Common Opportunity Zone Legal Questions, with Steve Schneider

Steve Schneider

What are some of the most common Opportunity Zones legal questions and issues when it comes to starting or investing in a Qualified Opportunity Fund?

Washington, DC-based attorney and accountant Steve Schneider is the head of the passthroughs law group at Baker McKenzie, the largest tax law firm in the United States.

Click the play button below to listen to my conversation with Steve. Note: this interview was recorded on April 3, two weeks before the second tranche of IRS regulatory guidance was released to the public.

Episode Highlights

  • How to make the exit work at the fund level.
  • How to address the investor tax liability liquidity issue in 2026.
  • The issue of unimproved land.
  • Qualified opportunity zone business eligibility issues.
  • Some legal best practices for fund compliance and document creation.
  • How current owners of property inside an opportunity zone can participate in the tax benefit.
  • The legal practicalities of making an Opportunity Zone investment.

Featured on This Episode

Industry Spotlight: Baker McKenzie

Baker McKenzie

Baker McKenzie is the largest law firm in the country, with a headcount of over 6,000 lawyers. The firm specializes in tax law and fund structuring and has thus far been one of the leading law firms for the Opportunity Zones industry.

Learn More About Baker McKenzie

About the Opportunity Zones Podcast

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

Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. And today, I’m on site at the Coasis Coalition Opportunity Zones SuperConference in Dallas. And in person with me today is Steve Schneider, a DC-based partner at law firm Baker McKenzie. Steve, thanks for joining me today and welcome to the podcast.


Steve: Well, thanks for having me here. I appreciate it.

Jimmy: Yeah, absolutely. I don’t think I’ve had an attorney on the podcast yet. So, I’m, kind of, excited to dive into some of the legal ramifications of opportunity zone investing. So, Steve, first tell me about Baker McKenzie and the work that your firm is doing in the opportunity zone space. And what services specifically do you provide to your clients and who are your clients?

Steve: Sure. So, Baker McKenzie is a small law firm about 6,000 lawyers, you know, maybe, you know, one of the top-sized firms in the country. And we do a lot in the fund space and I’m the head of the pass-through tax group and the pass-through group covers funds in real estate and whatnot. So, our group does a lot in that and the team with, of course, the corporate attorneys and forming funds and really structuring the investments. And there’s a lot of structuring between the person selling the property, buying the property, getting set up right, writing the fund documents. And really just making sure you don’t cross any lines you shouldn’t cross.

Jimmy: Yeah. And who are your clients typically in these early days at least?

Steve: You know, we have a wide spectrum of clients. We’ve got the funds themselves. We’re sitting at several qualified opportunity funds themselves who are all different sizes and some quite large. And we also have folks selling. I’ve got several clients that are selling into qualified opportunity funds and we’re trying to structure it to make it work for the buyer. And maybe have a little bit of rollover into the fund themselves. And also, qualified opportunity funds aren’t necessarily all big funds because they’re really just two or three persons. What used to be a called a JV, but if you dot your Is, you can make that a qualified opportunity fund. And so, you know, a “Private Fund” if you will, so.

Jimmy: Right. It’s easy enough to self-certify as an individual or a small group, right?

Steve: Yeah, that’s the beauty of the self-certification.

Jimmy: Right, yeah. So let’s back up for a minute here and I want you to tell me about your background, Steve, and your areas of expertise and how did you get to where you are today.


Steve: Sure. So, my background is I’m both a lawyer and an accountant. But I started out at law school, spent four years at the government in the pass-through division of the IRS Chief Counsel’s Office. And then spent six-and-a-half years in the big four accounting firm in pass-through taxation, always working in through the, you know, funds, joint ventures, that sort of space which always includes a lot of real estate. And then, I was on the law firm side since 2005 and pretty much stayed in the same general space of funds and real estate. But I was in the law firm side drafting a lot of documents and I just take people soup to nuts through it.

Jimmy: Sounds good. And your firm has a focus…your firm is a large firm, large tax firm. But one of their specializations is opportunity zones obviously. That’s why you’re here with me today. And you’re a panelist on the Opportunity Zones SuperConference Panel this week. So tell me, what’s your overall view of the Opportunity Zones program.

