OZ Pitch Day - March 7, 2024
Alternative investments are quickly gaining ground in the marketplace. But what’s driving this trend, and how can investors take advantage?
Andy Hagans is Chief Operating Officer at OpportunityDb.com, and the founder of AltsDb and The Alternative Investment podcast.
Click the play button above to listen to our conversation with Andy.
- The macroeconomic trends increasing the popularity of both Opportunity Zone investments and other forms of alternative investments.
- How alternative investments are different than investing in the stock market and other types of asset classes.
- How alternative investments can be useful to improve the risk-return characteristics of a portfolio.
- What real estate investments are considered alternative investments.
- The driving force behind a remarkable final quarter for the Qualified Opportunity Fund marketplace.
- An overview of the tax benefits provided by the OZ program and the requirements for investing capital gains in Qualified Opportunity Funds.
- The location criteria for investing in Opportunity Zones and other considerations when searching for potential funds.
- What alternative investment choices are gaining traction and why.
Featured On This Episode
- Andy Hagans on LinkedIn
- Andy Hagans on Twitter
- Andy Hagans OZ Pitch Day Segment on YouTube (entire segment: Opportunity Zones 101)
- AltsDb: The Alternative Investment Database
- Delaware Statutory Trusts (DSTs)
- ETF Database
- Guide to Alternative Investing (PDF), by Andy Hagans & Jimmy Atkinson
- Impact Investing
Industry Spotlight: AltsDb
AltsDb provides world-class tools, education, and analysis to help individual investors, family offices, financial advisors and industry service providers navigate the ins and outs of the alternative investment landscape.
Learn More About AltsDb
- Visit AltsDB (The Alternative Investment Database)
- The Alternative Investment Database on YouTube
- The Alternative Investment Podcast (homepage)
- The Alternative Investment Podcast on Apple Podcasts
- AltsDB on Facebook, Twitter, and LinkedIn
- Alts Expo – Online Event (December 8, 2021)
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: Welcome to The Opportunity Zones podcast, I’m your host, Jimmy Atkinson. In today’s economy, Qualified Opportunity Funds and Alternative Investments at large are exploding in popularity with High Net Worth investors. Here to discuss this and more with me today is my good friend and newest partner at OpportunityDb, Andy Hagans. Andy is also founder of AltsDb, the Alternative Investment Database, and he co-hosts The Alternative Investment podcast with me. He joins us today from Holland, Michigan. Andy, thanks for joining me, and welcome to the show.
Andy: Thank you for having me, Jimmy.
Jimmy: Absolutely, Andy. Great to be here with you today. So, what are some of the macroeconomic trends that are increasing the popularity of both Opportunity Zone investments and other forms of Alternative Investments?
Andy: Great question. What are the trends? Well, you name it, right? We have increasing inflation as well as investors are anticipating sustained higher inflation in the future. We also have an expectation of higher tax rates in the future, specifically higher capital gains tax rates. And of course, we also have, along with the inflation, really high valuations across many different asset classes, not only stocks and bonds, but residential real estate, all kinds of real estate.
And so, investors, when you talk about inflation and looking at yields on bonds are way down, investors are looking for yield, right? Honestly, looking for positive returns. So there’s a lot of tailwinds, I think, that are growing the popularity of Alts and especially Qualified Opportunity Fund. There’s gonna be a monster quarter ahead for QOFs, in my opinion.
Jimmy: And why is that? Explain why this last quarter of Q4 here as we’re, when we’re recording this we’re toward the end of October gearing up for November. Why do you anticipate a monster final quarter for the Qualified Opportunity Fund marketplace?
