COVID-19: Relief for Opportunity Zone Businesses, a Zoom Meeting with OZ Pros

OZ Pros Jimmy Atkinson & Ashley Tison

Congress has passed three phases of coronavirus relief packages, with a fourth potentially on the way soon. How can Opportunity Zone businesses seek relief? And how can Opportunity Zones assist with economic recovery?

OZ Pros hosted a Zoom meeting with 80 of the most engaged Opportunity Zones participants in our network. The Zoom meeting included presentations from Ashley Tison (OZ Pros), Howard Matalon (OlenderFeldman), and Reid Thomas (NES Financial).

Click the play button below to listen to an audio recording of the Zoom meeting.

Episode Highlights

  • Information for small businesses seeking relief through the FFCRA and CARES Act.
  • Furloughing vs. laying off employees.
  • Provisions for paid leave.
  • Overview of the coronavirus economic relief packages that have been enacted thus far.
  • Paycheck Protection Program (PPP) vs. Economic Injury Disaster Loan (EIDL).
  • Biggest takeaways from final regulations on Qualified Opportunity Funds.
  • How Opportunity Zones can participate in coronavirus recovery efforts.
  • How the potential of significant capital gains recognized during the recent stock market selloff can be deployed into Qualified Opportunity Funds.
  • Attendee Q&A session.

Video Recording of the Zoom Meeting

Featured on This Episode

Industry Spotlight: OZ Pros

OZ Pros

Founded by Jimmy Atkinson and Ashley Tison, OZ Pros offers a simple document generation tool for quick and easy Opportunity Zone Fund and Opportunity Zone business creation. OZ Pros also offers a full-service package that can include fund formation, PPM generation, pro forma and pitch deck, compliance, and administration.

Learn more about OZ Pros:

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.

Webinar Transcript

Jimmy: Thank you very much for joining the Zoom meeting, hosted by OZ Pros, opportunity zones strategy session, final regs, coronavirus, and Q and As. And presenting during this meeting today will be my partner at OZ Pros, Ashley Tison. Ashley is a business attorney and opportunity zone consultant in Charlotte, North Carolina. Also presenting will be Howard Matalon, partner of employment practices at OlenderFeldman in New Jersey. And we’ll also hear from Reid Thomas, executive vice president at NES Financial and Reid is joining us today from the California Bay Area.

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So, very quickly the agenda for today’s call, we’re going to have a presentation on the COVID-19 relief legislation, very timely, and some SBA resources to go along with that. We will do a brief walkthrough of some of the biggest points from the final regs which came out in December. Reid Thomas from NES Financial is going to speak a little bit about some timely matters relating to opportunity zones in the current environment. And then like I said, we’ll have some time for some participant Q and A toward the end of the meeting.

And now without further ado, I’d like to turn it over to Ashley to begin today’s presentation. Ashley, go ahead.

Ashley: Thanks, Jimmy. As always, it’s a pleasure to be in front of our audience. And thank you, everybody, for participating in this Zoom call. We’re looking forward to sharing with you some of the stuff that has recently come up. So, as everybody’s aware that, you know, our world has been kind of turned upside down relative to this COVID-19 thing. And so, we’re all you know, in one way or another, dealing with it. So, that was one of the main goals or what we’re trying to accomplish on this call. So, you know, I am an attorney, so I’ve got to hit it with this legal disclaimer. And this is not legal advice because we’re on a big, gigantic Zoom call. And so, if you feel like you need legal advice with respect to any of this, give us a call and we’ll be happy to coordinate that later on.

So, our first speaker, we’re going to let Howard jump in here first. He is an employment litigator with OlenderFeldman. And he has been representing clients with respect to human capital management for 30 years. And I was actually on another call where Howard presented and based upon that call you know, and some of the stuff that he was talking about, we thought it was very timely that he’d get in here and give everybody an update about some of the things that are embedded in the legislation that can impact both opportunity zone funds starting up, QOZBs, and existing businesses. So, we wanted to hit that from a high-level first. So, Howard, I’m going to turn it over to you now. And you let me know when you want me to hit slides.

Howard: Yeah, you can go ahead and roll. So, first of all, thank you for the opportunity. The most horrific thing I heard today is that I’ve been practicing law for 30 years, which just makes me that much older. Thank you very little. So, we’ve had a lot of updates in the last couple of days. In fact, updates as most recently as yesterday from the Department of Labor on the Coronavirus Relief Act. The good thing is that the new news is all good. They’re finally beginning to clarify the small business exemption for what I call the childcare portion of the Coronavirus Relief Act. And we’ll go through the slides and as we go, we’ll kind of explain things.

