Opportunity Zones may just be the perfect vehicle to deliver economic relief to the areas hardest hit by the coronavirus pandemic. How can the incentive be expanded to further catalyze the recovery effort?
Blake Christian is a tax CPA for Holthouse Carlin & Van Trigt (HCVT), a regional accounting firm with offices across the western United States.
Click the play button below to listen to my conversation with Blake.
- Why the Opportunity Zones tax incentive is perfectly structured to deliver economic recovery in the wake of the COVID-19 pandemic.
- Blake’s ideas for expanding the Opportunity Zone incentive to provide additional economic recovery:
- Be more beneficial to small business.
- Give a time extension to fund a QOF. (Note: This interview with Blake was recorded prior to the IRS issuance of Notice 2020-39.)
- Allow for after-tax non-capital gain investment to be able to secure OZ benefits.
- Expand the number of Opportunity Zones.
- Loan interest exclusion provided to QOZBs.
- Payroll tax exemption for QOZBs.
- Why expanding the number of Opportunity Zones in each state by 20% could be helpful in targeting unemployment.
- Public-private partnerships: How municipalities and local economic development agencies are leveraging the Opportunity Zone incentive.
- Some of the best Opportunity Zone deals that Blake has worked on this year.
- How a Joe Biden victory in November may affect the Opportunity Zone incentive going forward.
- Why governors and municipal leaders all over the country — regardless of political party — view the Opportunity Zone incentive as a positive economic development tool.
Featured on This Episode
- Blake Christian on LinkedIn
- Representative John Curtis (R-UT)
- Curtis Bill
- IRS Notice 2020-23
- IRS Notice 2020-39
- Senator Tim Scott (R-SC)
- Senator Scott’s letter to Treasury with his 10 recommendations for expanding Opportunity Zones
Industry Spotlight: HCVT
Founded in 1991, HCVT provides tax, accounting, business management, and mergers & acquisition services to private companies, closely-held businesses, public companies and high net worth individuals and family offices. With a team of over 650 members, and over 100 partners and principals, HCVT is known in the marketplace as a firm with deep technical skills addressing the most complex tax issues associated with partnerships and pass-through entities. HCVT has eight offices in southern California, plus offices in Walnut Creek, California; Fort Worth, Texas; Park City, Utah; and Phoenix, Arizona.
Learn more about HCVT
About the Opportunity Zones Podcast
Hosted by OpportunityDb.com founder Jimmy Atkinson, the Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in opportunity zones.
Jimmy: Hey, one quick note before we begin today’s episode. This interview was conducted prior to the IRS issuing Notice 2020-39. We do reference IRS Notice 2020-23 which extended certain 180-day deadlines to July 15th, 2020. This extension has been extended even further to December 31, 2020. We were unaware of this when we recorded this so you may hear us referencing the need for additional relief for investors with respect to their 180-day deadline. Just know that we recorded this prior to that deadline getting further extended out to the end of this year. And now without further ado, here’s today’s episode. Enjoy.
Welcome to the Opportunity Zones Podcast. I’m your host, Jimmy Atkinson. COVID-19 has turned the world upside down but can opportunity zones provide relief? Blake Christian is a CPA and partner at HCVT, a regional accounting firm with offices across the western United States. He joins us today from his home office in Park City, Utah. Blake, thanks for joining the show. Welcome.
Blake: Glad to be here, Jimmy. Thank you.
Jimmy: Absolutely, Blake. Been trying to get you on the show for a while now so glad our schedules finally lined up and that we can get some of your insights today. So I know you have a lot of great ideas on expanding some of the provisions of the opportunity zone incentive to help with our nation’s COVID-19 relief efforts. Why do you feel like the opportunity zone incentive is the perfect platform for catalyzing such relief?
Blake: Well, what we have here is a program that’s been out for two and a half years roughly. It covers the entire nation as well as our territories and it already includes the census tracts that are in economically challenged areas and there’s gonna be I would guess probably 80% of the spikes in unemployment are gonna be in these economic regions that are already part of the OZ program. So I think it’s a…for that reason, it’s a great platform to start the recovery.