Andy: Okay. A couple things. Just the context here, we have so many High Net Worth investors, very-High Net Worth investors that are sitting on very large capital gains from their positions in the stock market, sometimes the bond market, sometimes also private businesses that they may have sold or other direct investments in real estate that they may have recently sold. So there’s a lot of dry powder of realized capital gains that many investors, as we get close to the end of the year, are saying to themselves, “Oh, wait a minute. I don’t wanna pay this giant capital gains tax bill.” So in comes a QOF to the rescue where the investor can invest into the QOF, if they find a QOF that they like, and then not only defer that capital gain payment for five years, but also eventually receive that step up at the end of 10 years.
But more importantly, as it pertains to this quarter, there’s an additional tax benefit, as you well know, Jimmy, for Qualified Opportunity Funds where that initial deferred capital gain is reduced by 10%, but that benefit will be disappearing on December 31st. So, I think there’s gonna be a nice little bumper crop of assets raised by these QOFs that are out raising money right now in this quarter before the end of the year.
Jimmy: Yeah, that’s a good point, Andy. Yeah, there’s three main tax benefits to Opportunity Zones investing for a taxpayer with a capital gain. There’s the ability to defer the capital gain until the end of 2026. He also gets to reduce the amount of capital gain recognized by 10%, and he gets to eliminate capital gains tax liability on the subsequent OZ investment after holding for 10 years. But that second benefit, that 10% reduction in capital gain recognition of the initial capital gain, as you rightly point out, that does expire at the end of this year, barring an act of Congress that may extend that. And hopefully, we do get an extension of this program at some point, either later this year or toward the beginning of next year, although, you know, whether that is gonna come to fruition or not is a matter of speculation at this point. Nobody knows for sure.
Well, Andy, before we move on with the episode today, I actually kind of wanted to zoom out and get a little bit of background on you. I mentioned in my intro today that you’re a good friend of mine, and that’s actually true. I don’t just say that about everybody, but you and I have known each other for going on about 20 years now, I think. But maybe a little bit of background on you. You’re quite the entrepreneur, and you’ve had some private equity investing experience along the way as well. So tell us a little bit more about yourself.
Andy: Yeah. So, as you mentioned, I am an entrepreneur, a serial entrepreneur, and I really have been, ever since I got started in my career, one of my first big successes, Jimmy, was with you, of course. We co-founded, along with a third partner, the ETF database, etfdb.com. And so that experience was awesome. Like I had a lot of fun running that website and really got my feet wet with financial data, and macro-economic analysis, and also just learning about the product side of investment media. So, you and I, we grew that business along with our partner, Michael Johnston, and we eventually exited it in 2012.
Now, you, Jimmy, you’re the one who found into the Opportunity Zones program, right? I’ve sort of been in and out of this private equity and entrepreneurial world, but you’re the guy who came to me actually, saying, this program is amazing and you started this podcast and I was happy to come alongside you as a partner to help you expand it. And we’ve decided to now expand our universe into the larger world of Alts, which I’m tremendously excited about. Along with specifically the QOF’s opportunity, there’s just so much interest in Alts right now. And I only see that growing in the next 5 to 10 years.
Jimmy: Yeah, I agree with that. I wanna talk with you about Alts in a couple minutes here, but first, I did mention we’ve known each other for a while, right? And I started talking with you about Opportunity Zones almost as soon as I first started learning about them way back in 2018, you know, a little over three years ago now, but it took you a little while to really get it. You kind of dismissed it, I think, at first, when I first started talking with you about it. But as an investor, Andy, you know, eventually, you did come around and now you’re an investor in Opportunity Zones. What finally caused you to get excited about OZs?
Andy: Well, I think it was a combination of two things, Jimmy, and I actually think that this is probably the case for many Opportunity Zone investors. The first thing that piqued my interest was the tax benefits, right? And one specific thing about Opportunity Zones that I harp on over and over and over is the tax benefit of deferring that capital gain and then having it step up at the end of 10 years. The beautiful thing is that you can put any capital gain proceeds into QOF and defer them, right? As opposed to a DST or 10-31, where it has to be a capital gain from the sale of an investment real estate property.
