The Biggest Problem with Opportunity Zones, with Justin Wolk

Justin Wolk

What is the biggest problem in the Opportunity Zone space today? And why is there pushback from potential investors with capital gains?

Justin Wolk is a capital advisor for StackSource, a New York City-based real estate technology company that connects commercial real estate developers with lenders.

Click the play button below to listen to my conversation with Justin.

Episode Highlights

  • The biggest problem in the Opportunity Zone space today.
  • Why StackSource has been hosting Opportunity Zone educational seminars all over the country.
  • The people who know where the actual capital gains are.
  • How the Opportunity Zones program has opened up real estate investing to a new class of investor.
  • What investors should look for in a developer before investing in an Opportunity Zone project.
  • Are Main Street financial advisers at a point where they are ready to invest their mom-and-pop clients in Opportunity Zone funds?
  • The issue with the 2026 date, and why that date is written into the statute.
  • The tension between taking the time to get educated and vet projects vs. the ticking clock.
  • The importance of debt to Opportunity Zone projects and why banks don’t care whether or not a project is in an Opportunity Zone — but why they should care.
  • Is additional oversight needed for the Opportunity Zone industry?

Featured on This Episode

Industry Spotlight: StackSource


Headquartered in New York City, but available nationally, StackSource is a commercial real estate tech and financing company that offers smarter, simpler debt financing by quickly connecting commercial real estate developers with lenders. Their team has hosted numerous breakfast seminars to educate financial professionals on the benefits of the Opportunity Zones program.

Learn more about StackSource

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 joined by Justin Wolk. Justin is a capital advisor at real estate technology company StackSource. And he comes to us today from his home office in Brooklyn, New York. Justin, welcome to the show.

Justin: Jimmy, thanks for having me. I really appreciate getting to talk to you today.

Jimmy: Yeah, sure. It’s good to be here with you today too, Justin. Thanks for coming on. So I want to come at you and push your buttons right away here. What do you see as the biggest problem in the Opportunity Zones space? And is there anything in particular that’s really grinding your gears?

Justin: Well, you’re asking this question because you know this. I am very frustrated with the Opportunity Zones space. I am disappointed because I feel that there are too many people who are not truly qualified to be in the Opportunity Zones space yet. I think that there are too many guys who have these websites. And they say, “Oh, I have a website. I’m a developer.” And you see all these projects on their website, and they have all these beautiful renderings. And you’re like, “Well, what have you developed?” “Well, nothing. I, you know, I have projects coming together.” “Okay, well, show me something you’ve completed.” “Well, I haven’t completed anything.”

To me, these are now the people that are coming out and asking…not all of them, but a lot of them are coming out and asking and putting together Opportunity Zones funds to raise money for projects without the experience or the knowledge or even the wherewithal to truly be in control of these type of funds. And that is my biggest problem with the Opportunity Zones space as we see it today. And I think it’s something that has to change drastically and change quickly.

Jimmy: Yeah, I want to talk to you about some of your ideas that you may have for how that can change. But in the meantime, before we dive in, tell me about StackSource. What is it that you guys are doing over there, and particularly, what are you guys doing in regards to Opportunity Zones?

Justin: We started our process probably about two years ago, our CEO was a Google guy and a Facebook guy. And he saw a need for more electronic-based and AI-based capital advisory and he put together StackSource. And, you know, similar to a traditional brokerage, we have real ex-developers, ex-investment bankers, putting together loans, bringing in private equity, bringing in joint ventures, that kind of activity. But more importantly, we allow consumers to go on our website and put in what they need for any type of loan request or any type of financing request. It’s very quick, it’s very instant. We have investment from Prudential, we have investment from NVP, which is an arm of the owner of Audible’s company, which was recently bought by Amazon. So we’ve been able to really make a lot of headway in our space and really kind of shake up the finance industry in terms of capital advisory brokerage and ultimately real estate investment banking.

Jimmy: And what is your background, your personal background? What’s your role in the company and how did you get to where you are today?

Justin: So I was a developer for a long time, I’ve raised a lot of money for my own projects. I’ve raised a lot of money for other people’s projects about…I would say about a year and a half ago. For me, I saw a need, this kind of pivot out of development. I had too many projects going on. I wanted to get out. I still wanted to put deals together but I wanted to do less of developing and more…I wanted to do more investment banking. I enjoy putting deals together. I don’t like the long time frame to wait for development. So I went back into capital advisory. I linked up with Tim. You know, our pipeline’s pretty heavy right now. I personally have already originated this year alone almost $35 million worth of debt I expect to close and originate probably another $150 to $200 before the end of the summer. My goal for this year is a half a billion. We’ll see if I can get there. My pipeline is pretty heavy and, you know, we have some really good projects that we’re presenting financing for.