Jimmy: Right, Blake. So the ideas that you have for the opportunity zone incentive providing relief for COVID-19 could be even more beneficial if the incentive was expanded somewhat. You recently wrote a paper that goes into detail on six different ideas you have to expand the incentive. I’m just gonna list them off one by one here very briefly and then I’d like us to dive into each of these six.
So number one, you’d like to expand the opportunity zone program to be more beneficial to small business.
Number two, you’d like to give an extension of time to fund a QOF. So change those deadlines for QOF funding.
Number three, you’d like to allow for after tax non-capital gain investments to be able to secure some limited opportunity zone benefits. So that’s a really interesting one because currently only capital gains money is eligible to receive the benefits but this…your idea here would expand that to non-capital gain as well.
Your fourth idea is you’d like to expand upon the number of opportunity zones. You know, currently we have 8,700 and change opportunity zones but actually if we were to expand that even further…and I’ll have to ask you about how many more you think might be necessary there when we get into that one.
Number five, loan interest exclusion provided to qualified opportunity zone businesses or QOZBs.
And then sixth and final is you have an idea for a payroll tax exemption for QOZBs as well.
So Blake, if you wouldn’t mind, can you kinda walk us through each one of those six points in more detail?
Blake: Sure. And so the first one that would be a little more expansive for qualified small businesses, I’m really…my starting point there, Representative John Curtis, a congressman out of Provo, Utah passed a bill, not numbered yet or I would give that to you. And so his office had come up with a plan to allow any small business and he had set a gross revenue, annual gross revenue limit of $1 million. I’ve talked to his office. I told them “You gotta bump that up.” You know, that wouldn’t even cover a lot of liquor stores. So let’s bump that up to I say $10 million.
And so any business under $10 million of annual revenue regardless of where they are could take opportunity zone funds regardless of whether they were in an OZ census tract or not because those small businesses are the ones that are gonna have some real, real challenges restarting and surviving. The estimate is that restaurants, probably 50% will close or never reopen. So it’s pretty ugly in that real small business. They don’t have a lot of access to capital. They don’t have any type of reserve. So this would be very beneficial to those small businesses.
Jimmy: And is your idea there that those would have to be wrapped in a qualified opportunity fund as well or would they just be able to automatically access some of the tax benefits of receiving capital?
Blake: No, they would…that would apply to the extent…an opportunity zone fund, QOF, invested funds into them.
Jimmy: Okay, so essentially, it’s relaxing some of the restrictions on geographic limitations on qualified opportunity fund investments? A small business located outside of an opportunity zone would satisfy the asset test requirement either at the 90% level or the 70% level I suppose depending on which entity within the fund held the non-opportunity zone qualifying small business. Is that right?
Blake: That’s correct. And they’re…you know, the congressman has certainly received some pushback because of now stepping outside the boundaries of the opportunity zone program. But again, I think there’s such a need for that. This would be an easy add-on obviously to…gonna take congressional action. We may not see them be as open-minded. And if not, I think we can…we’ve got a plan B that we’ll…we can discuss another time.
Jimmy: All right, sounds good. I might have to have you on again some other time then. Do we wanna move on to our second point there, the extension of time to fund a QOF? What do you mean by that one?
Blake: Yeah, so we did… we do have some relief. IRS Notice 2020-23 allowed a July 15th, 2020 funding date which is beyond the…what would’ve otherwise been the June 27th date. But that doesn’t give you many… it’s only a couple of weeks so it’s not real beneficial. And in a lot of the other areas like 1031 based on a 2018 revenue procedure, they generally had an extension until a period after the natural disaster designation was lifted. And so my proposal is that there be an extension of the less sort of 180 days from the current regulatory deadline beyond that or 90 days after the end of the COVID-19 natural disaster designation was lifted.
We could either do that nationally or you could do it based on where they were formed or where their QOZB is located. But that should be an easy one and with all the uncertainty, it causes people to not make decisions. And so I think this is a very reasonable extension. The ABA is also asking for a similar extension of time.
Jimmy: Yeah, that would help a lot. That would give investors a lot more time to be able to figure out how to allocate their money. And the economic times are very uncertain so yeah, certainly any extension on the timelines…I think a 180-day timeline makes sense under regular economic conditions but with what we’re seeing now, I agree, an extra 90 days or 180 days depending on the case would be very much welcome. Anything else to add there or should we move on to the third point that you wanna bring up?