Steve: I think it’s a very interesting program. It’s almost like some of the same nuances we have from writs that obviously started slow and grew really big, except Opportunity Zones started big and grew even faster. And it’s a complex set of rules with a targeted focus that really…both have a lot of potentials, but also has it in the short timeline to get it all together because of some of the diminishing benefits. For example, the deferral ends in 2026. So, there’s a lot of people clamoring from all sides and meeting with people that are investors. People are trying to, you know, just set up the businesses and selling the funds, and people have their own property already. And it just comes from every direction and they are all trying to meet that deadline, balancing that with the sometimes painfully slow guidance process. Yet, I know they’re trying very, very hard.

Jimmy: Right. Yeah, I know it is painfully slow because the clock is ticking on investors who are realizing gains or about to realize gains or maybe they have already realized gains, you know, 90 or 100 days ago.

Steve: Exactly.

Jimmy: And yet they don’t have the guidance that they need from the IRS. You mentioned the deferral running out at the end of 2026. So, in order to take full advantage of the 15% step up in bases, you need to have your capital deployed.

Steve: This year.

Jimmy: Or least, yeah, by the end of this year into a fund at least. The fund itself doesn’t need to have the capital deployed. But the investors need to get their money in the fund before the end of this year, barring any legislative changes though, so.

Steve: And I think that’s why the larger blind pool funds that are really getting a large number of investors that want to go out there. You know, there’s enough uncertainties we’ll talk about that are making me hesitant, absent that guidance. But yeah, there’s just not much time left in the year.

Jimmy: Yeah, it’s a whole bit of a problem, isn’t it?

Steve: It’s going to ruin that Christmas, I know it and that summer.

Jimmy: I’m sure it will. One of your colleagues at Baker McKenzie, Chicago-based Dan Cullen, he’s on your group. And he testified at the IRS hearing last month or not last month, in February. What were some of his key talking points and how were they received by the regulators do you suppose?

Steve: Yeah, I think the key things he was really dealing with the practicalities needed by these funds that are waiting to pull the trigger. The biggest one, he focused on and I think we all need guidance on, is how to make the exit work. And he explained how you have a step up in bases and as long as you’ve held it for 10 years. But a fund owns many assets. And literally, right now it seems to imply that you have to sell the interest in your fund to get that benefit. But the funds sell assets. And so, he suggested an approach saying that why don’t we have a look-through approach and allow that step up to cascade through the assets? Much like we have already in the tax rules for partnerships when you make an election called a 754 Election. So, that was the main push.

I think it was well-received. And we’re anticipating hopefully this next set of regs that we’ll get some more guidance on that. I think there’s still going to be some quirks in the details because it gets a little complicated. If you’re getting a step up and selling your interest, the step up is basically and the date you sell your interests and it gets fair market value. If you’re selling your assets, you know, how does that mechanically work if they’re sold over different periods of time? When are you measuring that step up? You know, things like that.

Jimmy: Right. And for some investors, it might be much easier to sell the individual assets off as opposed to selling the interest in the fund.

Steve: All the investors.

Jimmy: There may not be a market for the interest in the fund. Right?

Steve: There is not a market. People are worried about walking in their liabilities. We deal with a lot of work a lot in the writ area as does Dan. And we’ve had to sell writ stock for some tax quirk reasons too. And it creates a hesitancy out there. People buying into something that they’re not really wanting. They really want the asset.

Jimmy: Right, right. So, you mentioned the second tranche of IRS regulation. They’re expected out any day now. It’s possible they are already out by the time this podcast episode airs. Just for my listeners out there, we’re recording this on the afternoon of April 3rd. So, we don’t have the regulations yet. But what are you personally and what is the rest of the legal industry most looking forward to receiving more clarity on from the regulators?

Steve: I would say the biggest thing we’re looking forward to hopefully receiving guidance is what I said Dan spoke about at the IRS hearing about the bases step up and the exit. I think that’s what’s holding the blind pool funds back. I mean, somewhere out there that folks are thinking, oh gosh, do I do a separate AIV alternate investment per investment, make them all like many funds so that I could sell one QOF at a time. Complications like that that I’d really would rather avoid doing. So, I think that’s probably the biggest. Other big things are how to address liquidity issue in 2026 when the tax is due, right?

Jimmy: The investors have taxes, right?

Steve: Investors have taxes, right.

Jimmy: Where do they get the cash?

