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What are the investment due diligence considerations when evaluating opportunity zone business and real estate deals?
This episode is the audio version of an OZ Pitch Day panel titled, “How to Evaluate Opportunity Zone Deals.” The panel was moderated by OpportunityDb founder Jimmy Atkinson. Panelists: Greg Genovese, Gordon Goldie, and Jill Homan. Recorded live on November 3, 2021.
Click the play button above to listen to the audio recording of the panel.
- Current trends in opportunity zone deals and what’s to come in the near future.
- Key factors to consider with investing in OZ projects including unique risks and benefits associated with non-traditional investment strategies.
- Opportunity zone investments as a useful tool to improve the risk-return characteristics of an investment portfolio.
- Developing an opportunity zone investment strategy how to apply it to a portfolio.
- Financing opportunity zones projects and other cost considerations.
- How to retain the tax benefits of OZ investments within estate planning and asset protection.
- Multifamily OZ investments and the key elements to assess when analyzing an opportunity.
- Opportunity zone regulations and policies to consider in relation to asset protection.
Featured On This Episode
- OZ Pitch Day
- Jill Homan | Javelin 19 Investments
- Greg Genovese | Investors Choice OZ Fund, LLC
- Gordon Goldie | Plante and Moran, PLLC
- Fortuitous Partners
- Schedule K-1
Industry Spotlight: OZ Pitch Day
The OZ Pitch Day Fall 2021 was a live, two-day online event geared toward matching investors who have capital gains with Qualified Opportunity Funds that are seeking capital. The live event took place on November 3-4, 2021 and featured pitches from 16 Qualified Opportunity Fund issuers, several educational sessions, and a post-event group networking session.
Learn More About OZ Pitch Day:
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 How to Evaluate Opportunity Zone Deals panel. Real quick. We could just go around the room here. We could just go in an alphabetical order. So, Greg, I’ll start with you. If you could just quickly introduce yourself.
Greg: G is at the top of the list for once.
Jimmy: It is.
Greg: Yeah. Yeah. Thanks, Jimmy. Nice to see you again. And real quick so we can jump right into this, my name is Greg Genovese. I’m the CEO of USG Realty Capital and the CEO of our fund, Investors Choice Opportunity Zone Fund. This is our fourth fund since 2018 and I’m happy to be here to help out any way I can. So, thank you.
Jimmy: Fantastic. And Gordon at Plante Moran, please.
Gordon: Yeah. Great. Appreciate you inviting me here, Jimmy. My name’s Gordon Goldie. I’m a partner with Plante Moran. We’re a top 13 or so CPA firm with regional offices, mostly in the Midwest, The Great Lake states, and also Colorado. I work with my practice basically helping clients that are putting together real estate projects or business expansions utilizing incentives. I probably spend about half my time with Opportunity Zones the last several years, and still work a lot with the new markets tax credit and federal historic tax credits, and other incentives.
Jimmy: Fantastic. And Jill.
Jill: Great to be with you here this afternoon. So, Jimmy, appreciate all the work that you do. I know you’re on the forefront with OpportunityDB. And Greg and Gordon, good to be with you. So, Jill Homan, I run Javelin 19 Investments. My background is really 15-plus years of real estate acquisitions and development focused on emerging neighborhoods. Spent the last three-plus years, I guess it’s four maybe, but really as soon as the legislation passed with Opportunity Zones focus on utilizing this tax incentive. We work in three verticals. The first of which is we are doing some development in Opportunity Zones. So, for example, we partnered, a co-development partner on a student housing project where we raised $20 million of OZ equity with our partner, RISE, and the project delivered this summer. Where we spend a lot of our time is actually we’re a registered investment advisor representative. So, we work with investors who’ve had very significant capital events and we help them allocate their capital.
So, we underwrite individual assets for those investors who would like to go into a single-asset fund, and then we also cover the market in terms of multi-asset funds. So, we cover about 15 of the largest funds and help investors determine which is the most appropriate fund for what they’re trying to achieve for their goals. And then thirdly, we work with two opportunity funds. One is a fund based out of the West Coast called Pinnacle. And the other is Fortuitous Partners, which is a sports anchored opportunity fund. So, they’re both doing some really exciting things on the fund side, and then we’re providing really underwriting and team help for the projects and the funds.