Jimmy: Yeah, that sounds great. Can you tell me about who some of your clients are, some of the people you’re working with? I know you mentioned Prudential and Amazon. But if you could characterize who you’re working with on a day-to-day?

Justin: So most of the people I work with are former developers. They like my development experience. I’m doing a lot of CMBS stuff. I have a couple of famous clients that, you know…actually we’ll talk about a little bit into when we’re…during the podcast because there’s an Opportunity Zones tie-in. Generally for me, my easiest and most prevalent client that comes in is guys who do need advisory for building mid to high rise apartment multi-family condominium, some hospitality, but mostly multi-family and condominium units. Because of my background in development, it’s easier for me to see the big picture, it’s easier for me to understand the equity sourcing, it’s easier for me to understand how they need to get to where they’re going to go. And it’s usually developers that are on the cusp of making that jump to the big time, but maybe haven’t been there yet. So they need some more creative financing just to get there. That’s the client that comes to me and that’s the kind of client we close.

Jimmy: And you’re in the New York area. Do you stick within New York or are you nationwide?

Justin: No, we’re definitely nationwide. I do more outside of New York than I did. New York’s too hard to base your whole business around. I mean, I’ll do a lot of in-face and in-person advisory. Most of my lending contacts and most of my debt funds come out of New York. But my originations, I mean, I do more probably in, you know, Arizona and California that I’ve done in New York this year, even in my pipeline, just because our reach is so long, you know, through the internet, and it’s just very easy now. You know, aside from hopping on a plane to see a site, the numbers are pretty good, we have a lot of good market data, good comp data.

And if you understand the business, you can help to source funding a lot easier, you know, using that market data where you don’t have to…you know, it used to be if you know the New York market, you know, you’re able to source debt and source equity. But once you stepped out of your market, you know, what were you gonna do? Now we have enough market data that I can look up something in Orlando or look up something in Dallas and say, “Okay, I know the pricing here. I know what this guy should get for an apartment or this guy should get for a condo or this guy should get for multi-family or this guy should get for retail.” And I’ll be able to source that pretty quickly.

Jimmy: Good. Let’s shift our conversation to Opportunity Zones now. I know that you’ve been very active in education of this new industry. You’ve been putting on Opportunity Zones seminars all over the country. Can you tell me a little bit about those and why that’s been so important for you to do that?

Justin: Sure. For us, and for me, personally, I’m one of the few on our team that still does, is actually raising for real Opportunity Zones projects. I truly have in the pipeline, one closing right now both debt and equity. And for me, it is important for me to go to not…I don’t care about the big institutional funds. I don’t care about the Goldmans and the funds of the world that have their own fund and they’re putting things together, those are always going to be there. To me, it’s important to meet with tax professors. It’s important to meet with lawyers, it’s important to meet with accountants, it’s important to meet with family office advisors. Those type of guys who know where the actual capital gains are, they are the most important part of this project because you need capital gains to make this work. Sure you can bifurcate; sure, you can split and you can figure out the math later.

But on a general idea of how to put equity into these projects, you need real capital gains, and you need real foot soldiers. And to me, I believe that those people are the most important part of this process. So my company has put together a free brunch. We don’t charge. We invite professionals, we invite real estate professionals, we invite tax professionals, we invite accountants to come to learn about Opportunity Zones, to learn about Opportunity Zones in their areas, to learn how the program works, to understand how they want to invest, to understand how to marry it with debt, as the regulations were updated in both October and recently as last month, we were able to add and pivot those changes into our seminars.

And so we’ve been able to educate people and actually get real investors who really have sold stock in Apple, who really have sold a piece of property and want to find an alternative to a 1031 exchange to actually put their money into a real program. And I mentioned earlier, you know, I have some, you know, real good quality clients and good quality friends who are doing really big things in this space. So it’s not just, it’s no longer just people who are in the development business. This space is educating people who have real capital gains. And that’s what we want to bring in when we are funding projects for either our clients, our developers, or just helping, you know, a real fund get the money that they need for a specific project.

Jimmy: You know, I feel like this program is opened up real estate investing, private equity investing too, a whole new class of investor who may not have considered it a year ago, but now that the Opportunity Zones program is underway, it’s very enticing, is it not?

Justin: I think so. You know, and that’s a good segue. My very, very close friend is Clifford Harris. But you would know him as the rapper and actor, TI. I mean, he is like…he’s a great friend. He has become a beacon for this program. He has bought his own projects in Opportunity Zones. He’s hooked up with another gentleman named David Krause who…I don’t know how into hip hop music you are but a gentleman named Nipsey Hustle passed away a couple months ago. He was shot. His legacy was putting together this thing called Our Opportunity where they were going into Opportunities Zones and they were using this program to revitalize these communities.