Okay. So, this is what probably everybody wants to talk about, which is this issue of furlough versus layoff. So, there are a number of buckets out of the calculus, and my guidance is being revised almost weekly based upon the complexity of the situation for small businesses and the new opportunities that are available for loans. This is your opportunity if there wasn’t one before, ladies and gentlemen, to clean house. And by that, I mean putting the furlough and layoff to the side. The first thing to always ask yourself is, do I have employees that are currently on staff that I’ve only allowed to be on staff because we needed extra bodies and candidly, we’re in the position now where none of that’s necessary and because the water level of business is receding, we’re beginning to see the dry cracks? Let them go. Let them go now, not furlough them because furlough is basically an invitation for them to come back to work.

The key difference between furlough and layoff, of course, is a furlough they remain employed. Huge, huge thing to remember because with a furloughed employee, any benefit they have under federal or state law as an employee remains with them even if you’re not paying them. Layoff, of course, you are letting them go. And one change we need to make to this going forward, the Coronavirus Relief Act was supposed to go into effect April 2nd. That’s what they told us. It’s, in fact, going into effect April 1. So, if you’re going to do layoffs, you have to do them today or tomorrow. Otherwise, you’ll run afoul of the act.

Let’s go to the next slide just to see if we’re going to talk about coronavirus as we go through this. Okay. We can go through all of the slides and I think it’s important to share these out because it will play into your calculus of furlough versus leave versus loan. We’re adding loan in because of the CARES Act SBA provision. Here’s something brand new that you don’t know because it just came out yesterday from the Department of Labor. The question was raised way back when when the Coronavirus Relief Act provisions were announced, that the Department of Labor was going to create this small business exemption for businesses under 50 employees.

And for those of you who have companies of 50 or more, you know that the Coronavirus Relief Act is an adjunct or an extension of what was called the Federal Family and Medical Leave Act, which only applied at one point to businesses 50 or higher. So, I am sure in the last couple of weeks since the DOL announced the law and said that they would provide guidance on the exemptions, that the DOL website has been spammed with requests for exemptions. So, what they’ve decided to do is said, “Forget that now. We’re going to actually allow the businesses who are under 50 employees to self-exempt only as to what we’re calling the childcare provision.” And the childcare provision, and I’ll break this down, make it simple, there’s caring for yourself, there’s caring for someone else who’s sick, and then there’s caring for kids that are healthy because of school situation. Okay? I’m just going to pull this guidance up because literally it just came up.

So, the way that the Coronavirus Relief Act works for the worst provision, which is that $200 per day or $12,000 for the 12 weeks, that no longer applies to a business of 50 or under, where an authorized officer of the business can make this determination. And it should be done, I believe in some kind of written memo or guidance that the business will maintain on file. One, the provision of the paid sick or expanded medical leave would result in the business’s expenses and obligations exceeding business revenue and cause a business to operate under minimum capacity.

Or two, the absence of those employees would entail a substantial risk to the financial health or operational capabilities of the business because of their specialized skills. Now, that would apply… I have a client, for example, who’s got 85 employees in New Jersey and they’re a manufacturing business. Okay. If the employees decided en masse to say, even though they haven’t in the past, “You know, I think it’d be a good time for me to stay home with the kids,” that would work a death sentence for the business, which is a critical business operating in the medical provider space.

The third exemption, and remember these are or provisions, so you don’t have to comply with all of them, just with one of them, is that there’s not enough workers ready, willing, and able, and available to perform the services necessary for the business to operate. Critical stuff. Right? Because this was the worst fear of all of our businesses. You have a 50 employee or under business, most of us are small business owners, my firm is about 30 employees, where all of a sudden all the employees who were capable of teleworking say, “I can no longer telework because I have to take care of my kid.” Well, thank God the DOL got something right and they posted this guidance. This is an official DOL guidance by the way.

Interestingly enough, you are not going to see it anywhere but the DOL website or you know, reported from news sources. Very, very important for you, guys to take a look at the latest guidance. I’m going to send around the link after the broadcast to where all the new FFCRA guidance is and I’m guessing every single week, they’re going to add to their frequently asked questions. Amazingly, this is buried at question 58 and 59. So, if you’ve gone through the five pages, you won’t find it. Okay? And the news sources are only slowly coming up to speed. The only reason I found that is I was going to publish a list to a client. I said, “Well, that’s odd. There’s more than 39 questions today.” And then you started seeing all the other questions below it. Really important that if you have an FFCRA situation, whether it’s the emergency paid leave of the 10 days or what I’m calling this childcare portion of the relief that you take a look at the site.

