, 2019 is the last date for an investment in order to take advantage of the full step-up in basis. That said, the other benefits of the program aren’t going away at the end of 2019.
So there’s still the 10% step-up in basis after year five, and, of course, the big benefit, once again, is the capital gains exclusion on the back end. That one’s not going away for a while yet still, so it’s still seven more years. But, yeah, I agree with you. It is disheartening and it is disappointing that we haven’t heard more from the IRS by now. And it looks like we probably won’t hear anything for who knows when, a few more weeks, maybe. Maybe we won’t hear anything more until February or March. It depends how long this drags on for.
Gerry: Yeah. And you’re right, Jimmy. The big power of this program is the tax-free upside. So, frankly, investors should know that that is available to them all the way until December 31, 2026. So you can make an investment in an opportunity zone program by December 31 of 2026. Of course, you would have had a done deal within 180 days of the gain in question and you’ll still…even though you won’t get any deferral and you won’t get any reduction of your original gain, you will still get the tax-free upside, and that’s where the big power is. And, you know, there is still some chance the program can be extended. We’ve seen a surprising amount of activity actually all around expanding the opportunity zone concept, including concepts of making more communities available to be able to invested in, including disaster affected communities were hurricanes and whatnot have occurred.
There may be some activity to extend the length of the program, given all of the delay. So there could be some upside on legislative and/or rule-making activities, and, you know, we all need to know, there could be some downside. In the United States, they can change tax rules any time. If this becomes too expensive for the government, it’s possible the program could be stopped or modified. I doubt they would modify it, but they could look at and stop the program earlier, if they see that the cost to the government is more than they anticipated. We’ll see.
Jimmy: Yeah, that’s interesting. We’ll just have to wait and see. And, yeah, so I guess Puerto Rico is a good example of one of those places impacted by hurricanes last year. The entire island of Puerto Rico has been designated an opportunity zone, and that was the one big exception to the 25% rule that I can think of.
Gerry: That’s correct. There are technical reasons for that. But, interestingly, investing in opportunity zones in Puerto Rico is especially advantageous generally because if you invest in Puerto Rico the correct way, you actually avoid all U.S. taxes and you only pay a flat 4% tax to Puerto Rico. So not only are opportunity zone fund investors benefited by that program, the fund’s investments can be benefited by this lower tax rate. So there’s already a fabulous tax incentive for investment in Puerto Rico. And I have heard that Puerto Rico is considering actually eliminating tax entirely somehow consistent with opportunity zone type investing. So this could be extremely beneficial for opportunity zone venture investing.
Jimmy: Yeah, very interesting. I hadn’t realized that there were incentives in place to already attract capital into the opportunity zone. Instead, it might not even make that big of a dent for them. That’s interesting. So, Gerry, what do you expect most opportunity zones funds capital-based to look like? Who is actually going to invest in these things? Is it private wealth management? Is it family offices, ultra-high net worth individuals, just regular retail investors, large institutions, corporations? Who do you think is going to be the primary driver here? Who’s going to invest in these?
Gerry: That’s a good question. First of all, remember that you need to be someone who has a liability to pay tax to make this matter to you, right? So many pension funds, foundations, non-profits, etc., they don’t pay tax, so the Opportunity Zone Program doesn’t have a high degree of relevance to them. So, with that being said, look to see who are the parties out there who invest and are required to pay taxes. So if you start from the ground up, we, as individuals, obviously, we’re all required to pay taxes, I guess maybe unless you run a religion. So net net, you’re going to have wealthy individuals who are going to want to access this to a great extent. A big reason to focus on retail capital is because of that.
Secondly, you’re going to have what are called family offices. Some of the people listening to the call might not know what a family office is, but what it generally is, is a family that had a business that became very successful and they were able to sell it for a nice return. And they say, “There. So now what do we do? We used to have a business that kept us busy and provided us good income, and now all we have is money.”
So what happens is the family office will generally engage professional investment management to manage their investments, and, many times, members of the family will also participate in that. So a family office is an investment vehicle, which can be structured any number of ways, that tries to maintain and enhance the wealth of persons and families who come into some money. So those are taxable, so the family offices are a likely source of investment to the Opportunity Zone Program. Family offices are kind of where institutional investing kind of starts because they become more and more sophisticated. So a big target for opportunity zone fund investors will be family offices.