Steve: I mean, I co-teach a course at Georgetown on drafting partnership and LLC agreements. And one of the topics we talked about is tax distributions. I make sure you don’t put people in a position where they have taxes without cash. And I’ve got published articles on that topic as well. And so, the hope is that in 2026 they’ll let us maybe do a debt finance distribution or something in 2026 to give people some cash. And is that going to be limited to only appreciation in the assets since it’s formed? So, people aren’t really taking out their initial capital because the rules are designed for you to keeping that capital. What kind of restraints are going to be with that debt? And I think debt in general there’s other questions about how does the bases step up work? After the 10 year hold when there’s debt, we think it should have worked like a normal tax rule would work in counting debt in terms of the full fair market value. But it will be nice to have more clarity on that, so. I mean, there are lots of other…lots of other nuance issues as well. It would be…it would be nice to have a little bit more clarity on dealing with some of the rollover issues maybe of the seller of a property may keep some interest in it, how mechanically that’d be addressed. And…

Jimmy: I know you’ve got a big list of topics.

Steve: Yeah, I’m just thinking. I don’t think in this set of guidance, but they’ve also talked about it, they’ve got two proposed sets floating around at the IRS right now. I think in the next one, they’re talking about giving guidance on certification process as well, right, because we don’t really know the full details of what our obligations are, and what they’re going to want from us. And we’ve got a couple of simple tax forms, but…

Jimmy: It’s just like a one-page tax form, right now.

Steve: It’s like a one-page form, yeah, exactly.

Jimmy: Yeah, it doesn’t ask for a lot.

Steve: Yeah, exactly. Right, so.

Jimmy: So you mentioned tax distributions being a potential problem, right? You need some more clarity on that because otherwise, you could get into a situation where investors will owe tax in 2026 on their original gain that they, you know, realized in 2018, 2019 and beyond. Yes, so what are some other solutions for that?

Steve: Well, people could always borrow what you call across the top, right? You can theoretically borrow against your interest in fund. Hopefully, the IRS wouldn’t have any issues with that. But not too many lenders want to loan against that, right? I mean, that’s just not the type of asset that a lender would loan against. So, you might need to seek other lines of credit or what not to pay the tax. But of course, there’s a lot of folks with a lot of gains who do have different cash sources coming and going. And by the time 2026 comes around, no matter what they tell us, you at least will know and then we can plan accordingly.

Jimmy: Yeah, you will have a few years hopefully to figure it out, right?

Steve: Exactly.

Jimmy: Were there any other topics that you’re looking for clarity on from the IRS?

Steve: Yes, there’s a big one out there that we haven’t mentioned yet, which is the land issue, if you will, right? Because what the IRS has said in the rule that requires you to substantially improve a property, which is essentially doubling its tax basis, so improving it as much as you paid for it. And they give us some guidance saying that you could carve out the land in doing that measurement, okay? Well, what if there’s only land that they bought?

Jimmy: What if you’re only buying land…

Steve: What if I’m only buying land, you know.

Jimmy: …then, how do you improve from nothing basically, yeah.

Steve: How to improve from zero, right. You can’t divide by zero. I mean, you know, would a dog stand be big enough to do it, right?

Jimmy: Yeah, and I’ve heard the example of buying a parking lot and then just putting up a little attendant shack and then…

Steve: Yeah, exactly.

Jimmy: Yeah, exactly.

Steve: Exactly, so…

Jimmy: Does that qualify?

Steve: And I’ve heard some rumors from the government saying well, that’s probably not enough, right? So, I told people I’d make it look more significant. Another real practical issue I’ve been coming across lately is what is the property? What is the property? I’ve got a piece of land that’s got three buildings on it, right? And they’re operated together, but they’re separate standalone buildings, right? Maybe one already exists. You know, we know in the IRS ruling that if I bought a two-story building and made it ten, clearly that’s one property, right? But what if I didn’t want to put my new eight-story building right on top of the two, I wanted to put behind or maybe historical rules require me to keep that two-story where it was and not touch it, right? So, it’s the question of what is a property has been a big issue in my practice.

Jimmy: Yeah, that’s interesting. Are there any other points you really look into…

Steve: The, I mean…

Jimmy: …to get some more guidance on?