So, just the idea that so many more accredited investors can access or can enjoy the benefits of the Opportunity Zones program, I think is really, really appealing. And of course, they are significant tax benefits. But second, Jimmy, I think what ultimately pulled me in sort of allowed me to pull the trigger, so to speak, on an investment was the story of the specific investment. We hear the word impact investment. Sometimes people will roll their eyes at the idea of impact investing. I kind of understand why. Sometimes it can get a little bit corporate with the ESG stuff, but if you find an Opportunity Zone project that you’re excited about, I think that story can be so, so powerful. Just the idea of place-based tax policy, right? Because if you’ve traveled around the United States, if you’ve been all around Chicago, right? The nice neighborhoods and the not-so-nice neighborhoods, or Detroit, or around the Midwest, if you’ve been to Gary, Indiana, or in your case, Puerto Rico, right? You recently went to Puerto Rico, which I understand that entire island is an Opportunity Zone.
Jimmy: That’s right. Nearly the whole island.
Andy: So I think if investors find a specific project that they’re excited about, then adding the tax benefits almost, I don’t wanna say they’re an afterthought, but I actually think that’s the main driver. Investors identifying projects that they get excited about, that there’s a story to the project that kind of hooks them in.
Jimmy: Place based tax policy that really helps benefit the communities where the developments are occurring. Yeah, I agree with that, Andy. I think there’s something to that. Well, so now let’s get back to Alts now, though. Why Alts in general, not just for you, Andy, but for investors at large, let’s take a typical high-net-worth, self-directed, accredited investor, why should he or she be turning to Alts potentially?
Andy: Good question. And I used to say there were three main reasons that investors are shifting assets into Alts. And now I say there are four, I’m gonna give you a bonus reason, but those three reasons, and I’ll just cut to the chase. I’ll give you the reasons, and then I’ll dive into them in some more depth. Number one is higher returns, right? Investors are always looking for alpha, looking for yield and income. Number two, portfolio diversification. So, it’s not just return, but investors want to minimize their risk, especially in the context of an overall balanced portfolio. And number three, the tax advantages.
So, many types of Alts, many specific products like DSTs, and of course, Qualified Opportunity Funds, as well as other forms of direct investment in real estate, energy programs, which can give other tax benefits. Those can add up to be substantial tax savings. So investors are looking at those triple net returns, returns after fees and inflation and taxes. That’s the bottom line, right?
The fourth bonus reason I’ll give you that investors are looking into Alts is impact. I think this is true in almost every segment of Alts. Of course, we’ve already discussed impact investing through Qualified Opportunity Funds, but also think about like crypto, right? Investors can get very, they kind of fall in love with the story behind crypto and how it’s changing our economy. And so, that’s a big driver with people who invest in cryptos, not just the potential profit, but also being involved in the story. And I think that’s the case with a lot of direct investment in real estate deals as well, just, people like to invest in places or in products where they have passion.
So, to step back a little bit and go back to that first reason I gave, which was higher returns, you know, if you look at the bond market right now, so I have Wallstreetjournal.com loaded in front of me. It’s October 25th. So it says the 10-year yield right now is 1.639%. So, about 1.64% is the yield on the 10-year. Now, depending on who you ask, our current inflation rate is 5%. Some people might say it’s higher than that though. They might say it’s 7 or 9%. So, right off hand, the yield on a 10-year is very negative. It’s quite negative. And not only that, but if you’re holding a bond in a taxable investment account, you’re taxed on that nominal yield, right? The real yield is actually negative, but you’re taxed on that nominal yield, which is positive. So, that’s gonna drive your triple net returns even lower on investing in the 10-year.
So if you think about how terrible of a deal, I know that’s just one specific bond issue, but the bond market overall, the yields are not good in the context of higher inflation and potentially rising inflation. We can turn to the stock market, which has had just this huge, huge run-up. And, you know, that’s great. Everyone’s sitting on these capital gains. Whether they’re realized or unrealized, that’s great. But if you’re thinking about investing new money now into a market that’s had this run-up, it gets a little dicier, and then you can look at direct real estate investment where there’s been incredible cap rate compression or in residential real estate, housing prices are up, what? Twenty, 25% year over year.