Blake: Yeah, so number three is to allow investments of capital but they wouldn’t have to be capital gain deferrals. And I probably get four to five calls a week asking why that is not part of the statute. And so my proposal is to allow those funds to be invested and we wouldn’t get the basis bumps at the 5 and 7 year but we would get an exemption at the end but it would only be 50% exemption of the gain. And so that would be a little bit watered down. But there’s a lot of money sitting on the sidelines, people with cash but they…you know, for one reason or another, they just don’t have large capital gains to deploy into the fund.
So this would allow new capital come into the stack and be invested. It’ll only cost the government half the cost of the capital gain rollover and they’re not even getting a deferral. So it’s…I think it’s a win-win on the program.
Jimmy: Yeah. No, I like that one quite a bit. Already you are able to do that. You can bring on capital gain into the stack but it’s not eligible for any of the favorable tax treatment of course. So you’re not incentivizing that capital to flow in really. I’m gonna put you on the spot here now, Blake. If this were to go through like you would like it to just as you described, how much more additional capital would you expect to flow into opportunity zones over the lifetime of the program? Would this be like a 5% bump or would it double the amount of money coming in or somewhere in that range? What do you think?
Blake: Yeah. And I’m really estimating but I think when the dust settles, I would not be surprised that at least a third of the total funding would come from after tax dollars going into the program.
Jimmy: So a 50% increase if I did my math right there?
Jimmy: That would be impressive. That would certainly help a lot. Let’s move on to that fourth one unless you have any other points to make on number three. But that fourth one is to actually expand the number of opportunity zones or the number of census tracts designated as opportunity zones I should say.
Blake: Yeah, and if I could only pick one out of my six, I’d probably pick this one. Because this would let us really target the program even more than it already has. You have to remember the the program was launched at the end of 2017, effective date of January 1st, 2018. And the governors were saddled with picking the applicable census tracts by April 1st is my recollection but April of 2018.
So and to tell you the truth, a lot of the governors and their minions didn’t really know exactly how the program worked. And so they picked census tracts, and I’ve talked to a lot of government agencies, they picked census tracts based on criteria that ended up not being great for economic development. They thought they were, you know…some thought they were trying to help the residents there. And they didn’t really have an understanding of the program.
So my proposal on this point is let every state increase their census tracts by 20%. So it’s kinda fair across the board. No state’s getting any advantage. And the criteria that the governors would have to pick from would be the highest spiking unemployment rates for the surrounding area. And so they would go from the highest unemployment rates and that would that would be their population of census tracts to choose.
And then the second criteria would be…maybe it would be mandated but they would be highly encouraged to pick census tracts that were adjacent to existing OZ census tracts. The reason for that is I wouldn’t want to have some island, one census tract four miles down the road from a cluster of three others. You know, let’s kind of build on what’s already there.
But I think this would allow the governors to kind of surgically fine tune the geographic OZ census tracts and they’ve got two and a half years under their belt to see where money’s kinda starting to come in. And so it’s a great time to do something like this. And so anyway, that’s my other… and I think my most critical of the six would be this one.
Jimmy: Yeah, that’s a great one because as you point out, when they made these designations more than two years ago now, yeah, they were working with a lot of incomplete knowledge of the program and now everybody has…everyone’s so much more educated on this tax incentive and there’s a lot more information out there. The regulations are final, right? So in a way, giving the governors’ offices almost like a mulligan. Any opportunity zones they regret…I’m sorry, any census tracts that they regret not designating opportunity zones, this is their chance to kinda fix those problems. I think that’s a great one.
Blake: And that’s a great point. I should’ve brought that up. I don’t have that in my proposal but that is actually very important is that to allow governors to swap out a census tract. Now again, I’d have to think about that. We’d all have to think about that because there may already be a project going in there. But maybe you freeze that one and then move it over to another one and say only projects that are underway in that census tract that you have your entitlements or something can move forward. Otherwise we’re moving it over here.
Jimmy: Yeah, that’s an interesting idea also. Yeah. So it’s definitely, definitely a neat idea to try to expand the program and throw some more communities into the mix that might desperately need the capital as well. So Blake, your last two ideas here, numbers five and six, both deal with providing some exemptions or exclusions for qualified opportunity zone businesses. So can you walk us through both of those now maybe?