Steve: Yeah, I mean other things, yeah, I don’t know if they’re going to get into all these, but like the carried interest structuring. I mean, I think a lot of people are saying well, how do I do that? How does that count toward it? How does that work? Can I even…can I get QOZ benefits on the carry itself or could the carry hurt me and then not be cashed and not be viewed as the right… Should I be separating the carry. Should I be trying to combine it to the jazz up my return? I think that’s an issue. And then how does the carry work with the related party rules because often the person selling property may stay on and do some work on the property and get a carry. Plus some rollover. How does that work with the related party rules and how is all that put together? So, and there’s one more big thing in there too is the IRS has the authority to elaborate on what I call recycling, you know, of cash. So, if the fund sells a property and buys another one, you know, we do have like-kind exchange rules already. Thank God it didn’t get completely repealed. But the statute gives the IRS more authority to elaborate on those rules and give people more ability to read this, particularly given the restrictions about the 90% test. And every six months’ testing you could have something that could satisfy like-kind exchange, I mean within 180 days, but maybe it’s causing me a problem under the 90% test. In the meantime while I’m waiting to get my new property. So, a lot of guidance on that rollover would be helpful.

Jimmy: Yeah, it’s all…it’s a lot for investors to manage for sure. It’s a lot to keep track off.

Steve: Yeah.

Jimmy: Yeah.

Steve: And the one panel I was on today, there was a lady who was on the corporate side talking about the PPMs and I said, you know, it should be double the size of a normal PPM. But at some point, you don’t want to say too much because you could bombard people and they won’t, you know, follow it. So, you’re trying to craft a PPM document that’s understandable, right? And you also, there’s this unknown, right? You don’t know what you don’t know. And you won’t know those things until you start doing it. And so, I can’t warn them about the unknown, so other than generic warning.

Jimmy: Right. So, Steve, what’s your breakdown of OZ clients so far in terms of real estate investors versus business investors? Have you been seeing any business investors coming yet or what are you seeing?

Steve: Yes, in so far all the actual people crossing the line saying I want to hire a lawyer on real estate because it’s more certain. There’s just so much uncertainty on the business. But I definitely heard talk in the business. I’ve talked to people saying yeah, I really want to do this. I want to, you know, and some of it is just free advice, somebody saying, “Hey, I want to open up a dot com,” or whatever, maybe some startup business. Well, my advice is, if you’re going to start up a business right now, brand new from scratch, I would probably make your headquarters in an Opportunity Zone. What would be the downside, right? I mean, we don’t have the full certainty as to how the IRS is going to measure your in-of-zone or out-of-zone business and maybe you tell me, you know, everything is really outside the zone and you just have an empty desk, that’s not going to work. But if you have employees, you know, real people, I’d definitely consider setting up in a zone.

Jimmy: If I have…now, I’m going to ask you for some free advice.

Steve: Yeah. We’re in a zone right now.

Jimmy: Yeah, we are in a zone. So that’s actually a good point…

Steve: This seems a good enough spot. I feel safe.

Jimmy:…to mention on the podcast we are coming to you from an Opportunity Zone in the Greater Dallas area in Plano, Texas at the Opportunity Zones SuperConference here put on by the Coasis Coalition. So…but getting back to my question, I want some free advice now. If I have a dot com business and I set up my headquarters, let’s say, right here in Plano, Texas in the Opportunity Zone. I’ve got a staff of…let’s say I’ve got a staff of a dozen people and they work here. This is their fulltime job working at my dot com. But my income is derived from all over the country because I sell an E-product or I’m shipping across the country a physical product, you know, an E-commerce type business, how does that shake out do you suppose?

Steve: Well, I mean if you’ve got all your employees and you’re actually doing all your development opportunities, then I’d feel pretty darn good about that. Just because your customers are outside, I mean it may…we don’t have the guidance but they may give you until, like, where are you closing the sales, right? I mean, and there’s a lot of taxes using that. We do a jurisdiction which is all the time cross-border. I mean, Baker & McKenzie’s a huge cross-border law firm. This is a common issue.

Jimmy: Where is your tax nexus essentially, right?

Steve: Yeah, exactly. Where is… yeah, exactly. So, and those are big things that, I mean, we in the tax group worry about sometimes. But hopefully they won’t get that complicated, right? Because it’s a crazy complication.

Jimmy: Yeah, but this is a 50% test, right?

Steve: It’s a 50% test.