Then, there’s regular C corps out there that have accumulated some money and need to figure out what to do with that, or they themselves want to expand their businesses and they can see arrangements to do that in opportunity zones. So we’ll see operating businesses take advantage of opportunity zone investing, either through investing excess capital in some of the funds or by being the subject of some investments by opportunity zone funds into those companies or their subsidiaries in very creative structures. So that, net, net, I don’t think it’s going to be highly institutional investors in opportunity zone funds because most institutions find a way not to be taxpayers anyway, but you’re going to get to sophisticated taxpaying individuals and enterprises.
Jimmy: So mostly high net worth family offices, C corps, that’s going to be the capital base for these things. That’s good. That’s a good breakdown. If I’m an investor and I want to make an opportunity zone investment, what should I look for in a project or in a fund?
Gerry: That’s an excellent question because, all too often, when you have tax incentive dynamics such as these, there’s not enough attention paid to the core investment thesis, whether it be a single asset investment through a qualified opportunity fund or, you know, a widely-held and multi-asset investment opportunity fund. Net net, you can’t forget your basic due diligence on whether it constitutes a good investment. So I guess I would say that, “Look, if you’re an investor, you should go through your normal due diligence process.”
It’s not worth having a terrible investment because you have a tax incentive dynamic because, frankly, you’re not going to be worried about your tax incentive dynamic, if you’re not producing gains. So the kinds of things you look for with respect to the due diligence to an investment, you look to see, I think first and foremost in every situation, who are the people you’re putting your money with? Have they got experience? Have they evidenced that they have high standards of ethical behavior and responsibility to their investors? And then what’s their skill set and what’s their level of expertise in the area where you’re talking about that qualified opportunity fund making investments?
I think what you’re going to see, and I think you saw that with Scaramucci’s SkyBridge where we just saw the two parties that were working together break apart, the other party, the investors, were saying, “We didn’t really have enough expertise,” is what I read. So what I think you may be seeing is opportunity funds who may partner with sub-advisors or sub-managers so that, to the extent, it’s a multi-concept investment fund, you’ve got highly-qualified and experienced persons taking the helm of the particular segment that they’re working on. So, net, net, your due diligence is quality of the people, their track record, their sense of responsibility to their investors, what is the strategies that they’re undertaking and do those strategies make sense and do they have the expertise required to execute on these strategies.
In this particular environment where we’re probably a lot closer to a peak than a trough economically, my caution to investors and to fund managers is focusing on recession-resistant arrangements may be more important now than might otherwise be. However, as Warren Buffett has said in so many words, if you’re a long-term investor, economic cycle is not all that important. If you’re a buy-and-hold investor, make a quality investment that has the ability to persist because, at the end of long cycles, you’re going to be ahead.
Jimmy: That’s great advice. It’s hard to argue with Warren Buffett, for sure. Now, if I’m a fund manager, so put on your fund manager or fund sponsor hat for a minute, what should I look for in a project, if I’m looking at different real estate projects to invest in or different ventures to invest in?
Gerry: Well, you know, we’re undertaking right now a very heavy data analysis of the opportunity zones throughout the country. We’re actually starting at the state level and to create a point system where, you know, if we start at the very state level, you know, some of the first data dynamics will be, well, how solvent is that state, which would have some issues when you look at a state like Illinois, and what is the tax burden per person in that state, drilling all the way down to the specific things around the community in question. So I think the first question is, in respect of the type of investment you’re going to make, is the opportunity zone that you’re focused on going to be one that can support that investment, whether it’s a real estate or other property investment or whether it’s an investment in a company? Interestingly, there’s probably a lot more flexibility in that regard, if you’re doing venture investing.
In this current world where we live in the abstract so much, we create software, we have contractual relationships to building our businesses, geographic location is much more agnostic, you actually might actually find that you have less opportunity zone characteristic analysis weighting than you would for a real estate investment. So net net, what sponsors should look at with regard to opportunity zones will vary, depending on what the strategy is of that fund and the investments that that fund is pursuing. Beyond that, again, we get back to basic due diligence and analysis of investments. And if an investment works, you should be able to show that.