Jimmy: Yeah, that’s great. I’m familiar with both those funds. Jeff and Brett, both those guys do an incredible work with those two funds there. So, I think the vast majority of the attendees in the audience today are likely, I might describe them as high-net-worth, self-directed, accredited investors. I don’t know, maybe we’ve got a couple of advisors on the call. Maybe we’ve got one or two-family office reps. But primarily, they’re folks who are interested in probably investing in a third-party qualified opportunity fund. We may also have some ladies and gentlemen on the call who may have enough capital that they’re interested in structuring their own captive QOF, but whatever the case may be, I really wanna focus today on how to evaluate Opportunity Zone deals and how to evaluate Opportunity Zone funds. Gordon, I wanna turn to you first just for some really high-level advice that you might give to such taxpayers, investors, potential investors who are considering investing in Opportunity Zones. What should they be looking at, what type of advice would you give them at a high level, and what sort of questions should they be asking?
Gordon: That’s a great question. I think everybody would agree that the most important thing is that you really need to look at the investment itself. You can’t let the tax tail wag dog, and hate to say that as a tax person because I love the tax side of things, but the benefits themselves are not gonna make a bad deal a good deal. And everybody’s probably heard that a million times. So, I apologize for saying that again. But I think it’s really most important that you make sure whatever deal you’re investing in is gonna be a good deal, at least to the extent that you can. Obviously, there’s a lot of deal due diligence and such that goes into that. And Jill and Greg are way more suited to address those types of things than I am, but I’d be remiss if I didn’t mention them.
The other thing too is to look at it in the perspective of your entire portfolio, you sell a business and have a liquidity event. And there’s a lot of appeal to being able to defer the taxes from that entire liquidity event by investing into an opportunity fund. But it doesn’t make sense to put all your eggs in opportunity fund baskets, and particularly if it’s all real estate, for example, having all your wealth or vast majority of it tied up into real estate may not make sense. So, it’s important to look at how much of your wealth makes sense to put into these types of assets. Those are kind of the high-level things, but from a more tax-oriented side of things, part of it depends on whether or not the fund you’re looking to invest in is kind of building in the tax benefits into the rate of return that they’re pitching to you. So, to the extent that you are really accepting a lower rate of return from the real estate itself because it’s gonna be enhanced by the Opportunity Zone tax benefits.
Then I think it gets to be important to really understand those benefits. And hopefully, either be able to get information from the fund that you’re looking to invest in as to benefits including things like the effects of the depreciation, deductions, and real estate deal, when you might be able to take those deductions, you know, which gets into technical things like when you’re gonna end up having basis from debt and things like that. So, I’ll avoid getting too technical there, but if you’re happy with the cash returns projected from the opportunity fund and you don’t feel like you’re necessarily taking a discount, you know, because you’re expecting to get benefit it’s from the Opportunity Zone and the Opportunity Zone is really gravy on top, then maybe you don’t need to spend as much time focusing on those tax aspects. But to the extent that you really are needing to get those Opportunity Zone tax benefits in order to make the return that you really make it worth your while to invest in this project, then you really need to spend the time understanding a lot of the technical nuances of the fund and how it’s structured and making sure that they fit your particular situation in terms of being able to, you know, realize those benefits.
Jimmy: Fantastic. Well, Gordon, you mentioned returns briefly. So, I wanted to share this slide, which I shared yesterday during my OZ 101 presentation at the beginning of day one. Jill, you may recognize this slide.
Jill: Yeah. Look at that.
Jimmy: I stole it from you. I did cite you though at the bottom of that. Walk us through this and tell us a little bit more about how the Opportunity Zone benefit can help juice after-tax returns.
Jill: Yeah. And I think, Gordon, hit on a lot of fantastic points. Really the takeaway with the slide is that when an investor, if they were to think about what the benefits are to them, it has between about 40% to 50% higher aftertax returns by investing in an opportunity…using the Opportunity Zone structure versus not using the Opportunity Zone structure. And so that’s the difference between the blue line and the red line are these higher aftertax benefits. But the next question is, is an investor taking a commensurate increase in risk in order to get these additional benefits? And that’s where I would say it depends. And that’s where you get into the evaluation of the opportunities. And so when we work with investors who’ve had gains, you know, call it from $1 million to a couple hundred million, what we really work on, I think, a great point is fundamentally, an Opportunity Zone investment is a tax incentivized real estate private equity investment. And I’m only focusing on the real estate side of it, you know?