Jimmy: That says 50% of income has to be derived from within the zone. Is that what it says?

Steve: Yeah, but you just give me an example where 100% of your income I would say is derived from within the zone, right? So…

Jimmy: Well, but I guess I’m playing the devil’s advocate. Really, my customers are located primarily outside of Opportunity Zones.

Steve: Right. And so, it really depends with the IRS what comes out in the guidance. But saying, how are they going to measure? They’re going to look at traditional principles of tax or where does the sale close, where are their activities? I mean, usually people sell all over the world, but they’re not taxed all over the world. They’re taxed where they’re at, right? You know, what we call effectively connected and have a physical presence. And so, you know, what you described I think would be quite clearly, you know, good in that context. But the reality is, businesses aren’t 100% physically in one spot, I mean. And in the conference somebody was talking about, hey why don’t you at least give out divisions and franchises and whatnot, make that a separate legal entity in the zone? I mean, do the best you can. But hopefully, I do think soon this might be in this next level of guidance any day now. But they’ve been saying that for a while, so.

Jimmy: Yeah, they have, yeah.

Steve: I tell people a week, just to give it some cushion. But…

Jimmy: I’ve been saying a week for three weeks now.

Steve: I’ve been saying a week for three months. But anyway I think that we will see some guidance because I definitely talked about that. I just don’t know which project it’s in because last I spoke to the IRS folks, they said they’ve got, they kind of chopped it in half in the two different proposed writ projects. And my guess is what they probably do is they will probably decide which goes in which half. I mean, how far along it is and what they can scoot it in this pile and this pile.

Jimmy: Right. And they’ve already sent in the proposed guidance to one side, that’s right.

Steve: So the one side, to the OIRA, yeah.

Jimmy: Right. But just so I guess we are waiting on the OIRA to approve that and release it. That’s what we’re waiting on for now as of…

Steve: Yup OIRA. Was it like a week or so…

Jimmy: Did I get the acronym wrong?

Steve: No, it’s right. I’ve heard it called OIRA.

Jimmy: OIRA, OIRA, it’s part of the OMB at the White House, right?

Steve: Yeah, which is all new, right? I mean, all these came in, in 2018.

Jimmy: Yeah.

Steve: We didn’t used to have that level of review.

Jimmy: Right. So, anyway, this is all of…as of April 3rd when we’re speaking right now. What are some other…business is really tricky. Because I mean, obviously real estate you know it’s either in the zone or it’s not. A building can’t walk across the street. Business is obviously…

Steve: But I have had properties across the line, you know.

Jimmy: They kind of straddle the census tract.

Steve: Yeah, straddle. There are some straddles.

Jimmy: Okay. So, that’s an interesting case, but probably an edge case.

Steve: Not too often, yeah.

Jimmy: Yeah, not too often I would see that. Yeah, where was I?

Steve: Where the operating business…

Jimmy: The operating businesses. What are some other tricky parts of identifying whether or not a business is in a zone and…

Steve: Oh, I think, you know, where the people are, you know, is the main thing. You’re going to have people at multiple locations. And so, do you need to create a separate entity for the people that are in the zone location? And you could just create in a company, you know, transactions. You know, those have transfer pricing issues like you have in any other business, right.

Jimmy: So, you might have one umbrella company, but then there would be under that umbrella company there’d be like different corporations split out.

Steve: And you wanna encourage it. I mean, you could have a large corporation that, I mean a large corporation’s division might be some other completely independent business, right for a small guy. And in fact, a large corporation might buy that business, right, that already existing and create an opportunity zone. You’d hate to lose that benefit, right? So, I think that you will see people having different legal frameworks around what’s in the zone and really scrubbing through and trying to make educated decisions. But…

Jimmy: We’ll know a lot more.

Steve: We’ll know a lot more when…

Jimmy: In the coming months.

Steve: But even with that, it’s going to be totally factual, you know.

Jimmy: Yeah, I’m sure too. So, you know, we spoke about business for a few minutes here. I know most of your clients, though at the moment actually, is it all your clients at the moment are real estate focused?

Steve: Yes.

Jimmy: And what are some of the most common questions that you’re receiving so far from different people? And I guess you’re fielding questions from business investors too. You’re just… Yeah.

