Turbocharging OZ Returns with Historic Tax Credits, with John Blatchford

Can opportunity zones be leveraged for historic renovation projects? How does the combination of historic tax credits and the opportunity zone incentive improve investment returns?

John Blatchford is Owner and Founder of Kunst, a real estate company that buys and renovates vacant historic buildings in Cincinnati, Ohio.

Click the play button above to listen to my conversation with John.

Episode Highlights

  • Why investors without capital gains are investing in opportunity zone projects.
  • How accumulated capital from the coasts is flowing to low income communities throughout the country, including Cincinnati.
  • How historic tax credits and opportunity zone incentives can more than double the bottom line returns realized by investors and remove some market risk from the equation.
  • Challenges posed by opportunity zone regulations when pursuing development of historic buildings in low income communities.
  • The importance of preserving historic buildings in U.S. cities.

Featured on This Episode

Industry Spotlight: Kunst

Kunst, founded in 2015, buys vacant, historic buildings in the Over-the-Rhine neighborhood of Cincinnati, Ohio. The Kunst team completely renovates buildings into apartments which are then rented out to the community.

Learn More About Kunst:

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.

Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson. How can historic renovation and historic tax credits be combined with opportunity zones to create compelling properties and compelling real estate investment returns? That’s the topic of today’s discussion that I’ll be having with my guest, John Blatchford. John is owner and founder of Kunst and joins us today from Cincinnati, Ohio. John, welcome to the podcast.


John: Thanks for having me.

Jimmy: John, we’re going to talk a lot today about opportunity zones throughout the course of the episode, of course. But first, can you just tell our listeners and me a bit about Kunst in general? Can you give us a little bit of background and tell us, what do you guys do exactly?

John: Yeah. So our company is Kunst. I started it in 2015. We buy vacant historic buildings here in Cincinnati that are basically bombed out from 40 years of neglect and we completely renovate them, turn them into hopefully, beautiful apartment buildings, and then we rent them out. And over time, we’ve kind of learned and added on this tax credit component, historic tax credits, which we’ve used on every project, something like $7 million in credits across 20-some projects. And then now in the last couple of years, adding in opportunity zones as well, to make the projects even better.

Jimmy: Good, and for your properties, in particular, your opportunity zone properties, but really just all your properties, who are your investors typically, and what do they like specifically about your real estate investment strategy of redeveloping these historic properties?

John: Yeah. So our investment group so far, so we’ve worked with about 30 investors with about $3 million in capital raised. So, you know, relatively, and certainly in the global or national real estate world, but small amount of money per investor. Right now, our minimum is $50,000. So the profile, I think it’s typically, people who’ve made their money outside of real estate, they’re successful in some other path, started their own business, had good careers, and, you know, have some savings and want to invest in real estate. And they might have a few other real estate investments, you know, certainly probably own their own homes, stuff like that. But they’re trying to get more into real estate and view it as a good place to be putting their money and certainly in kind of the medium, long term, relatively safe way that real estate is. So yeah, we have a mix, probably to some degree of like people that are truly just looking for a long term passive income and the people that are more annual return-oriented, maybe a little more like shorter term trying to get a multiple on their capital but typically, certainly medium to long term investors looking for a passive income and just a return on their their capital.

Jimmy: Right. And opportunity zone investing is definitely medium term, at least, long term, because of the 10-year hold that is required to take advantage of all of the tax benefits. Why did you start investing in opportunity zones specifically? And I guess, before you answer that question, maybe you can tell us a little bit more about the history of your firm. I know you were founded in 2015, opportunity zones didn’t really start rolling out until middle of 2018, at the earliest. When did you first take note of the program? When did you first start investing in opportunity zone property specifically and why?

John: Yeah. Our first three buildings, we did use the historic tax credits, property tax abatements, some local incentives but it was really our fourth building that we learned about the opportunity zones program and started investing, you know, at an opportunity zone. And that really came from an investor, actually from New York, who was our largest investor at the time, still is one of our largest investors. And he was primarily interested to invest with us and invest in our neighborhood here in Cincinnati, Ohio, because of the opportunity zone. He is mostly involved in the stock world so a lot of his net worth can come from capital gains or does. So he was very interested in the opportunity zone. He had actually educated me a lot on it. We did one project which actually we finished and now is renting out for the last couple months. That was our first kind of OZ project, in the opportunity zone. And now every project since then is opportunity zone as well. So we’re fortunate in a way because this neighborhood that we’re in, Over-the-Rhine in Cincinnati, is pretty much entirely an opportunity zone. And so all the projects we’re doing now kind of are already included, and we just have to follow the regulations and make them a part of an opportunity zone investment.