Well, TI or Mr. Harris has taken this on full force. He has bought projects, he’s raised capital, he’s doing multi-family. He knows all the provisions, he’s gone to Washington, he’s gone to Newark to the Forbes Opportunity Zones Summit, he has really taken this and he’s really putting together real money from real athletes, specifically in urban communities, real actors, real musicians who have excess capital gains, he knows all the rules, all the regulations. His family office has been instrumental in helping put his vision on the map. And so there are people in the space, who you would not think were, you know, becoming real estate investors or becoming real estate moguls, who have now found a way to become important in the real estate investment world through the Opportunity Zone program.

Jimmy: I did not know that about TI. I had been reading about Nipsey Hustle. I had seen he’s been getting some quite a bit of press lately since his death in particular, obviously, about his involvement in the Opportunity Zone space. Beyond them, though, those are pretty high net worth individuals, are you seeing maybe sub-high net worth investors come in a little bit more as well who may have some sort of capital gains?

Justin: So to me, that’s where you got to go. I mean, yes, to your point, of course, if you have, you know, actors and athletes that have a million dollar ticket, and a million dollar capital gain on their stocks and bonds and whatever, sure. But to the doctors, to the lawyers, to people who are borderline above accredited investor to even below…I think there’s a kind of a gray line on accredited investors being in the program. But for all intents and purposes, the average mom and pop investor is the person who the smaller projects need to go to, to make things happen, and they have real capital gains, they have real reasons to invest in this program. And the concern for me, and I guess the segue to that is, who is managing this money once they segue and they put their money into these type of projects? Who is going to protect them? Why are they giving, you know, Jon Jones, who has an Opportunity Zone Fund who went to the state registrar, formed an LLC, filled out the form with the IRS and said, “Okay, I’ve put together and Opportunity Zone Fund. I’m a developer now.” Why are they giving him their money? And so that is a problem in the space that I believe we need to watchdog a little bit. However, to the same point, it is very important to understand that their money is the most important because the average capital gain, the average institutional investor is not just rolling around with, you know, capital gains overnight, you’re going to see more money coming in from capital gains of investors on a smaller level, but in mass quantities. At least, that’s my understanding, and what I’m seeing so far in the space.

Jimmy: And the best way to access those mom and pop investors is to go through their advisors, their lawyers, their CPAs, their financial advisors, is that right? Is that typically your process?

Justin: Absolutely. I think those guys are the most important right now. I really do think they need the education. I really do think that they need…I think that these pitch decks and I think these project decks really need to be tailored to the…at least from my experience. You know, we’re raising a project right now, a self-storage project, we’re going to close in a couple weeks, majority of it’s debt, we’re marrying it with some equity, all Opportunity Zone qualified capital and qualified equity. I believe that the financial advisors and the financial professionals that we’ve marketed to, we’ve gotten an education on what they understand about real estate.

You know, everybody understands cap rates, everybody understands basic things. But you know, outside of a basic pro forma, how you really petition those type of advisors is going to be how successful you will be in actually raising money for your fund or your project. And that’s what we really have to get to is the difference between raising money for a fund and difference for raising money for a project, that’s real, versus, you know, “Hey, we have an idea. It’s in an Opportunity Zone.” And I said this to you on our call, you know, I don’t want to see any more things on Crexi or LoopNet about, you know, this fully functioning retail center with no value add, is in an Opportunity Zone, you should buy it. That’s a bad advertisement. Nothing good can come out of that for an investor investing in that. It doesn’t solve any of the requirements of an Opportunity Zone.

We need to make sure that our professionals are really getting a true education on how this program works and that the money that’s going into this program is behind developers and investors who actually understand real estate, they understand returns, and that there was a long-term plan in place with their money, real PPMs, real projected returns, whether it be a preferential return, or whether it be, you know, a refinance in a couple years that, you know, gets them at least their money back because just the way the regulations rule, you just can’t pull out the cash. If these advisors do not have a proper education, they cannot properly advise their clients. And that’s where the problem could come.

Jimmy: Yeah, many of these overnight fund managers have set up websites where they sell the sizzle of the program, but not really the steak of the underlying investment. And possibly they haven’t even identified the underlying investment. I agree with you there. And just because you have a project that is physically located in an Opportunity Zone doesn’t necessarily make it a good deal. It doesn’t necessarily make it a good deal without the Opportunity Zone program. And then looking at it through the lens of the Opportunity Zone program might not necessarily make sense for Opportunity Zone equity to come in because of certain requirements that are necessary for it to make sense there such as the substantial improvement test. Is that kind of what you’re getting at?