And so, when asset classes get, I don’t wanna say overvalued, but when they’ve all had this run-up, and the yield in many of them is negative in real terms, it’s only natural that investors are going to look elsewhere for yield. And then you combine that with the fact that in the news every day, you know, you’re reading about potential tax increases coming in the future. That’s just gonna be another tailwind for investors to take another look at Alts, and especially tax advantage Alts where they can get not only yield, but they can also get significant tax benefits as well.
Jimmy: That’s great, Andy. So there’s a lot of good reasons why investors should be looking toward Alts, those four reasons, again, higher returns, improved portfolio diversification, the tax advantages, and then of course the impact. That’s your bonus reason for this podcast episode. So, what about The Alternative Investment podcast? You and I fired that up a few weeks ago. Can you tell our listeners what it’s about and why did we choose to start it?
Andy: So The Alternative Investment podcast is a podcast about Alts and direct investments. And what we know, what we already know by operating OpportunityDb and this podcast is there’s a tremendous interest in alternative investments, but there’s also limited information and sometimes, frankly, a lack of transparency in the world of Alts. And so, the idea behind the podcast is, we are going out and we are talking to leaders in the world of Alts and just getting information about their products, about their thought process, about their investment strategies.
So it’s really interesting content. I mean, some of the guests we’ve had on so far have just been incredible, the type of projects and projects they’re doing and funds they’re running. So, just for instance, couple recent guests that we’ve had on the podcast. We had Sam Hales from Saratoga Group talking about mobile home park investments. And just really interesting hearing about the financial opportunity there just in terms of profits, dollars and cents, but also just how his group is managing these mobile home parks to make them, you know, safe, quality places to live, which makes, you know, again, that impact aspect to alternatives.
So I thought that was a super interesting episode. And then one other one I’d like to bring up, another recent guest that we had was Chris Rawley of Harvest Returns. And Harvest Returns, they are bringing liquidity and fundraising for various agribusiness and sustainable agriculture projects. So, again, if that’s like a passion of an investors, you know, that’s an opportunity for them to deploy some capital privately through this alternative investment and invest in something where they think the story is really, really cool.
So, on a big broad level, we know of course that there are financial reasons why High Net Worth investors are turning to Alts, and especially tax advantage Alts. But the most fun part of the podcast are the people we meet and the interesting investment stories and investment theses that we are learning about as we go.
Jimmy: Oh, fantastic, Andy. It’s been a pleasure speaking with you today. Thanks for joining me. Before you go, where can our listeners go to learn more about you and AltsDb?
Andy: Well, they should check out AltsDb, the Alternative Investment Database at altsdb.com, but they should also definitely just open up their podcast player, which probably that app is open right now on their phones. And if you just type in, The Alternative Investment podcast, our podcast will pop up so they can subscribe to that and listen to new episodes as we release them.
Jimmy: Yeah. And we hope you do, please do that if you get a chance to. And for our listeners out there today, I will also have show notes on the Opportunity Zone Database website for today’s episode. You can find those show notes at opportunitydb.com/podcast, and there you’ll find links to all of the resources that Andy and I discussed on today’s show. Andy, thanks for joining me.
Andy: Thanks so much, Jimmy.
Jimmy: That’s it for our show today. A huge thank you to you, our listener. If you liked this episode, please rate and review us on iTunes. The Opportunity Zones podcast is produced by the Opportunity Database. Visit opportunitydb.com to learn more about Opportunity Zones and Opportunity Zone fund investing. You can learn how to subscribe to this podcast and read more about today’s guest in the show notes by visiting opportunitydb.com/podcast. And we’ll back soon with another episode.