Steve: Yeah, I’m fielding questions from all, but the ones that have things right here right now, it’s a whole life cycle of…it could be the seller, right. The person who has a property in the zone says I want to capitalize on this. I want to…I’ve had the question of is this structured properly, will this be a good zone property for a buyer? And therefore, should I sell it now. You know, we’ve got somebody who’s got a building only partially built, right? It needs to be finished building. Should I sell it now before it’s finished so that the buyer can finish it and get their doubling of bases? Well, the answer is yes. I think that did make sense, actually. But they don’t really want to, you know, part with it completely. So, they want to keep a piece of, right? Now, you have the related party issues, the carried interest issues and how all that structure works. And those are quite complicated. It would be nice if the IRS gives it a little bit more guidance on, you know, even how you measure a 20% related test when there’s a profits interest that just has that piece of profits only but not capital, you know. Once you sell it and once you’ve formed the fund and the issues come up with… can you have a feeder fund, right? I mean, funds off in a feeder fund for people you have certainty, people that are grouped together.

Right now, the rules are written that the person who has the direct gain has to be a direct member in the QOF. And although the QOF rules are written such that one lower tier regarded entity, so you can take the benefits of some of the safe harbors from the regulations. But you can have two lower tier entities. So, you’re in this funny spot now where you have this wooden structure and so we’re walking clients through how to do that, how to make sure you qualify the opportunity fund is fully compliant before your first investor comes in. So, if you are the investor, you want to scrub the investment and make sure it is compliant, right? You need to have your documents agile enough so that you can modify it as the rules change. You need to have PPM disclosures to your investors and you’re trying to think of all the things that could go wrong. At the same time, you don’t want to scare them out the door, but you do need to let people know the open items.

Jimmy: Absolutely. So you mentioned the 20% related provision. Tell us a little bit more about that. I mean, I guess that plays into, I have some real estate in an opportunity zone already. How do I benefit and then…

Steve: Exactly, because…

Jimmy: So, tell us a little more about how that works for an individual who wants to capitalize on OZ, on the OZ policy. But they already own the…

Steve: Right, they already own the property, right? So, the restriction is that the buyer, which is either the fund if it does directly around the lower tier qualified opportunity partnership or QOP. If it’s the buyer has to acquire it by purchase, okay, from a nonrelated person. And they lower the relationship test in the 20%, okay. And so, a couple of things people are grappling with is, well, I could lease the property, the land, you know, the land issue anyway. I could lease the land so I’m not actually acquiring land by purchase, but I’m not acquiring the land at all, right? And then build on the land, so I’ve, you know, like, sometimes New York City is a ground lease in those big buildings. And some other locations obviously as well. But, you know, that’s one option. Some folks say, well, gosh a lease could be viewed as property if capitalized things in your lease, you know, has that measure and, you could say okay, fine, I’m going to go and actually put it in, okay, but you can have the seller sell, say, 80%, okay, and contribute 20%. And in that case, the seller would not be participating in the benefit of the qualified opportunity zone from an investor standpoint. But they would get to keep their investment, right? Can pull them in and let’s say 20, I’m going to go down to 19.9 just to be a little threshold.

Jimmy: Yeah, sure, sure.

Steve: But the fund can do that because when you use the regarded lower tier entity, only 70% of the assets have to be good, right? So, you could have had the contributed 19.9, yeah, that’s the bad assets and acquired by purchase, but you have enough cushion with the lower tier. You couldn’t have done that if you did that at the top fund entity. That’s where the favorable rules came in the last set of regulations.

Jimmy: Right, right. And what are…you touched upon this in one of my previous questions, but what are some of the other practicalities of pulling the trigger on making an opportunity zone investment on actually writing a check to one of these funds or self-certifying my own fund as an investor?

Steve: Well, if it’s your own fund, it’s pretty easy, right? Because it is self-certification, you know, but you do need to make sure your ducks are in a row because one of their requirements…

Jimmy: There’s a lot of compliance that I have to do, right.