So, in terms of how the paid leave provides, right? So, we’re going to go back to that slide. Great. That’s all the provisions. It falls into one of two buckets. The first bucket is I’m caring for myself, I’m caring for a loved one, I think I might have corona. Ten days of paid leave, 10 days. Okay. That’s critical because after the 10 days expires, you’re on unpaid FMLA, unpaid FMLA, which for those business owners who’ve never encountered what FMLA is, effectively what it means, these people are out of work, but you must provide them with a job when they return. And I think we’re going to see some new guidance from the DOL on that as well.

I’ve heard rumors, although I haven’t actually seen it in the law, that that might not apply to businesses of 25 employees or under, but we’ll get there. For now, if they’re out, they’re out sick, they think they have corona, you have other situations that happened today, and for one of my clients, they’re told by a doctor that because of their COPD, which is a breathing disorder, that they should absolutely stay out of work. Let him go. Let them stay out of work. Let them take advantage of the law when the law comes into place. And then after that, it’s 10 weeks of paid time off. They can apply for disability under your relevant state law in New Jersey. We call it Family Leave Insurance and TDI, Temporary Disability Insurance. They can apply for that.

The important thing that the DOL got wrong. So, many states, including New Jersey and New York, have what they call their own separate law called Earned Sick Time Leave. This was passed last year in New Jersey and New York that provides employees for a whole variety of reasons, including needing to be home with five additional days of paid time off. That is required by state law. It doesn’t matter whether you have corona or not. The law had been on the books for a while now. For most employers, that operates in New Jersey and New York from one employee forward, that five days had to be provided at the beginning of the calendar year.

So, for your employees who are working, who are taking advantage of the coronavirus law, they will get one week of earned sick time under New Jersey law and that is, by the way, full pay. Then they will get 2 weeks of the leave that’s provided under the FFCRA, but that is capped, that’s capped at $511 per day to a maximum of $5,110. Okay? Really important to know. There’s a difference between that law operating, I’m going to pull my own slides up, and what I’m calling this childcare leave. Okay?

So, if you are applying for the childcare leave and one of the reasons that you’re home is because you’re either caring for an individual who’s subject to an order of self-quarantine, your wife gets sick, you’re caring for a son or daughter because the school’s closed., that is paid at two-thirds base pay at a maximum of $200 per day or the $12,000 that’s listed at the bottom. And as we develop questions, if you have questions, we can either do it today. You can send me questions. Send the questions to the guys, and I’ll be happy to answer them for any business who needs some help. Okay. We can move on to the next slide. Thank you.

All right. So, provisions for paid leave, it’s capped at $10,000 per quarter, but it’s really $12,000 for this emergency leave. The requirements are in effect on April 1 but they are not retroactive. They are not prior to Wednesday of this one.

Ashley: And, Howard, this slide was prepared before we got that update from the Department of Labor website. And so, we’ll amend this slide to include that information and then we’ll also include on here, a link to that information from the Department of Labor.

Howard: Okay, great.

Ashley: Awesome. Well, thank you, Howard. Anything else that you wanted to throw in there other than…

Howard: So, one other really important thing, and I know you’re going to touch on the loans.

Ashley: Yeah.

Howard: So, true story on the guidance, right? Because everyone said, “Well, how does the existence of the loans affect your guidance on furlough or layoff?” And by the way, on the front of furlough or layoff, here’s the practical guidance. If you care about these employees, A, B, you absolutely need them for the business at the point where the business will come back or C, you’re concerned that in some markets, for example, let’s say, logistics transport, that if you don’t furlough them and they’re laid off, that when the economic condition gets better, but they will go to work for Amazon fulfillment, which they will, then you should furlough them. Layoffs are permanent. They will not forget the fact that you laid them off if they even think that the business is capable of continuing. So, let’s be honest about that.