Blake: So one of the frustrations with the program…and believe me, overall I love this program, I think it’s very well designed, but again, when you’re putting your financing, capital stack together to finance these bigger projects, there’s no incentive at all on the debt side. It’s all equity driven. And so…and I’m stealing from the California, former California enterprise zone program that had a tax exemption for loans to enterprise zone businesses.
And so basically, what you do is now you’re incentivizing investors that just want a debt return to take a lower interest rate because they’re gonna get a tax-exempt return on it. And so that can bring the overall cost of the project down. And again, keeping in mind these are pretty economically challenged areas that people are making investments in in the opportunity zones. So this is basically like a synthetic municipal bond, if you will.
And so again, the lender gets tax-free treatment on it, doesn’t demand as high an interest rate because on an after-tax basis he’s still walking with a healthy return. And then the opportunity zone project gets a lower overall cost of funds on the project.
And then the final one is just… again, I’m probably stealing a little bit from the CARES Act but I’m taking it one step further and allowing both the employer and the employee to have an exemption for the first 12 months of salaries paid to an employee that resides in an OZ census tract and it doesn’t have to be the same OZ census tract that he works…he or she works in but…and I’m keeping the compensation on the low end.
The first $48,000 of compensation would get a FICA tax exemption, both the employee and the employer. So the employee walks with more cash at the end of every week or two-week period and the employer, his cost of hiring that person is reduced by 7% to 8%. And so anyway, again, just trying to incentivize people to hire local and also help out that person that lives in the census tract get a little better take home pay.
That’s my dream fix.
Jimmy: Excellent. Those would be a dream come true. That would do quite a bit to bolster the program. But dreams aside. What’s the appetite in Washington for making these changes? You mentioned you were working with one representative on at least one or two of these but what…how does this actually become reality then? What’s the next steps for pushing this through congress, some of these ideas?
Blake: Right. Well, I’m also reaching out to Senator Scott’s office in South Carolina and he submitted on May 4th a list of 10. I didn’t get to him quite in time but he has a list. Anybody that wants the letter, you can go online or contact me. But most of them range similarly. You know, extensions, some relief from the 90%, qualified asset test, a 12-month extension for the substantial improvement test. Some of that is already kinda baked into the IRS Notice 20-23.
But there’s still…because of the way that the emergency designation was announced, there’s still a little bit of gray on whether that’s gonna kick in some of these 12- and 24-month extensions. So he wants to be a little more specific in that.
So anyway, I think there’s some open-mindedness. There’s still a lot of bipartisan views of the opportunity zone program. But at the end of the day, this is helping the hardest hit. And really if you step back, the hardest hit across the country is the hospitality industry. And a lot of those people, a lot of those restaurants are in these opportunity zones or near them. And so I think beefing up the program is…this is the right time to do it and I think there’s an appetite in congress to do something like this. And why start some other completely new program where it’s a hiring credit or something? Just build it right into this.
Jimmy: Yeah, and another benefit of this is it’s not just telling the Treasury Department to fire up the printing presses right away, right?
Jimmy: It’s actually incentivizing private capital flowing into these areas. I wanna pivot now, Blake, and talk with you a little bit about public-private partnerships and economic development agencies. You’re currently engaged with a few economic development agencies and municipalities in the Southern California area. And obviously, municipalities have a lot of opportunity zone assets and a lot of skin in the game so to speak. What are you seeing them doing out there? How are they using the opportunity zone incentive?
Blake: So I’m working with two large counties in Southern California and then a city and then I’m also working with a new client in the Baltimore area. And what I’m seeing is there are still… it took them probably a year, a year and a half to really fully understand the program and things. And so they’re trying to use it. You know, I would say 50% for revitalization of certain poor areas.
And then the other half which kinda goes hand in hand with it is…and it’s business attraction and…but they’re also trying to be very sensitive to not not destroy the culture and things of the neighborhoods that they’re trying to revitalize. So it’s kind of a fine line. They’re engaging the residents there. In a couple of situations, we’ve had the residents view the opportunity zone program very negatively. So there’s some education outreach.