Justin: Well, I mean, look, outside of the substantial improvement test, if you’re not following the requirements, like yes, you can, of course, dump money into an Opportunity Zone project to get through the first, you know, test the regulations, which is, “Hey, you know, our assets are in an Opportunity Zone.” But at some point, if you do not follow all the guidelines, your investors are going to be hit with a heavy, heavy problem in their taxes. And if they’ve invested their money into your fund and you have not properly educated them, or you have not properly put this together and how can you, right? The regulations are so new and they’re so undefined that every person who is just, you know, arbitrarily getting involved in the space, they’re not qualified, right? There’s no test, there’s no series that you can take on Opportunities Zones. You’re essentially investing in someone’s LLC, who’s going and hoping that he can follow the regulations enough to protect your money.

They have no really fiduciary responsibility, at least from a legal stance, they have obviously a moral fiduciary responsibility and a legal fiduciary responsibility that stops at what can get you in trouble with the court. But from that standpoint, there are regulations that must be followed that if they are not followed properly, there’s going to be a big tax problem for your investors. And since this program is a 10-year-hold, we have to be very, very careful on how much we know and how much we follow. And to your point, you’re putting money in something that does not pass the substantial improvement test, and you get clipped. What’s going to happen in a year or two when the IRS says, “Well, your capital gain didn’t properly qualify in this Opportunity Zone, pony up your 20% right now?” Big problem.

Jimmy: Right, especially if that liquidity’s gone, right?

Justin: Of course.

Jimmy: So for the investors and for their advisors, I guess I would characterize it as an education gap, a huge education gap in understanding Opportunity Zones, and possibly even in just understanding real estate investing at square one, if they’re not familiar with that type of investing. What are you advising potential Opportunity Zone investors and their advisors to do? What should they look for? How should they identify a good Opportunity Zone Project or a good Opportunity Zone Fund?

Justin: I think the developer has to have projects complete. I won’t take on a development project to fund for guys that don’t have a real resume. The same general provisions and there was an article the other day, I think I saw on “The Real Deal,” but the article I saw basically said that banks don’t really care if you’re…I think the actual article’s title was, “Banks Don’t Care About Your Opportunity Zone Project.” And they’re right. Projects have to underwrite as good real estate projects. The fact that they are in an Opportunity Zone are only a way to make sure that we can attract some new investment that would otherwise have financial ramifications.

And therefore, people would put it into a project. So if the developer is good, if the developer is experienced, if the developer is seasoned and they have all the other trimmings of a good real estate project, I think that that can be ascertained pretty quickly by a financial advisor, by an accountant, by a tax professional, by a lawyer. I think if the project’s in a good neighborhood, I think if it caps right. And I think if the people who are involved in it really have an understanding of the program and have a good 10-year plan, again, a good 10-year plan is what you need, because that’s what makes at least developing so sexy about this project. You can build an apartment complex anywhere. And even to our point we discussed the other day, there are 100 of diamond in the roughs in terms of zones that really shouldn’t be an Opportunity Zone, right?

We talked about South Williamsburg, where South Williamsburg, I think the median income is like, you know, several $100,000, because of the demographics, it ended up being an Opportunity Zone. But it really shouldn’t be an Opportunity Zone, nothing there spits out the need for jet a rebirth because it already has had a rebirth. So, yes, you will continue to find projects in these diamond in the rough zones. And you can follow suit in those areas pretty easily to say, “Hey, this is a good project.” When you get out of the diamond in the rough areas, that’s when it really does look to the experience and the understanding of the developer to be able to really put together a real project, to really have real numbers, not inflated numbers of what multi-family would cost, or even what low income housing would cost or what your stipends are going to be.

Or if you’re doing self storage, guys who may give you these inflated numbers with really small units, and you’re like, “Well, small units don’t do good in self storage.” If you don’t understand the real estate you’re involved in, then you can’t get involved in a real estate project, which means that the advisors of people who have capital gains and those people with capital gains, they have to understand at least enough about the real estate to get involved, or they have to get behind real estate developers and investors who really have true experience in the space.

Jimmy: We’re a couple months removed now from the IRS publishing their second tranche of regulatory guidance. By this point, you know, I think everybody’s had a pretty good amount of time to digest the regs and kind of understand how Treasury is going to interpret the statute that Congress passed as part of the tax cuts and jobs act at the end of 2017. But, you know, if you’re a professional, maybe you’re a doctor or a lawyer and you’re making, you know, couple 100 grand a year, and maybe you have some capital gains in the stock market, you go to your financial advisor who you have your investable assets with, and you’re asking them about the Opportunity Zone program and say, “Hey, I want you to check out this Opportunity Zone program I’ve been reading about it in the ‘Wall Street Journal’ or in ‘Forbes,’ you know, you should I shift some of my capital gains from my Amazon stock, my Google stock, my Facebook stock into some of these Opportunity Zones?” Are those financial advisors, are those mom and pop financial advisors ready to give advice, ready to move their clients’ funds into qualified Opportunity Funds?