And so it is traditionally an illiquid investment. And so we have a lot of conversations about, you know, there is a tax bill coming due in tax year 2026. And so an investor needs to anticipate that and then needs to look at this investment in terms of the overall portfolio construction of what they’re trying to do. So, some of what we work with investors is looking at what is the experience of the funds? What are the fees? So, how is everybody being compensated? And I would just, for example, just describe the marketplace as you have a choice between investing in a multi-asset fund vehicle with an allocator fund or investing in a developer-led fund or a single-asset fund. So, there’s pros and cons with the choices. If you would invest it in a multi-asset fund where that fund manager takes those dollars and invests it into multiple deals, you’re paying two layers of fees. You’re paying the fund manager and then you’re paying the developers, their promote.
The pro is that you’re investing with an institutional fund manager who should optimize the point at which they’re making an investment into the deal. And that should reduce some of the risk associated with investing in a development deal because, you know, they’re able to bring in all of the capital into a development deal. They also have rights in these operating agreements, which allow them to optimize when they come in. So, that’s the pro, but the con is two layers of fees. The alternative is to invest in either a single-asset fund or invest in a developer-led. The pro of that is you’re paying one layer of fund fees. The con of that is you’re investing with a developer, and so there’s not an institution overseeing the investor and really on top of the developers. So, say, cost go up by 25% and the deal no longer works. There’s not that kind of control in place.
And so it really is, you know, there’s not a perfect solution, but it’s about understanding the fees that people are making along the way so investors can really make an informed decision. And, you know, while most…a lot of institutions are trying to solve for that deal gross return of call it 14% or 15% IRR, and then you look at where, you know, after the feed load is taking away, you know, maybe an investor is at a 10% net IRR and just understanding, you know, are these 400 to 500 basis points that the investor’s paying is that provide for risk mitigation, is that appropriate? And so those are the things that we talk a lot about is understanding the fees and then understanding the underlying deals and the returns as well.
Jimmy: Fantastic. Greg, I’m gonna bring you in here in a second, but first, I wanna just interrupt real quick to say that we are gonna leave some time at the end of this segment for some live Q&A. So, if you have any questions, please do use the Q&A tool in your Zoom toolbar. And by the way, we have Gordon Goldie here, he’s a CPA partner at Plante Moran. Most CPAs don’t really get Opportunity Zones, or they might not fully understand it. Gordon does. So, if you wanna play…Gordon, sorry, I’m kind of putting you on the spot here, but we may get a chance to play stump the accountant. If you have any really tough accounting questions, Gordon’s here to save the day potentially. So, please don’t hesitate to ask any questions. I’d love to do some Q&A toward the end of this segment.
So, anyways, back to How to Evaluate Opportunity Zone Deals. Greg, I wanna bring you in now, turn to you. One of the reasons why I invited you on this panel, Greg, is because your fund, the Investors Choice fund has an investment thesis of really investing in different real estate projects all over the country. So, you know, I’m curious, how do you evaluate the different real projects that you decide to go into? Also curious to know, what does your pipeline look like? How many projects do you turn down versus how many projects you accept? And what’s the process for getting involved? Just tell us everything you can about your evaluation process.
Greg: Sure. And I’ll try to be succinct and right on cue…
Jimmy: I don’t know you to be succinct, but go ahead.
Greg: This happens on every podcast. Of course, my phone start starts ringing right about the time I have to start talking here, but the ringers off, the vibrator is going. So, it’s bothering me. But listen anyways, pleasure to be here. Thanks again. Gordon and Jill made some great points, and they actually made a lot of points. So, I can’t really address each one, but one I wanna hone in on before I get into how to evaluate, at least in our opinion, is something Jill said about oversight. Because we’re not the same as we were three or four years ago in the sense of I’ve always been a big proponent, you know, our first three funds were single-asset projects. I’ve always believed in single-asset, let the investor evaluate the program. You can get a tax opinion. You can get all kinds of studies. They can kick the time. What we found during COVID, in fact, as you know, our first program outside of Seattle was named the top fund in the country by GlobeSt and Real Assets Adviser. So, we’re really proud of that not strictly because of the project.