And the the…one of the simplest ways to use it is there can be public-private partnership where you can do an infrastructure project. Probably the the best illustration is if somebody wanted to do a small solar farm let’s say a municipality wanted to put a solar farm facility into a neighborhood, well, that would be a perfect one where the opportunity zone could invest those funds. They would have to use some leverage so they would create basis in the in the QOF and the QOZB so that those write-off of the personal assets under the bonus appreciation rules would flow out.
So there’d be some upfront tax advantages and then the the municipality would pay for the parts of the infrastructure. They probably already own the land. They would pay for parts of it but more of the tangible, personal fee they can get expensed real quickly would be purchased by the OZ fund.
And then they can have an exit plan in year 10, 11 with basically a guaranteed return. And so it kinda from a cashflow standpoint, it kinda looks like a bond return for the investors and then a tax-free gain at the end. And then that municipality ends up owning it after that period. And it could run a lot longer than the 10 years. It just depends on how the numbers play out.
But that’s just one example that we’ve looked at. We’ve looked at water treatment plants in opportunity zones and so there’s… it’s pretty unlimited but then I…once in a while I’ll get a call from somebody and they’ll say, “Hey we wanna repave these streets.” And I’m going, “Yeah, that one’s not gonna work so well, but if you have some high cost technology investments and things, it can work out well for both sides.”
Jimmy: What about a toll road, would that work potentially?
Blake: You know, a toll road, that could… You know, the problem is…
Jimmy: You mentioned paving streets and that just popped into my head. I was just curious about that.
Blake: Yeah, it’s funny. Gosh, 20 years ago I worked at actually a French company that had a…did a lot of this stuff all over the world, did a bunch of toll roads in Southern California which is a new concept. Obviously, very common on the East Coast. But yeah, that could be the infrastructure cost of the gates and things if they just happened to, you know…if you could put them in a census tract, that could work.
Jimmy: That’s interesting, only have the checkpoints or the gates in the opportunity zones.
Jimmy: That’s a goofy example.
Blake: No. Well, we…actually, I like the example. You just have to happen to have a census tract that straddles a freeway or a future freeway.
Jimmy: Well, exactly. Well, as you said, there is virtually no limitation to some of the ideas, right?
Blake: Right. Right.
Jimmy: What are some projects that you’ve been working on, Blake, just over the past few months here since the COVID-19 pandemic hit? I know you’ve been busy working on quite a few. Maybe you can highlight a few of your favorites.
Blake: Yeah, we set up a little over 30 in 2019 and then the first…start of the year we were probably setting up two to three a month. I will tell you in the last month and a half I’m probably setting up two to three a week. So the interest is is spiking despite all the uncertainty. One of my clients bought a…recently bought a hospital, two…you know, a couple of buildings or opportunity zones. He’s gonna do some COVID related things with that. So that one’s very timely.
I have a…Utah does not have a legalized marijuana system but they’re…I’m working with a medical marijuana grower, distributor that will probably have their retail facility in an opportunity zone. Working with an agricultural company in Central California that is making olive oil. And so they’re using this to expand their facility. And that’s… this one works pretty perfectly for that one.
I have a couple of people that are doing solar projects, and then on the East Coast, a kind of a WeWork format working space. It’s a very large one but central to a big, big redevelopment project. And that one is…just has a whole lot of elements that checks probably half the box that economic development people are looking for. It’s incubator, it’s workforce development, it’s kinda a little bit of everything but…and what I’ve…oh, and then back in Long Beach we’re working with a group that’s developing what we’d call a ghost kitchen that will have 20 kitchen facilities for people that are interested in food service, catering but don’t really want the financial burden of having a restaurant.
And so a few of these things actually work out… they were already in the works but because of COVID, they’re really more attractive projects now, like the ghost kitchen. You know, with the closure of so many restaurants, a lot of those business owners are still…they still have a huge following of clientele. And so some of them will move to probably the ghost kitchen. They won’t have the burden or the high rent and all the employees but they can still get their food out to the public. You know, it might be with…be it Uber Eats or they might eat on the rooftop, etc. So some really interesting projects.