Justin: On an average basis, no. I don’t believe that just yet, you have an appetite of guys ready to invest in projects the way that the world wants you to believe. A gentleman from Sky Bridge made a joke on, I think it was on the Forbes site, we laughed about this. And he said, “Opportunity Zones are kind of like high school sex, everybody’s talking about it, but nobody’s doing it.” My gut feeling in a lot of our seminars is we do have a lot of tax professionals. We do have a lot of financial advisors that come to these events because they’re trying to learn. I think they want to be able to say to their client, “Yes, invest in this type of fund,” and I think that they’re getting there.

I think in theory, because of the basics of the program, I think that many of the financial advisors do want to push their clients into Opportunity Zone funds. I believe that many of them also feel that they do not have the education and I feel many of them, up until at least last month, had even more trepidation because of the regulations. And even after the most recent set of regulations, still a lot of questions to be answered. So on a scale of education, I would say on a 1 to 10 scale. I think most financial advisors and tax professionals are at a 6, maybe at a 6.5. And I think that they really will not feel comfortable pushing their clients into these type of deals until they’re at an eight to nine. That’s just my gut feeling, seeing and talking to guys and trying to raise money for projects that are actually quite good to them right now.

Jimmy: Is it just a matter of time then before they become comfortable with it? I think we’re seeing, to your point what I’ve heard Anthony Scaramucci say and what you read Brett Messing say in that article about, you know, equating Opportunity Zone investing to high school sex, everybody’s talking about it, nobody’s doing it. We’ve seen a little bit of a trickle of some deals getting done. I know you have personal experience getting some Opportunity Zone deals done. You’ve successfully sourced some capital and some debt for some Opportunity Zone products, and I’ll ask you about that.

But getting back to my point, we’ve seen a little bit of a trickle of OZ money come in. Are we going to see the floodgates open here at some point where every tax advisor, every financial advisor in the country really has a firm grasp on this program and is ready to deploy mom and pop investors, Main Street investors’ capital gains money into qualified opportunity funds? Is it really just a matter of time before that happens? And how long do you think that might take for before we get to that point?

Justin: It will really have a lot to do with what the last set or the next set of regulations address, and why I say that is because I think 2026 is still an issue. You know, one of my biggest problems is that 2026 is still the cutoff date, right? I mean, they have been pretty hard lined about, you know, 2026 is the last…December 31st 2026, that’s it. So what’s going to happen everybody who invests in 2021 and 20…they didn’t move the goalpost like they did with getting out, right? The 10-year term can go to 2047 or 2048. They didn’t move the goalposts for 2026 for your initial savings on the capital gains.

So are all these financial advisors and tax professionals going to be able to source capital for their clients, you know, immediately in the next six months or seven months? I don’t know. So I think if they move the goalpost on the initial savings on that step down basis, I think that will give most of the financial advisors and tax professionals the time they need to get their clients in and excited and get themselves educated and find real projects.

I think if they don’t move the goalpost, I think there’s a good chance that a lot of these financial professionals are like, “Well, yeah, you can invest in this, but you’re gonna have a problem in a couple years.” And, “Oh, by the way, you know, you might not get the step down basis.” You know, I think that’s really something that they haven’t addressed that I’m kind of shocked that they haven’t addressed. Because it seemed like a…I mean, are they so desperate to get investment in the funds this year that that’s why they’re not moving the goalpost? Because right now, unless I’m missing something somewhere, I’ve read that, you know, eight different ways. I think if you come in after 2020, you’re going to have a problem.

Jimmy: Yeah, I don’t know if I necessarily agree with you there. So first of all, you are right, the end of 2019 here is, December 31st 2019 is the last date you can get money into a qualified Opportunity Fund and receive the full advantage of the program, including the 15% reduction in your original capital gains. As long as you invest through 2021, you’re still able to get that 10% step up in basis. After that, you know, you’re still eligible, you know, from 2022 through the end of 2026, you’re still eligible for the main benefit of the program, which is exclusion of the capital gains from within the Opportunity Zone, and you still get to defer your capital gains to the end of 2026. Why they haven’t addressed it…sorry to cut you off.

Why they haven’t addressed it, I think I have some color on that. The 2026 date, you know, take it for what it’s worth, it’s written in stone, it’s written in the statute that Congress passed. It would take an act of Congress to change that date. There’s nothing the Treasury Department can do to interpret that date in a different way. And from what I’ve heard from Treasury officials is they believe that Congress wrote the rule like that for a couple of different reasons.