But as far as the loans go, you know, at our firm, we started really looking carefully at the SBA guidance and we provided that in a separate set of PDF to Ashley to circulate around after this call. Our view is it’s really not free money. Okay? Because at the end of the day, the loan forgiveness is capped at $100,000, right? So, if you’re going to get $100,000 back, which means that you’re still out of the loan funds. So, the truth is if you have to do something and you need to do it now, the new guidance is, reduce your current staff levels with essential personnel. And by that, I mean those who are absolutely critical to operating the business currently. The non-essential personnel are those who could be useful to the business…who would be useful for the business, but will probably not be needed for a couple of months given A, that we’ve got the lockdown now until the end of April and B, we know that it’s going to take a while for us to get our loans.

The true story is for those who are looking just at the loans and the availability of the loans, I can give you some practical guidance. Chase Manhattan Bank, for example, who is one of the premier SBA lenders, has told its clients that they will not have the applications up for the SBA through Chase for two weeks, two weeks. So, you’re sitting here, thinking about your payroll and how you’re going to be relieved automatically, I can tell you, it’s not happening anytime fast. So, the guidance is balanced. Take care of your essential personnel, reduce the number of non-essential personnel, and then apply for all the guys that Ashley’s going to give you on the loan funding and otherwise. That is the best way to hedge your bets against the possibility that the loan process is daunting, that the websites don’t come up, that the SBA comes back with a series of questions you did not anticipate, and you’re sitting there for four full weeks without having gotten any relief from the government. And that’s basically it.

Ashley: Awesome. Thanks, Howard. And we will have Howard’s contact information in the show notes/the slides that we’ll be sending around everybody as well. Okay. And I’m going to hit this really fast about going through on the coronavirus and the economy and basically what the government is doing with respect to how they’re initiating relief. So, they did it in three phases. So, phase one was basically like, let’s dump a whole bunch of money into research, rapid response, vaccines, loan subsidies, and that kind of thing. And that’s where the first round of the emergency relief through the SBA itself came out. Phase two was the stuff we were just talking about, about you know, a lot of the elements of kind of expanding the FMLA and in other pieces of that, additional funding, that kind of thing, you know, to implement critical services. Then phase three is the CARES Act that was just passed recently and just came out of that. Phase three, probably being, I think probably the most important one that people will be interested.

So, I’m going to go through this, right. I mean, we kind of hit it on high-level at phase one and you, guys can certainly go through these slides. If you got any questions about this stuff, we can either hit them in the questions at the end of this, or you can shoot us an email, or we can hit it later on. We can round up after. This is phase two. So, like I said, kind of expanding the FMLA and getting some of the other things in there that Howard was just talking about. And then this is the big one, phase three. So, this one is the one that’s going to be sending each and every one of you, your checks out, you know, based upon what your income qualifications are and that kind of thing. There was also significant provisions included in there for businesses, including deferral of employee share of taxes. There’s a big one in here, and we’ll hit this a little bit later on, but on net operating losses carryback, an increased interest expense deduction from folks that are, you know, for loans and that kind of thing, and accelerating the QUIP deduction. We’re going to jump into this as well on the SBA in the loan forgiveness in the next slide. And then you know, other stuff that they dropped in there for student loans and that kind of thing. Forgive all your remaining student loans that are out there for everybody on the call. Just kidding.

So, the business tax relief. So, deferral of the employer share, that’s 6.2% of social security or self-employment tax and then having it paid in December 31st, 2021 and then in 2022. Net operating losses from 2018, 2019, or 2020 will be eligible for a 5-year carryback and the 80% of taxable income limitation will be temporarily removed. I’m going to expand upon this a little bit in heavier detail about specific application to opportunity zones, but that is significant because what it enables people to do is to then…they can effectively take any kind of depreciation expense that they’re incurring this year and run it back to get a refund of the taxes that they paid in 2018 and 2019, which is really significant for opportunity zone deals that have a significant amount of depreciation because their investors will be able to take advantage of that in order to offset other sources of income. So, there was a temporary increase in the interest expense deduction from 30% to 50% of ATI or adjustable taxable income. And then like I said before, the QUIP acceleration. And then it automatically extended to July 15th. I think that’s kind of old news by now.

So, this is the SBA 7(a) loan program that they initiated and this is available to employers with fewer than 500 employees. It’s up to $8 million, but it’s based upon two and a half months of payroll. And this goes into kind of what Howard was talking about, that loan forgiveness applies when the loan’s used for payroll. And I actually think that they may have cut out the rent utilities more, which I actually think that it’s actually just payroll now, so we may need to edit that slide. A lot of this was in flux over the weekend on what the final terms of the legislation was. So, forgive us for any of the specifics in that. And we will get confirmation on that before we send that out. Repayment ability is not a requirement, but you will be required to have been in business with employees on February 15th. And the government guarantee increases to 100%. They also put some incentives in there to the lenders that are actually really good or are going to make it so that pretty much everybody who’s in the SBA game is going to be looking to make these loans. And folks who are not in the SBA game are going to be looking to jump in. And like I said before, this is structured through banks and their SBA loan process.