If you’re going to put a housing project in an area, you better show that there’s going to be demand for that housing project. If you’re going to put an office building in an opportunity zone, you should show that, well, maybe this is a lower income community, but around it, there…and I know of a great opportunity zone here in Dallas where I worked there, which would be perfect for this. Around it, you have high rents, but in this particular zone, you don’t because you don’t have a lot of office projects. So you can predict the migration toward that. Net net, the sponsor and his strategy or her strategy and the underlying investment dictates how you look at it and the analysis that you will undertake to decide whether this is a good investment to make.
Jimmy: That’s great. That’s a great breakdown. I wanted to shift gears and talk to you about your current project, Coasis Coalition. And I know you’re in the early stages and maybe you’re not ready to divulge all of the details yet. But can you at least give me a high-level overview of what your company will do and what solutions it will provide for the opportunity zone industry?
Gerry: Yeah, of course. I can certainly give you some overview on that. As we’ve talked at the beginning of this discussion, I just feel incredibly blessed that this program came along where I can bring to bear so much of my expertise, and my experience, and my passion for what I want to do with my life right now and with the businesses I build. And the Coasis Coalition is a set of companies, all of which are public benefit-oriented, and have their public benefits actually written into their charters, and certain accountability dynamics written in their charters. They’re a set of companies meant to create community, not just in the low-income communities, but among those of us focused on the opportunity zone and focused on investing in and providing benefits to low-income communities and all the residents of those communities. So it’s a multi-prong enterprise.
One part of it is direct solutions, which we’ve been talking about. That is, opportunity zone funds. There’s so much capacity to place funds througout the country through this program that we don’t see this as really a competitive dynamic. That is, no one needs to be fighting off others. So what we intend to do beyond that is create ecosystems that can benefit the entire opportunity zone community.
So one of those is conferences and events. I’ve enjoyed over the last couple of years with a fabulous partner creating conferences and events in technology and in other business areas. And so we have a conference coming up in the Dallas area April 3rd and 4th. And we actually have it located at an events center, which is in an opportunity zone, which is an interesting coincidence.
Jimmy: Yeah. That’s great.
Gerry: And we intend to go forward with conferences. And I think that the way we will put on conferences, given my experience, will be very differentiated and beneficial to the participants. We have not only two days of plenary presentations, but we have an extensive venue for exhibitors and very creative ways to network to get to know the players in the space. We have a dozen or so breakout rooms and classrooms where separate presentations can be made by law firms to potential clients as a group or as individuals or by fund managers to potential investors where groups can get together, study groups, and talk about this issue or that issue. So we’re very focused on building a community of network partnering persons in this space.
We have other strategies, as well, that will be services to the community. That is, the opportunity zone investment and professional community. Those are a little more proprietary at this stage. Obviously, they’re going to become very well-known eventually, but we’d like to get them built out and out there serving everyone. And we feel like if we’re serving the community, we’re learning to create our solutions or to make our own solutions be better. So we see this as an opportunity to satisfy the great heart of love that the persons who brought themselves to the Coasis Coalition have, while also being persons who build sustainable and scalable businesses that do benefit families that work in those businesses and the persons who are the owners of those businesses and the persons they serve.
Jimmy: Very good. So, Gerry, are there opportunity zone funds so far that have caught your eye? Have you noticed anyone doing anything particularly interesting with this new investment vehicle?
Gerry: Yeah, so far, you know, I have not had the luxury to dig into many other strategies. To the extent I had seen them, they so far look like the same type of strategies you’d see in any environment. They’re mostly real estate-focused, but taking advantage of the Opportunity Zone Program. The question that you raised, Jimmy, is very interesting because I think there’s a huge room for innovation to create some really new and interesting things, so we’ll see, but I haven’t seen them yet. The most I’ve seen is a few groups that are saying that they will be doing venture investing. But I haven’t really seen how they’re going about it.