One, they wanted to incentivize early adopters of the program. So that’s that end of 2019 rule for the 15% step up in basis and the end of 2021 rule for the 10% step up in basis. They wanted to incentivize early adopters, early investors in the program to try to get this thing going as quickly as possible. And then the second reason why they wrote in that 2026 end date is a matter of congressional scoring and federal tax budgeting purposes. They had to get that deferred capital gains tax back within a certain 10-year window, and I suppose that 10-year window ends at the end of 2026 for congressional budgeting and congressional scoring purposes. You know, that doesn’t mean a lot of sense to the outside world. But from what I’ve heard from people I’ve talked to on Capitol Hill, it kind of makes a little bit of sense for them at least, within their world.

Justin: I would hope that the…but that goes back to your question, right? Your question is, if I am a financial advisor, you know, when am I going to get comfortable with pushing my client into this deal? And, you know, again, it is hard for any developer, and any investor…you know, long-term projects are not…you know, 10-year projects, 10-year holds, the average investor is not going into deals for a 10-year hold. I mean, you know, these are long….you know, even 10-year money is some of your cheapest money on Wall Street.

Why? You know, in terms of returns. Because when you have 10-year money, right, 10-year money is a safe long-term investment. That is your institutional money. The problem is, is that here you have guys that are…you need mom and pop people, right? You need guys with capital gains. And so if I’m a financial advisor, how am I going to properly advise you in to do a deal based on real estate ideas that I don’t even truly understand, for example, the idea of the capital gains at the end of a project.

In any pro forma you ever see, when you talk about profits and you talk about returns, if you look at any pro forma, 9 times out of 10, they don’t even discuss the capital gains tax on the way out because it’s usually not their problem, right? They don’t base their investments on the capital gains tax on the way out because it becomes the problem usually of their investors.

So now you’re asking financial advisors to say to their client, “Hey, take your money, put it into this project. But if you don’t do it by the end of 2019, you’re automatically losing 5%, on what you could save over the next seven years and defer, instead of putting it into, let’s say, you know, another property as a 1031.” I mean, we have to look at this when you’re raising money. We have to look at convincing them over a standard 1031, where they could just dump their money into a 1031. And whenever they’re ready, they dump it again at that sale.

So the loss of that ability…yes, you’re going to get, you know, 10% instead of 15%, of course. And, yes, there is still the carrot at the end of the rainbow for the real estate guys if there’s no step up capital gains, there’s no capital gains tax at the end project. Agreed, but if I’m a financial advisor, am I really pushing my clients, you know, into these Opportunities Zones right now, you know, past 2019 or, let’s say, past 2021? Let’s forget 2019. Past 2021, I think, are we rushing to the door to push guys into these projects? And I can tell you from actually being out there and raising money, that’s the pushback. That is truly the pushback.

How can they identify with their clients into this long-term fund, where they can’t touch it, they can’t feel it, they just get a dividend. And, you know, the carrot of not even saving the 15% if it goes past this year. So are they in a rush to push their money into the pot? Well, that would be the idea, right? “Hey, let’s try to get them into something before the end of 2019.” But now, there’s a lack of vetting, there’s a lack of vetting these projects right now. And I feel that just in talking to them, that is a problem that is going to just get wider after you get past 2019.

Jimmy: No, that makes perfect sense to me. And there’s definitely a tension. There’s kind of a tug of war between, you know, taking the time to properly vet these projects. Not only that, but taking the time to actually become educated about real estate investing in general and about the Opportunity Zones statute and regulatory guidelines. And then at the other end of the rope pulling the other direction is well, the clock is ticking, right? So you’ve got until the end of this year, the end of 2019, to receive the full tax advantage. And then you’ve got the end of 2021 to receive any of the capital gains reduction in basis from your original investment. Yeah, the clock is definitely ticking. It’s a problem.

Justin: And you know, Jimmy, the other thing is, I hear you and I understand to your point of, you know, what the Hill is saying to you as to why they’re trying to cut it off. But to my earlier point, they did move the goalpost for the step up, right? I mean, in a perfect world, it was ended December…this program went into place early January 2018, right? The cutoff was December 31, 2017. After that, you could have been in. And then the original regulation said, “Look, you have 10 years from such and such a date.” And then they said in the next regulations, “Well, we’re going to give you 10 years after that and another 10 years after.”

So really your outside date could be 2048, where you could still sell your asset and not get hit for a capital gains tax. And my question to them would be, well, if you were able to make it work financially and move the needle for that, I’m sure the capital gains are way bigger and way more important off those properties up to 2048. Well, why are you not able to figure out the financials to make sure that guys who get in in 2023 and 2024, they have the ability to move the needle. Because financially, I’m sure that the profits of a project that starts in 2023 and has benefits up till 2030, I’m sure the long-term benefits of that would probably exceed the gains anyway, or the tax money they would get any way off of this project, you know, not get paying the gains.