So, the Paycheck Protection Program versus the Economic Injury Disaster Loan. So, the difference between these is that the PPP, right, and my mind goes back to a ’90s song with similar initials, but it’s based on payroll, debt obligations, that kind of thing, incurred before February 15th. So, that’s two and a half times the business’s average monthly payroll. And it comes in at a fixed 4%, and there’s no payment for the first 6 to 12 months, and then it’s on a 10-year term. And the forgiveness is up to100% with approval. But as Howard said, it caps out. So, you need to be paying particular attention to the caps. The Economic Injury Disaster Loan, right, this is for payroll, fixed debts, accounts payable, or any other expenses that can’t be paid because of the disaster. And that’s up to 2 million bucks and it’s 3.75% for small business and 2.75% nonprofits. The repayment term on that one is up to 30 years, but it is not eligible for forgiveness. So, you’re going to want to weigh the two of those, particularly in light of what Howard was talking about with respect to how this will be tied into your payroll or how it is tied into payroll. And for startups like QOZB startups, they are getting to going. The PPP is not gonna…well, unless you have payroll that you already have, you know, you’re not going to be eligible for that one, but arguably you could be a candidate for the EIDL.

All right. So, how long does it take? So, you know, they’re talking that they are going to try to have applications in. I know that the SBA lenders that we’ve been talking to have been getting inundated with requests. And so, to the extent that you have an SBA contact, you’re going to want to go ahead and reach out to them. And if you don’t, then we can certainly hook you up with one. So, once again, they’re trying to get money out as quickly as possible, you know, the President said this Friday, but I’m not seeing that one coming. It will actually cover salaries for owners as well as long as, you know, that you are actually on payroll. There’s not any provisions for K-1 partners who receive guaranteed payments. And it’s only for compensation that’s under $100,000. So, credit cards and AP, so if you’re running your business on credit cards and you’re using that for AP or you’ve got kind of regular trade payables, those are not covered, if it doesn’t pertain to employee payroll. So, once again, this is one of the other provisions. There’s no need to file extensions for the April 15th extension. And then once again, there’s no revenue requirements, so you just have to have payroll. And then is interesting because it averages the number of employments or employees in 2019 versus 2020. And that percentage accounts towards the amount that’s forgivable, along the line with what Howard was talking about.

So, let’s talk about coronavirus recovery and opportunity zones. So, there’s some new lingo out there based on COVID. Like you’ve got folks that are not practicing social distancing and those are called covidiots. And I’m coining a new term today called COVID delays. And so, there’s been a number of questions about opportunity zones with respect to COVID and what’s happening. So, does a QOF get extra time to deploy capital because of delays? And I think that the answer on that one’s probably going to be no because it’s set. There’s no language in either the legislation or the regs that provide for additional time for the QOF. But a QOZ could potentially get extra time and an extra 24 months in the Working Capital CFR because of this federally-declared disaster area that was in the language of the final regs. And this may be able to apply across the country because of the national disaster declaration by the President. But there’s still some final questions about whether Section 501(b) is sufficient or whether he’ll have to actually issue a Section 401(a), a major disaster declaration.

So, interestingly, that extension to July 15th did not extend the partnership or S-corporation March 15th deadline. So, the deadline for 180 days after the partnership tax year is still September 15th, so that the provision that allows you 180 days until the partnership’s tax filing deadline is still being counted from March 15th. So, they’ll make it September 15th to deploy capital into the QOF. So, some thoughts about how opportunity zones, I guess, not necessarily take advantage of this, but how they could position themselves better for you know, actually being an instrumental piece in, you know, how we’re dealing with COVID. So, one of the big ones that everybody’s talking about is supply chain reunification, right? So, onshoring effectively or reshoring, if you will. And this is, particularly for medical supplies. So, if you’ve got a business that’s got any shot at being able, you know, to make a difference and to be spitting out masks or other equipment, that kind of thing, then you know, by all means, should be jumping in on trying to get that done in an opportunity zone.