Jimmy: Yeah, that makes sense. I would imagine that you were probably doing entirely opportunity zone investment or almost entirely opportunity zone investments since 2015 anyway, just based on the neighborhoods that you’re located in. And it’s also really interesting that one of your investors educated you on opportunity zones early on, because it usually works the other way around where the fund sponsor has to educate the investors on the tax incentive. What have you found in terms of that educational component? Because it’s such a new program, a new tax incentive, oftentimes, the biggest hurdle I have found at least is that educational component, getting people up to speed with what opportunity zones are, why you should care, why it can be a really great deal for investors. What have you found in your experience talking with your investors about opportunity zone investing? What’s been some of the feedback you’ve gotten or some of the pushback? I’m curious to hear some stories that you might have on that.


John: I never quite expected to be professionally involved in kind of the tax world, which is what this is, like how to avoid capital gains tax and different hold periods and all that, how we’re investing the money. So yeah, it’s definitely been first educating myself. And I’m grateful for kind of that experience and learn from the first project and then, in turn educating other people, investors, and potential investors. I guess what I found is that… So we have a fund now, and we are often having to educate people on what the opportunity zone is, and a lot of the investors can’t really take advantage of it or aren’t interested to. And that’s actually okay in the fund’s model, they can invest money that has no opportunity zone implication and of course, can check with CPA and qualified people. But the good thing about it, that in our current fund, probably half the investors are taking advantage of the opportunity zone and half aren’t. And so that works fine for us. And when we educate to the degree it makes sense, but also, it’s a benefit to the investors and if they don’t have capital gains, and they’re excited about the projects without that, then that’s just as well.

And I’ve seen this before, like people will discount projects or be willing to pay more for them, because they’re in the opportunity zone and there’s the obvious tax benefits. I think, for us, I just underwrite the project the same way, it has to be a good project, the historic tax credits have to be there no matter what, that’s really the model. And then the opportunity zone is the additional benefit, which, you know, is going to add maybe, you know, a couple points in a return to the investors, and it’s kind of up to them to take advantage of it.

Jimmy: Yeah, that’s interesting. For you, for your model, it’s just the cherry on top. You’ve already been in this area, and already utilizing historic tax credits for five, six years or so. And then, yeah, the opportunity zones really just boosts those numbers just a little bit more. And interesting that, I think you said only about half of your investors are taking advantage of it. Certainly non-capital gains money can flow into a qualified opportunity fund, it’s not subject to any of the tax benefits that opportunity zone investing can benefit an investor, but it’s available to them if they just like the project in and of itself. So that’s really interesting.

John: Yeah, and I think what’s nice, too, I think about the program is, it’s an interesting time with kind of the the Fed printing so much money and asset value is going up by a lot and crypto is going up by a lot, like there are a lot of capital gains out there. And so I think the main thing that’s helped is that money outside of Ohio is coming here because, you know, it’s an urban environment and we’ve hopefully proven out a good, solid model. Oh, and also they have all these gains that they can now invest in real estate and get a kind of an initial or automatic tax benefit. So yeah, I think that’s been the main sort of positive effect, it’s brought a lot of money from outside of Ohio, including kind of the East and West Coast, just from people with large capital gains. But then we also have, you know, plenty of local investors, and even investors outside of Ohio that just don’t really have those capital gains and just wanna invest in these projects independent of the opportunity zone.

Jimmy: Yeah, that’s great to hear too, because I think that was really one of the main drivers of the program, was that Congress was trying to figure out a way that they can unlock a lot of untapped or unrecognized capital gains that were kinda just sitting on the sidelines, largely in the hands of wealthy investors on the coasts, how could we distribute that throughout the country to these low income communities? And there were a lot of capital gains sitting on the sidelines as of the end of 2017 when the legislation was passed. And we had a big dip in the stock market, obviously, in early 2020, due to the pandemic, but since then everything, the stock market, at least, and crypto, as you know, has roared back. And those capital gains, the amount of unrealized capital gains, sitting on balance sheets all over the country has only had to increase pretty substantially, I would think, over the last few years since the legislation was passed. So it’s good to hear you tell us the story that it is working to unlock some of the capital, at least in the case of your fund. I wanna ask you about your fund now. How is it structured exactly? Is it a multi-asset fund or do you have one fund for every property? I’m curious to hear a little bit more about how you’re structured and what your pipeline looks like for deals going forward?

John: Yeah. So over the first four, five years, we did kind of the syndication model, find a property, go out to investors, raise the money, and then do the project. And that worked well. And I think a lot of people build a business out of that. I think for me, we switched to a fund model at the beginning of the year. I kind of just wanna pool a lot of resources together, have a bunch of different investors, including people that can take advantage of the opportunity zone or not, but get that money together and then know exactly sort of the funds we have available to do a project and then go forward on the whole process of acquiring the building and tax credits and all that. So yeah, so we have the opportunity zone fund, the qualified, you know, opportunity fund, which we launched at the beginning of the year. And it’s kind of the same or similar model as what we’ve been doing for five-plus years, historic tax credits, historic renovations, apartments, and now the opportunity zone.