Steve: There’s still compliance, right. And we don’t even know what are all those yet, right? That’s the issue. We have some draft forms, those simple one-pagers, right. But your fund needs to basically have a plan built in saying that here’s what I’m going to do. You know, I want to be investing qualified opportunity zones and I want to comply. And so you need that in your documentation before you put the money in. That ordering is important. So, make sure you have your documents saying that then you get the money in. And if you’re gonna use the lower tier entity make sure you’ve set up that lower tier entity as a regarded entity from a tax standpoint. And if it’s just your own private fund and there’s really nobody else in it, you know, you say, well gosh, I wasn’t really planning on having a second investor in that lower tier. So now I have to find one, right. So, the GP might be able to play that role or the rollover guy could have a little piece in that entity making it regarded. So, there’s ways to do it, but you need to make sure you follow all those. And like you said in the certification, we know the basic sample form the IRS has. But we’ve been told that further certifications are going to come out. What they’re wanting to do is make sure that we’re investing in the right things, right? You know how opportunity zones can’t invest in, you know, massage parlors and you know, golf courses, liquor stores.

Jimmy: Golf courses, I think.

Steve: Golf courses, right. I mean just these…

Jimmy: And that’s right. Those in businesses come from the…

Steve: But I didn’t see marijuana on the list though.

Jimmy: No, that’s true. And those in businesses are a holdover from the New Markets Tax Credit program, I believe. Is that right?

Steve: Yes.

Jimmy: It comes from that part of the IRC code, yeah.

Steve: It’s that part of the code. And I guess some of these restrictions but I don’t get some others, but I suppose the golf courses they’re not really developing.

Jimmy: Well, yeah the list is a little bit funny.

Steve: It’s a little bit funny.

Jimmy: Yeah. And it might be a little bit outdated too but… Well go on.

Steve: But what were we talking about, practical?

Jimmy: We’re talking about some of the practicalities of investing and actually pulling the trigger…

Steve: Pulling the trigger.

Jimmy: And then you are going through the self-certification if an individual or a small group of individuals wants to start their own fund. But what about writing a check to a fund?

Steve: Yeah, I think the being agile, adapting yourself to the new rules when you’ve got money coming in, right, you need to bake into your documents. If I’m going to start taking cash right now and I try the one people and I try to put as many open flexibilities, but what if I haven’t built in enough. So, I think that is why people are more than not waiting for hopefully any day now, any week now a set of guidance. And we’re hoping that they didn’t punt on some of the key issues. But I do feel pretty optimistic that they’ll cover a couple of the key ones, particularly the exit mechanism. And I think once funds hear that, then I think they could deal with the rest of the stuff. The liquidity issue hopefully they’ll deal with, allowing us to make some distributions to give them cash to pay the tax. Those are probably the two biggest ones that if they cover those, I feel like I could go.

Jimmy: Yeah, the exit is huge because I mean that’s when you reap the big rewards of the program.

Steve: Exactly. But it doesn’t stop…

Jimmy: So knowing how to exit…

Steve: It doesn’t stop at private fund, right? I mean, it’s sort of a big fund with, you know, unknown investors. That’s a huge thing. But a fund can just be three people, right? The same three people are going to do it as a joint venture, call it a fund. I’ve done several of those where that’s fine. We’ll deal with exit. We’re friendly parties. We’ll modify our documents. That’s not going to stop us.

Jimmy: Right. And what are some of the biggest misconceptions that you’re hearing or the biggest mistakes that you’re seeing being made here by different opportunity zones participants, especially in these early days before we have all the guidance out?

Steve: Yeah, you know, mistake is a harsh word particularly to a lawyer because we think of getting sued. But so I won’t say I’ve seen any mistakes, but…

Jimmy: Okay. No mistakes, how about you just say misconceptions maybe. We’ll call it misconceptions that you’ve seen or that you’ve heard.

Steve: Well, I think, you know, there’s open questions that different people view differently. Does the carried interest get the benefit of the tax freebee in your town? Right? Can I get a step up in my carry? You know, the statute refers to capital gains rolled in and that’s what qualifies it. It’s not an interest for services. Can you somehow staple that? You know, some people are more bullish than others on that. But why not try? Well, we’ll see guidance soon enough, right, because it could be that maybe that carried interest hurts us under the related party rules. I mean, so we’re trying to balance, you know, what might help us in some ways to what might hurt us if you’re dealing with a private fund where the guy with the carry is also the seller, you know. The other things people have wondered about is that it came up on one of the panels today was the attributes carry over, your tax attributes. How does that work? What is an attribute? For example, if I have a 1231 gain, okay, which is property…depreciable property, like, real property leased out, right, that’s 1231. If I have that gain, can I roll that into an opportunity zone on a gross basis before I’ve had in netted with some other 1231 losses? Okay? And then will that tax attribute of 1231 pop back up in 2026?