One of the other things, and this is actually from the EIG webinar earlier today, is that, you know, folks within the opportunity zones and particularly, some of the community organizations that are facilitating the opportunity zones and interactions amongst all the state agencies, have actually been instrumental in getting you know, groups that normally don’t talk to each other to actually start working together. And so, I think that that’s going to be one of the plays that could be a gamechanger here, is that for the first time, we’re seeing a consolidation of information relative to all of the different grants, and funding, and that kind of thing that’s available. You know, we’re starting to see that get consolidated into, you know, kind of group pages and into resources that are helping the communities tap those resources and helping them get into the small businesses that can actually make these things happen. So, once again, kind of another encouragement to be talking to your economic development folks, be talking to your chamber of commerce, be talking to the groups, or finding out if there’s groups in your area that can assist with that type of stuff about coordinating those resources into a concerted effort.

And this is actually probably the biggest one that I think could be a great marketing play for funds and particularly, for funds or QOZBs that have significant amounts of depreciation that are available in the first couple of years is that, like I said before, is that folks, taxpayers with excess losses in real estate can now deduct that against income from other sources and you could carryback that depreciation to losses to 2018 and 2019, and it also removes the cap on it. So, if you’ve got a mobile home park, if you’ve got something that’s you know, invested into personal property, so like a hotel deal, that combines, you know, your FF&E, your TVs, your beds, all that kind of stuff, into your overall development, and I think that you could actually be fairly attractive to somebody that’s got income from other sources because you’re going to allow them to be able to take that depreciation and apply it towards that income, even from previous years. So, every opportunity zone project that’s out there as a result of that, should really look long and hard at a cost segregation study so that that way you can separate what’s in your project that’s going to be personal property and gets a faster depreciation schedule from what’s actual real property that’s going to be depreciated over a longer period of time. And like I said, any projects with any way to advance that depreciation loss should really be looking at how they can do that.

So, I’m going to touch on this real quick on the opportunity zone final regs and some of the biggest takeaways from that. You know, we kid around that the final regs were…they were awesome and they basically gave us almost everything we wanted except one thing. And that one thing was specifically eliminated and called out inside of the opportunity zone regs is for existing property owners to be able to sell their property into a QOF or to a QOZB that’s owned by a QOF and then be able to reinvest those funds back into the deal. It was really unfortunate because, you know, there’s lots of deals that are out there that could get capitalized this way by effectively getting seller financing and then allowing the sellers to take advantage of their role, the rollover into the deal. And so, one of the things that the Novogradac Working Group has submitted and that I think a couple of other groups have submitted to Treasury for additional guidance on is to try and get a carve-out if you’re not going to be more than 20% of the fund. And so, to specifically allow that for folks that are going to have a portion of it rolled back over, but they’re obviously not just doing it in order to create a gain for themselves. So, the final regs additionally allowed some flexibility associated with Section 1231 gain. So, the way that the Section 1231 gains worked in the second round of regs was that you actually had to wait until the end of the year to figure out whether your losses and your gains offset and whether you were going to have a net loss or a net gain. And the final regs actually allow you to take the gains and to roll those over into an opportunity zone fund and then be able to use the excess losses against other income, which is actually pretty significant. That was actually great for our industry.

So, there was also…I mentioned this earlier when we were looking at a different slide, but it provided 180-day deadline from the partnership or the corporation for an S-corp tax year filling date. So, when the tax return is due, the time period for an individual partner or owner inside of that entity to reinvest their proceeds into to a qualified opportunity fund is now 180 days from March 15th. And I wish that we could have gotten the CARES passed, extending all deadlines to July 15th because then we probably would’ve gotten another 3 months on that. But hey, it is what it is. I also mentioned this before as well, that the final regs gave us an opportunity to be able to aggregate assets between personal property and an actual real property for purposes of the substantial improvement test. So, like in a hotel, they use the hotel example, that a hotel, if you’re doing a property improvement plan and you’re improving the property by $2 million, but your building value is $4 million, you can use $2 million worth of beds, furniture, that kind of thing, as part of your substantial improvement test. And that’s significant, particularly as it relates to what you can give your investors and what investors will be able to take as an offsetting deduction now that they’ve removed that cap for 2020 and backwards into 2019 and 2018. So, it also allows for an asset aggregation for purposes of parcels of property. And so, it allows you to effectively allocate this substantial improvement across a number of parcels as long as those can be considered kind of one parcel because before it was on an asset-by-asset basis.