But yeah, we’ve launched it, there’s been a lot of interest, again, even say Ohio to outside of Ohio, it’s probably 60%, 70% from out of state, which I think is interesting and good. And yeah, there’s a strong pipeline, so each of our projects is probably on a scale of say, $1 million to maybe $3 million total project cost. It’s kind of a smaller historic scale, anywhere down from 3 apartments up to now 30 at 1 site. And so with the fund, I mean effectively as we raise the money, we can kind of get more projects or bigger projects in that scale, there are tons of projects that we could do. And I think we could pretty easily or relatively and effectively deploy $10 million over the next year and just kind of a matter now of putting all that…the funds together and doing all the due diligence and getting the projects going.

Jimmy: Is that your target raise for the fund, $10 million or are you looking for a different number?

John: Yeah, it’s capped at $10 million.

Jimmy: What was the minimum investment?

John: $50,000.

Jimmy: $50,000, okay. So you’re pairing historic tax credits with the opportunity zones for your opportunity zone fund. You’ve been doing historic tax credits for a while, it’s part of your model, as you’ve mentioned once or twice. I’m curious, if you have any numbers you can share with us, what type of impact exactly does that combination of historic tax credits plus the opportunity zone tax incentive do to investment returns in your properties typically?

John: Yeah. Probably totally rough numbers, if we just took one of these historic buildings, do the same exact thing and didn’t have any tax credits or opportunity zones, it’s profitable certainly, like the rents make money. They’re good projects so they’ll gain value. And that’s probably in the range of like, maybe 8% annual or 10% annual return to investors. So no real tax incentives, just kind of the project in and of itself.

The tax credits are pretty special especially here in Ohio, because they’re pretty easy to turn into cash. So as soon as the project is done, basically 45% of your project cost comes out as cash. So that’s going be a majority, or maybe up to 100% of your equity, or 60%, 70%, 80% depending on, you know, how much you can get for those credits. And so if you can get most of your equity out when the project is done from this tax incentive, it’s not even based on refinance, it’s not based on selling the property, it’s not really based on the market at all, you just get it from the tax credit, you know, that’s pretty powerful and that probably takes you from, say, the 8% or 10% annual return maybe up to 15%, 16%, 17%, high teens saved in annual return. So that’s the tax credit piece.

And then if you add in the opportunity zone, that really depends on capital gains of the investor, how long we’re going to hold the properties and all that, but, you know, probably adding points to the annual return. And that a lot of that gain, or maybe all of it could be tax-free, that’s pretty powerful, just depending on over 10 years, what the appreciation in the market is and paying on the loan and all that. I mean, that’s a potentially pretty massive win. And also, even just delaying it for five years, you invest in the fund and then don’t have to pay capital gains tax on it, you’re basically, you know, investing that money, whatever, for free, that all are like are returns, if we’re getting a 15% annual return on the project, then that’s going to be effectively the money growing at 15% a year where otherwise it would have been had already come out as tax when you invested.

Jimmy: That last part, I like to liken to a interest-free loan from Uncle Sam effectively. But it’s even better than that, because you are getting an investment return on it too. Now, of course, there is a little bit of tax rate risk involved there, which is somewhat concerning for some investors. But yeah, suffice it to say that deferral benefit actually is fairly substantial just in and of itself, not to mention the huge benefit of escaping tax-free after disposing of the property after your 10-year hold.

John: Yeah, the capital gains you would be paying now compared to investing that in something else, that’s effectively free money. So whatever your, you know, capital gains tax rate is, it’s effectively investing that for free, and then whatever the returns of the project are, you are getting that and free money. So if it’s 15%, or 18%, or 20%, or 25%, or even 10%, whatever it is, you’re effectively getting that free relative to another investment.

Jimmy: Yep. And it’s hard to pinpoint exactly how much these tax credits and then particularly, the OZ benefit will impact returns, because there’s a lot of assumptions that have to be made regarding appreciation of the property and where capital gains tax rates are headed and what your current capital gains tax rate is. But suffice it to say, yeah, I like that concept of free money, essentially, because it really is a lot of free money that you’re playing with. So you can do quite a bit of good work with it in terms of getting a pretty juicy return.

John: Yeah. And I think there are a lot of assumptions to make in all of this and I think the dangerous one is especially to make are, how much is the property value going to grow? What’s the market look like? What are the rents six years from now? All that’s pretty much impossible to estimate until the returns…the returns offered are, I don’t know, somewhat made up. But, you know, one that you can count on are, well, so you were going to pay 20% capital gains tax today, and now you’re not and also you have this tax credit, which is definitely independent of the market, there’s risk in it for sure but there’s much less market risks here. You’re sort of like baking in or hopefully guaranteeing some of those returns.