And so Gordon had said…aptly said it was about the project. I like to go a step above that because in 32 years of being in real estate securities, I can tell you that I’ve seen deals that have gone wrong. And in about 80% of the deals that go wrong, it’s because of the sponsor not because of the project. So, who you’re investing with, our first pillar as far as evaluating is really who are you investing with? Because when things work out, everybody goes, “I love that deal in Downtown Sacramento.” When it goes bad, all of a sudden they’re gonna go, and I’ll just use your name, Jimmy, because I don’t wanna call anybody else out. But they’ll go, “Hey, that deal that Jimmy Atkinson did.”
So, first and foremost, number one is who are you investing with? And doing your homework there, their track record, their expertise in the industry. The second part is what we found during COVID was the vast majority of these opportunity funds were developer-driven. And so we had a situation where a lot of larger projects, $120 million, $130 million, $140 million projects, they need $50 million, $60 million to build them, they’re now tied off for a long period of time. And what a lot of people don’t know and I’m sure, Jill, does because she does consulting work, just because a project’s tied off because the state won’t let you work on it doesn’t mean you’re not paying every month for either developer fees or insurance and all these other things that go on. So, it doesn’t have to be COVID, but it’s all about mitigating the client’s risk or the investors’ risk for a long period of time building a portfolio that can withstand one, two, maybe even three recessions or as I like to call them tie-off points.
And so, we were doing larger projects, and the reason we came up with this Consultative National, a platform with Investors Choice, and it’s not to pitch that necessarily, it’s to say, “Look, we have a limited amount of time now, between now and the end of 2026.” You go to the local developers who have expertise. You go to the Opportunity Zones that have the best risk mitigated returns that are accretive to the local community. You co-partner, which is another term that Jill used, which I love, because by co-partner you eliminate the conflict of interest risk that could come with something that is purely developer-driven.
So one, you had asked, who you’re investing with. Our second pillar is what is the actual fund structure and what is the investor asset management focus and the fees associated with that. You hear a lot about vertical integration in industries because just saying the word is supposed to be just a good thing. Sometimes vertical integration’s good and sometimes it isn’t. We’re not a huge fan of pure vertical integration because I don’t give my money to my asset manager, my wealth advisor, and go, “Please just put it in your own bank account and then tell me how good you do with it.” So, we’re big believers in co-managing with the developer partner and then we get paid and our job is to be the advocate for the investor. That’s the second pillar.
The third is the project. Now you’re into the project. Is it a local developer that has expertise? What’s the timeline? How quickly is the cash flow, which is another thing I think Gordon had talked about? How quickly does that cash flow get turned on? And are you baking out not baking in the returns that come strictly because it is in an Opportunity Zone evaluated strictly on the project itself? And then lastly, our fourth pillar as far as evaluation is execution of the proforma in the business plan with third-party oversight. And that’s what we advocate for is we advocate…We’re not just about ourselves, we advocate for any project, any fund out there that is willing to segregate their compensation, co-manage with the developer partners so there’s checks and balances, and thirdly, making sure there’s some sort of third-party oversight. And then I’ll just throw another one in there because we’re big on that is doing social impact studies in each and every one of these projects so that the investors can see quantitatively how well the projects are doing.
So, we wrap that all up, and that’s why we structured our new platform to look at smaller projects, the $20 million, and $30 million, and $40 million projects, they only need $5 million, $8 million, $9 million, maybe up to $10 million of equity, quicker timelines. You can manage the process better. And if you ever do get into a situation of either recession or tie-off again, you now have the ability to mitigate that risk. And I think Gordon or Jill, I forget who said, cost go up by 20% or 25%. You also wanna work it out where your developers, because you’re bringing the money, the developers are taking on the risk of any cost overruns and the developers are actually putting out the guarantees for the financing. Third, financing needs to be in place before the investors make their investment not, “Hey, we’re gonna go out and find the permanent financing sometime later.” I think the programs that people need to look at are the ones that can bake out as much inherent risk as possible in as far as they can in a development deal and do the evaluation based on those four pillars. I didn’t know if I’d get another chance to talk. So, I thought I’d throw it all out. So, thank you.