And I kind of think they’re saying they’re doing venture investing, but with the opacity, with how unclear it is, with respect to the rules in that regard, they may be saying they’re going to do it and getting prepared to do it but kind of waiting to see what the IRS comes out with, with regard to their rules. But, so far…and, again, I only see what I see. There’s probably some really innovative things out there and I’m really anxious to see them. And, frankly, that’s, again, why I want to have an enterprise which is all about creating community and sharing ideas.
Jimmy: Yeah, that’s very good. Yeah, there aren’t that many OZ funds focused on venture investing yet, but, hopefully, that will change, once we get the final regulations and some more guidance on that. Do you think the Opportunity Zones Program will ultimately be a success? And by that, I mean will it offer the socioeconomic impact that Congress has promised? And how are we going to prevent this from just serving as a subsidy for gentrification?
Gerry: You know, that’s an amazing, amazing question and conundrum.
Jimmy: Because that’s one of the biggest criticisms of the program to date.
Gerry: Well, you know, we should withhold criticism until we see.
Jimmy: I agree.
Gerry: But there will definitely be persons who are in and out, right? They come, they make a development, they don’t have any particular interest in what happens at the community level other than their development be successful, they lease it up, and they get out. I don’t know if there’s much you can do about that. With the Coasis Coalition, we want to be a constant presence in the community. And we have a strategy to do that, which I don’t want to elaborate on right now because, again, I’d like to come out with it first. But we are going to be setting up very overtly a community-focused dynamic, complete with intentional benefits to the community that are capable of being tracked via data.
And I think if we have a company like that, we can help others who might not otherwise be that way be more intentional in how they positively impact the community. And we can perhaps help to set some paradigms and some examples and some ideas as to how to do that because you’re right. What is gentrification? Gentrification is merely increasing property values in a way that has some negative effects to the people there because their income dynamics then makes it difficult for them to stay in that area because of the increased cost that gentrification brings. It brings pluses and minuses to the community members.
It might make their property more valuable, but it doesn’t really… Gentrification, again, it doesn’t change the lives of the people who are in those communities that participate in the gentrification. That’s where we think the Coasis Coalition will make a big difference because, again, we’ll be able to announce this pretty soon, but we are going to have paradigms of success and examples of success and matrices for problem-solving that we would hope change the fabric of communities so that gentrification is benefiting the people who live in the community and they’re participating with that economic upturn, rather than having to find some other place to be because they are not enhancing and optimizing their lives and their economic results.
Jimmy: That’s great. I’m looking forward to seeing what Coasis Coalition can roll out here in the near future. Before we go, I’ve got a couple more questions for you. This one, I’ve asked of a few guests. What has been your most memorable investment or most memorable project that you’ve advised? Are there any that really stand out for you over the course of your career?
Gerry: Oh, my gosh. You know, that’s a darn good question. We had so many. We had hundreds and hundreds of investments, and my companies are all, you know… I’ve had three or four companies and every one of them was amazing. At one point, I had a shipping investment company. We thought shipping would be coming back. It turns out the whole shipping industry has changed. But the exposure, the global exposure, of being involved in investing in shipping is amazing.
I had business relationships in every place from Germany to China to Vietnam, obviously, all over the United States. The shipping industry is really amazing and you can learn so much in it. We weren’t all that successful. That’s the one area I didn’t have that much success, and I guess that’s pretty memorable. When you don’t have success and when you kind of put your all into something, and you invest a lot of your personhood in it, that can be a big blow and it takes something to pull out of that. So, probably, that’s my most memorable and not most positive.
As far as good memories, I’ve been very fortunate to work with some of the most stellar people you could imagine. I actually cannot think…as a lawyer, I obviously see all types and I can see some pretty bad human behavior. And especially when things start going south, the negative characteristics can come out. But through ups and downs, I’ve had the blessing of having partners, and employees, and others who were just fabulous people.
And what I’ve really loved about building businesses, more than building the businesses themselves, and I know that this might have an HR issue around it, I love seeing the people I worked with getting together ending up entering into committed relationships, creating families. That actually gave me a bigger thrill than building the businesses. Of course, it was essential to build the company for that to happen than, but it really comes down to people at the end of the day.
Jimmy: Yeah, it does. That’s great. It does come down to people. And speaking to your first memory you shared, I’ve had my share of failures along the way, as well, and that helps make you into a person, I think, the person you become. Some of those failures can help shape the person you become.