Jimmy: Yep. Yep, understood. That makes sense. And what have been some of your biggest opportunity zone challenges so far? You started the fund earlier this year. You’ve been doing this for a while, this type of investing, but with the opportunity zone piece specifically, what have been some of your biggest challenges?

John: Yeah. The main purpose of the program is probably also the most annoying part or worst part is, you know, you’re defined in time and you’re defined in location. So the location piece is relatively quite arbitrary, even here in Cincinnati from one street to the next one, one building, and we actually have two buildings on the same street, one is in the opportunity zone and one’s not. And that clearly couldn’t really be based on sort of income or poverty levels, just that was just based on the kind of census tracts. So that can be frustrating, because there might be great properties that come along, and they might even fit our kind of tax credits and our profile buildings we’re looking for and are excited about, but they might be just outside of an opportunity zone and that can be kind of limiting.

And then yeah, the timing piece. To have sort of a long-term hold, to have a five-year, and even especially 10-year plus hold, these potentially miss some really great opportunities to sell, get liquidity for the investors and for me, for us. So that can be challenging too. Obviously both of those are surmountable, but they can be annoying, I guess.

Jimmy: Yeah, that’s fair to say. I think some of the requirements, the compliance requirements of the program are a little bit rigid. Your point is well taken that some of the census tract boundaries are a little bit arbitrary, I guess, or inconveniently placed sometimes. They got to be drawn somewhere, I guess, but that’s interesting. You’ve got two buildings next to each other, one is in the zone, one isn’t, you know, I hear stories like that all the time. And it can be quite frustrating, I agree with you there. How do you see the future of the opportunity zone marketplace evolving as the years tick by here leading up to that 2026 sunset date? And what do you see for your fund in particular?

John: Yeah. So I would think as we get closer, I mean, to some degree, I guess, the investment gets less attractive, that’s for sure different for five or seven years, you know, especially on like a step-down basis, that’s more attractive than two or three years. So maybe it gets a little less interesting there. We don’t know what will happen. I guess, with capital gains tax rates, people having more capital gains, whatever is going on in the market, people may be more worried about the market, that those gains are not going to increase forever and so it might be a good time to pull out and invest. So yeah, so I think it’s good timing, I think now is probably a good time. I mean, two years ago was a great time and I think that’ll continue for a couple of years. And as we get closer to 2026, I’m not sure if they’ll continue to be the opportunity zone funds or what they’ll look like.

Jimmy: Well, only time will tell, right? None of us has a crystal ball that works particularly well. So we’ll find out as time passes. Well, just to bring it full circle now, John, you were talking about at the beginning of the show what you’re doing in terms of historic renovation, and you’re layering opportunity zones on top of historic tax credits, I wanna ask you a basic question before we end the episode today, what do you like so much about historic renovation and historic preservation of these properties that you’re investing in in Cincinnati?

John: Yeah, yeah, it’s a great point. It certainly started out as a passion thing, just liking old buildings, history, architecture. We’re also the general contractor on our projects so we’ve been pretty heavily involved on the construction side. And I think having an appreciation for construction, just the way that things are built, also gives you an appreciation of kind of old buildings, how well and how beautifully they were done, you know, 100-plus years ago, when they had way less technology. Imagine kind of project management and architecture and engineering and all that in the late 1800s. So I love that piece of it. I think it’s really cool, special, and important to be kind of preserving these buildings, to be doing a good job of it. And that’s the good part of the historic tax credits, is they’re effectively incentivizing you to even do like a higher level of historic preservation. And so the money is good but also the renovation should be good as well. So it’s a cool, I think, business to be in. Real estate in general is fun but then if you can fix up these cool buildings and make them cool again, that’s really special and the opportunity zone has kind of only added fuel to that, so.

Jimmy: Yeah. I love old buildings myself. They definitely don’t make them like that anymore in most places. Well, keep up the good work, John. I wish you nothing but the best of luck. Before we go today, where can our listeners go to learn more about you and Kunst?

John: Yeah. So our website is kunst.us, kunst.us, like United States. That’s probably the best place, just our website. You can see kind of our buildings, learn more about us. And then, yeah, I’m also fairly active on Twitter. It’s just @JJBlatchford. Either of those would be great.

Jimmy: Fantastic. And for our listeners out there today, as always, I will have show notes for today’s episode on the Opportunity Zones Database website. You can find those show notes at opportunitydb.com/podcast. And there you’ll find links to all of the resources that John and I discussed on today’s show. I’ll be sure to link to kunst.us, as well as John’s Twitter account. John, thanks for joining me today. Appreciate it.

John: Thanks, Jimmy. I appreciate it as well.

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