Jimmy: That was great, Greg, not succinct, but very thorough.
Greg: That was me succinct.
Jimmy: Yeah. It was you succinct. I’ve heard you go on much longer than that before. All good stuff all the time, but you know? So, we’ve probably got another 9 or 10 minutes before we need to wrap this up. Oh man, Gordon, we got a ton of stump the accountant-type questions in the Q&A. So, I’m gonna get to that in a minute. But first, I wanted to ask Jill one more question. Jill, part of the services you provide at Javelin 19 Investments is that you do underwriting on a lot of different Opportunity Zone deals. I think primarily real estate, correct me if I’m wrong.
Jimmy: What does your process look like? At least at a high level, can you describe how do you determine how good or bad a deal is? What does that underwriting process look like, particularly for an Opportunity Zone project?
Jill: Yeah. And so when we’re underwriting individual deals, you know, I’ve spent my career over the last 15-plus years underwriting individual assets. And then when I was at my previous company, a real estate development, I managed all the underwriting and acquisitions of all of our development projects in emerging neighborhoods. And I said it was a firm where we ate what we killed, which was basically there was no hiding. So, once we turned the underwriting over to the folks who were building the building, I still had to live with the underwriting because I was involved with the development project. So, you know, really you have two components, a proforma, you have what it cost to build and then you have what you think you can make in terms of rent. And so what we’re looking at is, you know, we’ve been able to pull together some great data about the cost of construction.
We’re really focused heavily on multifamily. We think it’s a great asset class about where we are, you know, at this point in this economic expansion, even including COVID. And so we look at the multifamily, we try to peel back where the fees are, you know, whether a land value is up…increased in value that the developers added some value there. So, we try to just unpack that. Was there a land lift? You know, where’s all the fees? We look at the costs and look at it across projects. Does it make sense? And then we also look on the revenue and operating statement side in terms of comparing it across competitive properties. And then also, you know, the expenses as well, we’ve pulled together great databases across all the different markets that we’re underwriting to. And then, you know, we’re looking at the cap rates in the current marketplace. We’re escalating those by 5 to 10 basis points per year. And that’s generally what a lot of the institutions are doing as well.
But fundamentally, what we’re trying to is solve between 100 to 150 basis points spread over current cap rates. And so if you imagine if the building was sitting here today, what would the building trade for? And that’s the untrended return on cost? What would be the NOI, and then what would be the total cost to build it? And that gives you your untrended return on cost, and then you compare it to the current cap rate. So, meaning if your untrended return on cost is a 5.5% in the market, you have new construction that are trading in comparable locations of a full cap, that’s 150 basis points spread. And that’s really what we think is adequate compensation for the development risk. If a project is yielding, say, a 5.25% cap rate and new construction trends for 5%, then I would much rather go buy new construction. You wouldn’t get the OZ benefits, sure. But from strictly a risk standpoint, we don’t think the capital is being compensated well enough for the development risk if you’re only getting, you know, 25 basis points. So, that’s really one of the things we look at.
We look at from a gross deal return standpoint, you know, between a 14% and 15% IRR. And then we also look at, you know, the equity multiple. You know, I joke you can’t spend IRR, and so you can end up with like a fancy IRR of an 18%. And then if your deal’s, like 1.5, I’m just using an extreme equity multiple, then I’d rather have a deal that’s a 12% IRR and a 3 equity multiple because, you know, that’s really what you spend.
And then there’s stuff that we see that comes up. Some folks trend rents at 3 and expenses at 2. And it’s just our view is look, if this is an inflationary marketplace and we think expenses are going to go up. And we think it’s a hard argument to make the one that you want to go up is gonna go up more than the one you don’t wanna go up. And so we think it’s either you trend them both or you, you know, hold rents and then trend expenses and then trend them both. So, those are things that we look at. And then we also just try to think on that interest rates are gonna go up, so we do model refinance, but we are adding basis points to what the refinance looks like as well. So, those are things that we really look at.