Gerry: It’s an interesting investment dynamic. We talked earlier about what should a person think about when they think about whether to invest with someone. It would be interesting to put on your due diligence, “Talk about your failures and how you’ve recovered from them and what they’ve done to form what you’re doing today.” The beautiful thing about the United States, in general… Someone was telling me about this. Oh, I have a client who was in the cryptocurrency mining business. And the latest drop has caused so many of those businesses to go under, and this client’s business did, sadly.
He’s a great guy, but he had one of his mining clients with a person from Belarus. And that person said, “I’m so glad to be in the United States, even though things went wrong, and now I have to collect my mining rig and go away, and I’ve lost some money, not a lot, by doing this. If we were in Belarus, you’d be a dead man.” The nice thing…and I’m not casting aspersions on Belarus, I’m just passing on his anecdote, but the nice thing is that, as a culture, we have the ability to accept failure and realize that there is value there and a person can step up, and recover, and redeem, and be the better for it.
Jimmy: Absolutely. I agree 100%. Well, before we go, Gerry, can you direct my listeners to where they can go to learn more about you and your projects? And maybe you can tell us a little bit more about the Opportunity Zone SuperConference that’s coming up in the Dallas area this spring? I don’t know if you have any speakers or an agenda planned that you can go into some details on, but…or, you know, let us know where we can buy tickets, at least.
Gerry: Absolutely. Yeah, no, there’s a really tremendous agenda. You can see it on the website. Speakers are rolling in as we add sponsors. We should have that, all the speaker lineup, resolved in the next few weeks, but the agenda is going to be tremendous. We’re actually kind of holding off on speakers while our sponsors arrange for their person to be involved. And then we’ll add some other speakers. But the website is kind of long. I think it’s opportunityzonesuperconference.com is the website. You can also find it, if you search Eventbrite for Coasis Coalition. Coasis is like the word oasis with a C in front of it, the concept being to evoke a feeling of cooperating in bringing about green and growth in an area that might be not experiencing green and growth.
So if you search Coasis, you’ll probably find the conference website. If you go on Eventbrite, you can find a way to sign up there, or you can sign up through the website. It’s April 3rd and 4th. It’s in a fabulous facility called the Plano Event Center in the north part of Dallas. As I said, it’s in an opportunity zone. The Mayor of Plano will kick this off and talk about their goals for their opportunity zone, and we’re going to have a ton of great people. Again, I’ve been doing business now since 1984, and the depth of the high-quality and experienced professionals that I can call upon is pretty significant, so it should be fabulous.
Jimmy: I’m looking forward to it. I’ll be there for sure, and I love that it’s in an opportunity zone. I think…
Gerry: Well, Jimmy, I will say this. I might know somebody who could get you a discounted ticket.
Jimmy: Well, yeah, put me in touch. I’d love to take you up on that offer. And I think that should be a requirement of all opportunity zones conferences. They should have to be located in an opportunity zone. I think that’s great.
Gerry: Well, I definitely think that. In fact, I think we should prohibit all others, you know? It would always come to mind.
Jimmy: Yeah. We should criminalize anyone who sets up an opportunity zone conference outside of an opportunity zone. That’s funny.
Jimmy: Well, for my listeners, I’ll have all of the links to the resources that Gerry and I discussed today in the show notes for this episode. I’ll have links to Coasis Coalition, links to his SuperConference that he’s organizing in Dallas in the Plano area in April of 2019. And you can find all of these on the show notes for this episode, and you can find those show notes on the Opportunity Zones database website by going to opportunitydb.com/podcast. You’ll find links to everything relevant from today’s episode.
Well, Gerry, this has been incredible. I really appreciate you taking the time out of your day to get on the phone with me and speak with me and my listeners. Thank you so much for joining me on the podcast, and I’m sure we’ll chat again soon. And I’m going to see you at that conference in April. I’m looking forward to it.
Gerry: Fabulous, Jimmy. I appreciate what you’re doing. It’s a great service, and I look forward to listening to more of your podcasts.
Jimmy: Excellent. Thanks for the kind words, Gerry. Talk to you soon.
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