Jimmy: No, you’re right. That’s an interesting point, you know, the 2047, 2048 date was not written into the statute. That was just regulated by Treasury. I don’t know, I think maybe their hands were tied with the 2026 end date because it’s explicitly written into the statute. But, Justin, I would encourage you to write a public comment letter to the Treasury Department before their IRS hearing next month and see if…you know, write it in the context of what you’re seeing different mom and pop financial advisors, the pressures that they’re under, and maybe add some color to it in that regard, maybe they’ll take a look at it. But beyond that, maybe you might have to write a letter to your congressman or senator to get the law changed.

So I want to talk to you now about some of the actual real world experience that you have, because you actually have some real world experience sourcing capital for qualified Opportunity Funds. So I wanted you to kind of paint that picture for me. Can you tell me about one or two of the OZ deals that you’ve done? What does one of these actually look like from start to finish? What’s involved? Maybe you can just walk me through the last one that you did.

Justin: I should be closing this next 8 days, a $12 million self storage deal. That deal has about $4 million of equity. It’s been raised through an Opportunity Zone Fund. My limited understanding and, you know, I only get what they tell me but the equity piece was raised by the sponsor. He was able to put together a fund. He was able to solicit capital gains. I did help solicit some of the investors who did represent that they had qualified capital gains. He had the proper accounting firm behind it, he had the proper tax professionals and legal professionals overseeing it to raise the equity, when the regulations came out, it kind of put the cherry on top and then put a bow on it for about $4 million, the rest was all debt.

The bank treated the debt as recourse to any sponsor that had a 20% voting interest. They did make them sign as if it was just any regular investing deal. They were willing to do that. The bank did not give any special preferential treatment to this being an Opportunity Zone. They did notate the fact that it was a long-term hold. They will give them non-recourse debt to the extent of once the construction phase is done. And so with the idea of recourse in these deals, my understanding is that the recourse component is very important to how the long-term and the capital gains ramifications are for the fund.

And so I would say to you that based on what I just told you, they did treat this almost like any other real estate project. And I know we made a comment earlier that there was an article about banks not caring about Opportunities Zones. And I would say to that, I think banks need to care about Opportunity Zones because there are recourse provisions and specifically provisions where the debt should…has to be non-recourse which could have capital gains effects on the members of the fund, should it have to be recourse or signed by certain members or preferential members, so on and so forth. With long-term holds and long-term deals being a finance professional, it’s very often easy to get non-recourse because the merits of the project carry themselves.

But when it comes to something like I’m doing with the self storage, this is a construction deal. And so by the banks not treating these construction deals as non-recourse, because, you know, $10 million, $12 million deals, they are historically not recourse. I mean, they historically are recourse deals. You can do a $30 million or $40 million or $50 million or $100 million deal. Even those you can push the lever, but you can find funds that will do the whole deal non-recourse. There are federal programs that will do multi-family and different programs all non-recourse. But on the average project, recourse during construction is an important part.

Well, recourse during construction can trigger a problem the way that the statutes of the Opportunity Zone provisions are written for capital gains purposes and for the long-term purposes. And so to that point, that is something that my investors are knocking their heads against the wall with, because they’ve set up their fund properly, they’ve done everything they have to do. But a bank’s not giving anybody $12 million non-recourse debt. A debt fund might, right? A debt fund might say, “Hey, we’ll give you non-recourse but you’re also going to pay LIBOR plus 700, or LIBOR plus 800.” So you just added, you know, on a $10 million example, you just added a half a million dollars to $750,000 of interest cost to your project.

So these are the things that I think from a finance side, we really have to care about. Bankers have to care about it, fund managers have to care about it, because the recourse issue during construction. Construction is a huge, huge component of this program. And if banks don’t get ahold of how they can…you know, if there’s not a way that somebody can say to a bank, “Hey, listen, you know, we got 50 investors in here. You know, how are we doing recourse on this construction loan?” Maybe the government can help with something.

Maybe there’s a program they can put together which will give…you know, kind of similar to where the SBA does it where the bank feels, you know, safe in lending their money to these projects. But debt is a huge component of these projects. You know, it’s not prudent to think that you’re just going to open an Opportunity Zone fund if you need $12 million for a project. You’re going to raise just all $12 million and put it all into a project. That’s just not how construction development goes. Debt is a huge part of this and recourse is a huge part of construction debt to certain numbers. And so banks are going to have to take notice that this is an important part of the process that they are going to have to get comfortable with because it is plaguing some of the progress on some of these projects.