And then we stress models because we’re looking at what are their returns really driven by? And what we want are projects where the value creation comes from building a building and creating the cash flow instead of the value creation coming from assuming a great cap rate sale. Because if the whole deal is assumed, its hinges on super low-interest rates at refinance and a super aggressive cap rate, then the value creation did not come from building a building and operating it. And that’s really what we’re fundamentally looking for is great assets in good locations that the value creation comes from building great buildings and operating that cash flow. So, a few thoughts.
Greg: Before you get over to Gordon, I just wanna echo something that Jill just said. Couldn’t agree more. These valuations need to be based on NOI. In fact, even decompressing the cap rate in your proformas over that 10-year hold is really an important element. Don’t count on cap rate compression over the next 10 years. So, I just wanna echo that. What Jill just said, there was very, very valuable information. So, I just wanted to put that out there. So I agree with you.
Jill: Well, and I’ve been saying cap rates are gonna go up for the last 10 years, but at some point, I’m gonna be right.
Greg: You’re gonna be right. Exactly, exactly. But that’s an excellent point. You can’t just look at an executive summary and see a number and go, great. It’s how did you get to the number?
Jill: And ultimately, these investors have harvested capital gains. So, they’ve sold their company, you know, sold their business, and the last thing they wanna do is just invest in a deal that is just not rooted in the fundamentals. And that’s what we try to do is kind of tease through what are the fundamental elements of what makes this deal work.
Greg: Couldn’t agree more.
Jill: And now Gordon, you get all the hard questions. So, just start quoting, you know, Section 752 and all these tax code sections.
Jimmy: Yeah. It does look like all the questions that came in are for Gordon. We’ll get to those in a second. So, I did just get word that the Caliber Funds breakout session just closed down. So, I think we have a lot of people rejoining us from that. And we’re gonna get going with the Hall Venture Partners Fund pitch in just a few more minutes here. We might go over a little bit this segment. We’ve got a little bit of buffer though, so that’s fine. So, Gordon, I’ll start you off with an easy one. We had a couple of questions about the 180-day deadline. When does that start? When does it end, depending on what type of entity you received the gain through? So, I’ll ask Frank’s version of the question here. He says he has a number of hedge fund investments which report on a calendar fiscal year. He’s heard two different versions of when the window closes for OZ investments to offset the capital gains in those investments. One is that it’s 180 days after the end of the fiscal year, i.e., around June 30th. The second is it’s 180 days after the tax filing deadline, i.e., around September 15th. I think it’s September 11th to be specific, which is correct?
Gordon: Although, they’re both correct. Yes. There’s actually a third option too, which is a 180 days from the dates of the sale that the passthrough entity is reporting the gain to you or realize the gain. And so you have to pick one of those three. I guess the important thing I’d say is that for any particular gain, you can only pick one of those three. And so I don’t think you have the flexibility to put some of your investment in during 180-day period starting the date of the sale, and another within the 180-day period starting on the due date of the return. It’s one or the other. And so you’ve gotta figure out what’s best for you. And that could also result in a blackout period because, you know, you could have…let’s say if you had a sale occurred on, let’s say, March 1 of 2021, so you could pick 180 days from that, you know, which would end somewhere before the end of the year, right? But then your next 180-day period that you could pick wouldn’t start until December 31st. So, there’s gonna be some period during the last couple of months of the year where it’s, I guess I’d call it a blackout period where you can’t invest during that period. But then after that, now you can basically up until, you know, September, like you mentioned, September 11th
Jimmy: And that’s available for taxpayers who recognize the gain via a Schedule K-1?
Gordon: Right. Exactly. Yeah. If the gain is from an asset you sold yourself, then you only have one choice, which is the date of the sale that you recognize the gain.
Jimmy: Right. Gotcha. Question from Joseph here, “Can OZ investments be moved into a trust and retain the tax benefits? What if it’s a marital trust?”
Gordon: Really the root of that answer is that, you know, there are certain situations where a transfer of an opportunity fund investment triggers what’s called an inclusion event, which would require you basically to recognize the deferred gain and lose all the Opportunity Zone benefits. There are quite a few exceptions to that rule that a transfer triggers an inclusion event, and a transfer to a trust could be one of those exceptions. It really depends on the structure. You know, it’s probably, you know, I don’t have time to go into all the details there, but the general kind of estate planning type of transfers are generally okay. But, you know, obviously, you’ll wanna verify that before you actually make such a transfer, but generally speaking, you can do that sort of thing.