Another significant item that was really nice is that they expanded the working capital safe harbor to 62 months for startups. If that startup has a 62-month business plan, it’s going to show how they’re going to deploy that working capital. And then the final piece, and this was actually really great as well, is that they highlighted that any asset sale after a fund has held its interest for 10 years will get capital gains forgiveness. So, no matter whether you’re divesting your interest at the QOF itself, or whether you are divesting at the QOZB level, or at the individual asset level underneath the QOZB, as long as you’ve held that asset and it’s a capital asset which has been held for 366 days, then you’re not going to pay any capital gains, which is significant because what that means is that any qualified opportunity fund that’s got 10 years of investment into…you know, a taxpayer that’s got 10 years into a qualified opportunity fund, they can then transact inside of the opportunity zones and effectively be able to not pay any taxes as long as that asset’s been held for 366 days. So, if you’ve got a fund, that’s got 10 years of time, and you go and you buy a house, and you sell it 367 days later, you don’t pay any capital gains on that gain, similar with businesses or any other assets that qualify as qualified opportunity zone business property.

So, I’m going to turn it over now to Reid Thomas with NES Financial…

Jimmy: Hey, Ashley, just before we turn it over to Reid, I know we had some people come in late, so I just wanted to reiterate that we are going to save about the last 10 minutes of this hour for some Q and A. So, if you do have any questions please use the chat feature, it’s in the control panel of your Zoom window. Sorry, Ashley. I just wanted to point that out, in case anybody had a question that’s how they can ask it. Go ahead, Ashley.

Ashley: Now, I’m going to turn it back over to you, Jimmy. Go ahead and I’ll let you introduce Reid and what he’s going to talk about.

Jimmy: Okay. Well, Reid is executive vice president and general manager of NES Financial’s specialty finance administration. They’ve been dealing with EB-5 compliance for a long time and they’ve gotten into the opportunity zone fund administration full speed ahead right when this thing came out. So, Reid, take it away. And Ashley, you’re still working the slides for Reid, I believe.

Ashley: Correct. Reid, do you want the first slide?

Reid: Yes, please.

Ashley: Look at that.

Reid: Look at that. Thank you. And first of all, thank you for having me. And let’s just go right into the meat of this. You did such a good job on the introduction. I’ll be brief here, but just a little bit background on who NES is. We’re a Silicon Valley technology company that was started with this idea that there’s certain initiatives, financial investment initiatives that get created from time to time with this intention of doing good. But for a number of different reasons, they sometimes fail. And so, we felt that by developing technology that was purpose-built for these kinds of initiatives or programs that we could help them ultimately succeed. So, as Jimmy articulated, we really focus on these specialty types of funds. We’re a fund administrator that builds technology specific for the fund type that we’re dealing with. So, in opportunity zones, that’s really a mashup of a private equity investment fund, a tax incentive program, and an economic development program or social impact program, all mashed into one. And so, we built a solution for that. We come from other sectors that are well-known in the real estate industry, some like EB-5 similar to opportunity zones in that it’s really a job creation, foreign investment/job creation program.

We’ve had success in the opportunity zones space. And so, I’m going to share some data today, things that we’ve been observing across our customer base. Today, we have over 75 opportunity zone funds under contract. We think that makes us the largest provider in the space. And as a result of that, we have an opportunity to see a lot, what’s going on. Yeah. Next slide, Ashley, please.

Ashley: I’m sorry about that.

Reid: No problem. So, today, you know, when the whole COVID-19 thing started and we could sort of sense this economic uncertainty coming, we reflected on whether this would be good or bad for opportunity zones. And being half full, you naturally want to trend towards, well, how was this a good thing? And at first, I thought this was a crazy idea, but the more people I bounce this off of, the more time that’s going on, maybe it’s not so crazy. So, I’ll walk this through with you today. I mean, maybe this whole chaos caused by this virus is making opportunity zones attractive. Maybe it’s the right time and the right place for the right solution because there’s these three sort of converging forces happening. I think there’s been significant realized capital gains happening. There is a spirit we’re seeing emerge in the communities about doing good. So, the spirit of positive impact. And with the economic downturn looking us right in the eye, maybe it’s the time for a conservative investment strategy. And all those things play together and put opportunity zones sort of in the center of it. So, next slide, please.

So, I think you’ve seen pictures like this. You know, we’re coming off the most significant bear market in the country’s history. And just over the last couple of months, there’s been a massive drop in terms of the value of the overall market. So, there was some panicked selling or some quick selling that was going on. After this kind of run-up in the market since 2009, it’s likely that significant amounts of those sales were done at a gain. And so, presumably, this could be the most massive capital gain harvesting event ever. And as a result of that, there may be gains. We used to talk about opportunity zones and how there were $6 trillion sitting on the sidelines. Well, maybe now a good portion of that is available for investment. So, next slide please.