Jimmy: Well, Justin, you’ve done it yourself. Now I’m going to recommend that you write another letter to the Treasury. We got to write them a letter about recourse debt and non-recourse debt and how it can be applied to the Opportunity Zone space. By the way, I did find the article that you were referencing. It was actually a Bisnow article from May 29th. And the title is, “Lenders Don’t Care If Your Project Is In An Opportunity Zone.” I’ll have that linked in the show notes for today’s episode. You can find those at Well, Justin, how would you like to see the Oz industry evolve over the coming months? Do you feel like more regulatory oversight is in play? I mean, you mentioned a watchdog role being necessary. What would you like to see take place here?

Justin: Yeah, 100%. I think you’re going to need a body that is a compliance body. I think you’re going to need a compliance body for fund managers. I think you’re going to need a compliance body for education. But, I mean, Jimmy, I swear to you, and this is not to out anybody, but there are people I see that have come to me for financing. And then I said this to you today, they’ve actually come to me for financing that are not qualified for projects that are now managing Opportunity Zone funds. And they’re representing themselves as, you know, knowledgeable in the space and they’re at all these conventions and thery’re guest speakers on panels.

And I’m thinking to myself, “Well, why are you here? You were an analyst here. You’re not…” And that’s not to say this isn’t America…American dream and people can’t start, but we’re talking about managing. What could be tens or hundreds or millions of dollars of people’s money on these individual projects. We just can’t turn it over to everybody because they know how to form an LLC and they know how to read regulations. Development is hard, construction is hard. And the banks don’t give money to developers that aren’t experienced and seasoned. Debt funds on average don’t give money to people that aren’t seasoned and experienced.

So I think that the government has a huge responsibility to tighten this up with terms of regulation. I know, nobody likes regulations. And, you know, we have a Republican Senate, but we need regulations. We really do. We need tightening up of regulations. We need more education and we need a couple more revisions to the program. We need to address some of the things that still haven’t been addressed. We need compliance, 100% need compliance. It can’t just be a form that you fill out because there is a fear. There is a fear that, you know, if money is invested in these things, what happens in a couple years, or, you know, a year or two, when tax returns are filed and the fund didn’t exactly know what it was doing or everything was too ambiguous? What happens when you don’t have the liquidity, as you said, and cash flow to solve the problem of you not properly following directions on an investment in Opportunity Zone fund when you were pushed to buy a group that thought that they knew what they were doing?

I think that that is a big, big problem. I think the people that are speaking on it, you know, were all kind of like just learning it. Anybody who’s in this space or who knows about the space, we’re all kind of like in this community and we kind of talk and share information and ideas. But we’re all kind of wading in the pool. And so, yeah, I think regulation is an important thing. I think more of it is an important thing. And I think that they have a lot to address still before we start, you know, really seeing a problem in a year or two. I really do.

Jimmy: Yeah, well, we’ll see what happens here with this IRS hearing coming up next month on July 9. We’ll see…maybe you’ll be there and speaking who knows? And again, I would encourage you to write a public comment letter on one or two of the points that we’ve brought up here today. Well, Justin, this has been a pleasure. Thank you for sharing your thoughts with us today. Before we go, can you tell our listeners where they can go to learn more about you and StackSource?

Justin: So you can check out my LinkedIn. It’s You can check us out at If you have any debt, equity, pref back, mezzanine, and of course Opportunity Zone funding needs for projects, and, you know, I’ll say this with a smirk on my face, projects that are real, that are ready to go and, you know, you’re experienced, I think that we are, you know, ripe to help anybody out who’s in it. I think we do a really good job. I think we have a good understanding of the Opportunity Zone space and so, you know, as a finance professional, I think we can be of help. And I said this to you on your podcast, pivoting a little bit, people should check out your website and your podcast because it really did help me or at least early on really learn and get a feel for this program. And it’s really, really helpful and you do a great service for the Opportunity Zone community.

Jimmy: Well, thank you. I appreciate the kind words. And I applaud you for the free breakfast that you’re putting on around the country. I think that’s awesome what you’re doing to get people educated.

Justin: And they’re good. I made sure that every outlet…and it’s a lot more expensive but I made sure at every breakfast we do, we have an omelette station because we weren’t just gonna do, you know, some continental croissants and juice, we go pretty in with the breakfast. So it’s worth coming out to.

Jimmy: Okay, good. I’m gonna have to check it out one of these days then. All right, Justin, thanks again. For our listeners out there, I’ll have show notes on the Opportunities Zones Database website for this episode. You can find those at And you’ll find links to all of the resources that Justin and I discussed on today’s show. I’ll have links to Justin’s LinkedIn account, to the StackSource website, and to the Bisnow article that we referenced earlier about lenders not caring whether your project’s in an Opportunity Zone or not.

Justin, thanks again for coming on. I appreciate it.

Justin: Thanks again for having me. I really appreciate it.