Jimmy: I have, by the way, posted links to Greg’s, and Jill’s, and Gordon’s websites where you can find out more about them and get in touch with them and their teams if you have any follow-up questions you’d like to ask any of the panelists today if we don’t get to your question. I’ve got two questions that I see here that I remember seeing yesterday, and we didn’t really get a chance to answer them, or maybe we didn’t answer them well enough. Hafey asks, “If you move states between now and 2026, in which state do you pay the deferred state tax to in the tax year 2026 when you recognize that gain, is it one, or both, or what?”
Gordon: Good question too. And, you know, I guess the first thing is you have to look and see what the state that you’re involved in and whether it’s the state that the gain was recognized in or the state you live in, how do they recognize the Opportunity Zone statute. Because some states have decoupled from the Opportunity Zone statute and they don’t follow that. And so, you know, that’s one thing you need to pay attention to is, you know, what does your state do? So, for example, California is one of the more infamous ones that don’t follow the Opportunity Zone statute. But I guess to specifically answer that question, I think it depends on the state, but certainly, you could end up paying tax. I mean, most, the default tends to be that you pay tax in the state of your residence and then you get a credit in that state’s tax for any tax you pay to a different state. And so different state taxes you for that gain because it was related to let’s say, real estate investment in that state and you end up paying tax in that state where the property was located, then you get a credit against your home state’s tax. So, you know, technically, you have to pick up that gain on your personal return in your state of residence, but then you might get a credit against the tax for that. So, it really depends on the state and what their rules are, but that’s kind of generally speaking how it would work.
Jill: And this is why you really wanna hire an accountant like Gordon. So, I mean, if nothing else, ’cause it’s so important to understand the character of gain and the timing and then these questions. So yeah, absolutely.
Jimmy: And we’re happy to have you here today, Gordon. I think we got time for one or two more questions. What happens if the Opportunity Zone investor dies before the end of the 10-year holding period?
Gordon: Generally speaking, the estate planning documents are gonna kick in and the investments gonna transfer according to those or probate, whatever, you know, if there’s not estate planning document in place. But generally speaking, as long as, you know, the heirs take, you know, step in the shoes of the person who died, they would become responsible for the deferred gain and would be entitled to the Opportunity Zone benefit. If they were to transfer the asset, that would be an inclusion event and it would trigger the acceleration of the gain and a loss of the remaining Opportunity Zone benefits. So, it really kinda depends on what happens with the asset after the death, but generally speaking, the death itself won’t trigger a loss of the benefits, but a transfer after that.
Greg: Jimmy, do you mind if I just…I’m just gonna take 25 seconds to dovetail on this, although I’m not a CPA. But I think the question regarding somebody dies, this is a big one because part of evaluating a program really has to do with the exit strategies designed in the program itself. So, you have the legal and the tax side of it, which is what happens when someone dies, the heirs are gonna get that at a stepped-up basis. But now you have to look at what sort of liquidity provisions does the fund actually have during that time period. So, you really wanna look for a fund that has advantageous liquidity provisions for the investor during that time period. Also, some people wanna get out right at 10 years, some people wanna stay in, and so you need to look at what’s their exit strategy structure and what’s their liquidity. And I think that’s an important element on top of just looking at from a tax standpoint with step-up in basis.
Jimmy: All right. Well, thank you to my panelists. I do have to wrap things up now and move along, but I wanted to thank each one of you, Greg, Gordon, Jill. Thank you so much for being here with us today and participating on this panel. Once again, I posted links to contact information and websites for our three panelists today if you have any follow-up questions you’d like to ask. I didn’t get to all of the questions for Gordon. I’m gonna try to address some of those in the Q&A and in the chat over the next few minutes. And I’ll try to forward on any really tough ones that stump me on to Gordon. And hopefully, we can get those questions answered down the road here. Appreciate all three of you for joining me today. Thank you.
Greg: Thanks, 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 be back soon with another episode.