And so, a lot of folks probably haven’t decided what to do without those realized gains at this point. But when you look at opportunity zones and you look at the types of investments folks might be interested in as a result of the downturn here in the market, countercyclical types of investments might become or might become more attractive. Some of them are listed here. Things like multifamily housing, be it affordable or not, student housing, those kinds of things. Across our database, the most prominent type of asset class that’s been invested in has been real estate. Within the real estate sector, it’s been housing. And this is how sort of the housing category from our client base has broken down. So, you can see a significant amount of investment that is well suited to opportunity zones. So, we have lots of capital gains likely being realized. We have folks who may be interested in countercyclical investments given the pending downturn in the economy here. And so, those may be a good fit for opportunity zones. Next slide please.

And finally, what we’re seeing is impact as a desire continues to grow an importance for investors. We run quarterly webinars and each webinar…we’ve been doing this since 2018 when we got started in opportunity zones, and every time we query the audience as to what their primary motivation for investing in OZs happens to be. And you can see, you know, the green was 2018 averaged out, red bars 2019. And then we just did a webinar at the end of Q1 or in February just before this, or maybe you just…when the fears were starting to really boil here. And what you can see if you look at just the social impact bar for a moment, what I felt at the time 13% of folks said their primary motivation was making impact. That surprised me as being pretty high. But since that time, we’ve seen that number continue to grow. Now, I think Q1’s number is skewed maybe because of the coronavirus going all the way to 53%. Also, we’ll see how it trends over the year. But also, on that specific webinar, we were really focused on impact investing and measurements and the like. So, maybe that skewed the results somewhat. But I think the general trend is correct, that we’re seeing more and more emphasis, on behalf of investors, an interest in doing good or making a social impact. So, next slide, please.

So, we have these three converging forces that can come together. What we learned last year was that there’s investors that respond to milestone dates. So, this looks at the inflows that we saw across our funds ramping through the course of the year with an explosion in December, in particular. So, we saw as much money flow into opportunity zones across our client base in December as we did in pretty much the rest of the year combined almost. So, massive amounts of investment flowing. The rapid sell-off that we saw in February and at least early this month in March was probably done without folks having a real well-thought plan on reinvestment or tax deferral. It was probably more driven by, let’s just get out of the market. So, the 180-day clock is ticking. Right. One of the nice things about opportunity zones is after you realize that gain, you have 180 days to figure out what to do with it. So, what we’re starting to monitor now very closely, is how funds are starting to flow into the opportunity zone funds, how investors are moving money in. And if history is to repeat itself, you know, six months from February, March puts us August, September, we might see another spike like this into the market because we have lots of gains, again, we have lots of gains on the sideline that have been taken off and now ready to be invested. We’ve got a strong desire growing from investors to do good and to help. And then the asset classes that do well in opportunity zones tend to be countercyclical. So, all the forces seem to be lining up. Next slide, Ashley.

So, our solution just real quick. You can see sort of the tabs across the top, right. Fund investments, compliance. Ashley did a good job talking about a lot of the rules. So, we track all of those kinds of things and then impact. And all of those things we put together because we believe that’s what’s special about opportunity zones, is all of those things need to be treated together. Just the last slide next then.

And so, I thought this was important to point out because this comes from the webinar we did earlier. We’ve partnered with Howard Buffett, who is a professor at Columbia University, and he’s created this impact measuring formula or tool, he calls Impact Rate of Return, iRR, to sort of align with the financial version thereof. And what it does, we liked it because it’s very algorithmic and actually produces a score in the same way you can produce an investment score from a financial perspective. We built in this capability to produce it from an efficiency of impact perspective. So, for every dollar invested, what’s the Impact Rate of Return on that? And it measures across the five categories listed there. So, this is a tool that we are starting to see tremendous interest in as people look at this.

So, I think the final point I’ll make is that while impact reporting may ultimately be required for opportunity zones, the time is right to do that now, getting it done early because the investors clearly care. The spirit of community that’s emerged from this virus is nothing short of amazing. And I think opportunity zones is a great way to help the country have sort of an equitable recovery, not like the last one.

Jimmy Atkinson

Jimmy Atkinson

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

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OZ Pitch Day 2020

November 17, 2020 – Find Your Opportunity Zone Investment