That’d be hopefully something that IRS would address because if you don’t do that, you never know what your net 1231 gain is until you flow all the way up into the top individual investor who has to run those numbers. And even they may not know until the end of the year when they see everything else they’ve had. So, I think not giving the people the benefit of using that gross and then catching it under the attribute rule so that not walking away from that potential recapture would be good. But I think that some people don’t even think about that, like, of course, 1231 gain is fun until you point out well it could be recaptured.

Jimmy: Yeah, no that’s…you’ve given us a lot to think about here during our discussion. You mentioned that you were on a panel earlier today here at the conference that we’re at. What would you say is the biggest take-away from the panel that you spoke on or maybe one of the other panels that you’ve seen here today? If you had to summarize it one point, maybe two points.

Steve: Two, right. You know, I was on two different panels and the big thing I took away was actually the huge interest in specific questions of the audience. You know, we went through some of the basics, but very good practical questions about what do I do in this situation? What do I…how does this attribute? How does the carried interest work? That came up.

Jimmy: And you don’t know the answer to that?

Steve: I don’t know, yes.

Jimmy: Some of these questions, you don’t know the answer to?

Steve: Yeah, exactly but I never answered I don’t know.

Jimmy: Continue.

Steve: I answer, here’s what a likely outcome would be, but obviously, I don’t write the rules. So, I can’t guarantee it, but based on my experience hopefully, it will come out this way. But what’s the best way to handle it should you wait, should you not wait, that’s really where my role as a counselor and a lawyer’s role as a counselor comes in, right? Some people will say, well you can wait. You you’re in a private fund. You don’t have to wait because we could always fix it up later, right? Some things how do you deal with it, maybe these are some things better dealt with, just a provision, your document that allows you to change in the future, and just let people know, you know, things could change. But the concern is though if you…these are closed-end funds, right, because this is a 10-year run. You’re locking somebody up for 10 years and there are so many uncertainties. In a non-family and friends environment that could be hard, right. I mean, it’s sort of like writing…it’s almost like writing a prenuptial agreement with somebody you don’t even know, right.

Jimmy: That’s a tough task sometimes.

Steve: It’s a tough task.

Jimmy: It definitely has to be patient capital the money coming in.

Steve: Exactly. But you’ve got deals, what are you going to be doing?

Jimmy: Yeah, yeah.

Steve: And as you make more money, once the rules are finalized it’s more money chasing those few deals. So, do you go forward now and go ahead and buy that property and maybe what you do is you set up your fund as a private fund then expand later and get some seed money in and at least get a track record.

Jimmy: Yeah, that’s interesting. A lot of specific questions that you received, I think, yeah, everybody has a slightly different situation and needs answers tailor-made for their specific situation, and that’s where you come in, so.

Steve: Exactly, how to integrate like-kind exchanges with the fund and for a million questions.

Jimmy: I’m sure you got a lot of questions all the time.

Steve: Yes.

Jimmy: You’re the OZ law expert yeah, so a lot of people want your time, I’m sure. So, well, tell my listeners now where they could go to learn more about you and Baker McKenzie’s Opportunity Zone service offerings?

Steve: So Baker McKenzie obviously has a website where you could find any of us or my e-mail, [email protected]. My partner Dan is [email protected].

Jimmy: We’ll figure that out.

Steve: You can google us and it pops right out, but that’s probably the easiest to either me or Dan, but we’ve got a whole team working on these things. And you know we are benefited by having the largest tax practice, I mean, law firm that I could think of by a multiple, and that’s just because Mr. Baker was actually a tax lawyer when the firm was founded and, like, 30% of our lawyers are tax. So, it’s just a topic that fit well within our funds groups in the heavy tax practice that we have. We just like complicated things.

Jimmy: It sounds like it, yeah. And this has been a rather complicated discussion today, but you’ve done your best distilling it as best as you can. So, I appreciate it. Well, for my listeners out there, I will have links to Baker McKenzie and I’ll also have Steve’s email address and Dan Cullen’s email address listed as well on the show notes page for this episode. And you can find those show notes on the Opportunity Zones database website at Steve, thanks for joining me today.

Steve: Great. Well, thanks. Glad to be here.