COVID’s not a good thing but I have to tell you from a business standpoint and an OZ standpoint, a lot of the projects…not the big real-estate projects necessarily or an office building but a lot of projects I’m working on kinda got more attractive post-COVID.
Jimmy: Yeah, that’s really interesting, a good mix of business and real-estate projects you’re working on. And I can certainly see that silver lining that you’re seeing also. Some innovation has been catalyzed by the crisis here. People have been forced to adapt and innovate. And yeah, like that ghost kitchen idea certainly sounds quite interesting. I can see how this pandemic would’ve…and the stay at home orders and the closings of restaurants would make that an even more attractive project of course.
We’re kinda getting toward the end of our time here today, Blake, but one question I wanna throw your way. I know you’ve got some thoughts on this. I get asked this question a lot. I think it’s come up more and more over the past couple of months and I’m sure you’re hearing it a lot too. With the election coming up in November, what if we have a change in administration, Trump’s voted out, do you think that the program could get thrown out? Could the opportunity zones program get thrown out or tweaked substantially? What are your thoughts on that?
Blake: Yeah. And it has over the last year even though it was a tremendously bipartisan bill to begin with in drafting and approval. And it helps the very people that the democrats would champion the most and we like that aspect of it. But I…you know, what…my response to that when people say, “Oh we could…you know, Biden could just throw this whole program out.” And and then they say, “What are you gonna do about that?”
And I say, “You know what? It’s not gonna be the rich people. It’s not gonna be the billionaires that will be screaming at Biden and his administration. It would be…it’s gonna be thousands of mayors and 50 governors will be screaming at him because this…” You know, even though it’s a federal program, most states have adopted it and governors and mayors love the program. I don’t care if they’re red or blue. They love the program hands down.
So this is kinda the last economic development tool a lot of states have. California for example got rid of their redevelopment program. Other states have because of budget constraints. This is a great program to revitalize neighborhoods and help the poorest community members. So it’s not a good thing to throw out.
Jimmy: Yeah, I’m with you there. Governor Newsom’s a great example even, right? Because he’s a Democrat, in a very blue state and in fact, California’s one of the last states that isn’t even conforming with the program. Their state legislature hasn’t passed any conformity legislation but Newsom’s been a huge champion of the program all along. So he’s one of those 50 governors who would be very upset if there’s any attempts to roll this back. I’m pretty hopeful that if Biden were voted into the White House that… he sees the benefits of the program I think and I don’t know that there would be a priority for his administration to unwind it.
Blake: Right. And the final point on that though is the…if that happened, if you knew that the tax rates were gonna go up in 2026 when you have to recognize your gain the program’s easy. You pull the money out and you tax it early. If you’re well invested and the project looks to be appreciating at a rapid rate, then you let your money ride and you pay a higher capital gain rate. But I just don’t…they’re not gonna come in and say, “Oh, you don’t get your tax-free gain after 10 years.” I mean, I just…that’ll be the last time anybody puts any money into some government program.
Jimmy: Yeah, yep, yep. You and I are on the same page there. I agree. And that’s what I’ve been telling people asking me that question also. So good to get your perspective on it as well. Well, Blake, it’s been great talking with you today. Thanks for your perspectives on the opportunity zone tax incentive and how you feel like it could be expanded to help with the COVID-19 relief efforts in this country. This has been a great, very insightful conversation so thanks for joining us today.
Before we go though, can you tell our listeners where they can go to learn more about you and HCVT?
Blake: Sure. Probably the easiest is just go to our website, www.hcvt.com, and we have an OZ landing page. And all of my contacts put my name in the search bar and you can find all the ways to contact me. I’m pretty easy to find.
Jimmy: Perfect. Yeah, you are. And we’ll make it even easier for our listeners because I’ll have show notes on the Opportunity Zones Database website for today’s episode and our listeners can go to opportunitydb.com/podcast to find the links to all of the resources that Blake and I discussed on today’s show. I’ll be sure to link to the HCVT opportunity zone landing page and some of the other resources we discussed here as well. So Blake, again, thanks so much for joining me today. I appreciate your time.
Blake: Thank you for having me, Jimmy and I…thank you for the quality of all of your programming. I listen to it and learn every time.
Jimmy: Awesome. Thanks, Blake. Appreciate the kind words.