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OZ Strategies For UHNWs & Family Offices, With Bob Hutchins
How can the Ultra High Net Worths and family offices use opportunity zones as a strategy for social impact investing with great tax savings? And what rewards do opportunity zones have in store for family offices?
Bob Hutchins is the Managing Director of the Ellavoz Shared Values Opportunity Fund and President & CEO of Ellavoz Impact Capital. The company sponsors and manages the Ellavoz Shared Values Opportunity Fund and the Ellavoz Impact Angel Network.
Click the play button above to listen to our conversation with Bob.
- Opportunity funds and family offices as a perfect match for social impact investing and tax savings.
- What rewards do opportunity zones have in store for family offices.
- How family offices should evaluate opportunity zone projects.
- Power of the private sector equity investment with the public sector debt and the incentives for projects that are eligible for them.
- Social impact asset class that link private capital in the hands of High Net Worth individuals.
- High social impact projects that can deliver returns for their investors.
- The types of opportunity zones capturing investors’ interest right now and a fund manager’s perspective on alternative investment options.
Featured On This Episode
Industry Spotlight: Ellavoz Impact Capital
Ellavoz Impact Capital is the operating company for the Ellavoz Shared Values Opportunity Fund and the Ellavoz Impact Angel Network. The Ellavozs Impact Angels are High Net Worth individuals, business entities and family offices who believe shared values investing in underserved communities and entrepreneurs will result in desirable financial and social returns on their investment.
Learn More About Ellavoz Impact Capital
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. Ultra High Net Worth individuals and families, as well as family offices, can use Opportunity Zones as a strategy for high social impact investing with great and tax savings. Here to discuss this and more with us today is Bob Hutchins. Bob is CEO of Ellavoz Impact Capital, sponsor of the series of Ellavoz Shared Values Opportunity Funds, and they also manage captive Opportunity Zones for Ultra High Net Worths and family offices. Bob joins us today from Belmar, New Jersey. Bob, welcome to the show.
Bob: Thank you, Jimmy. Thank you for inviting me.
Jimmy: Absolutely, Bob. Pleasure to be with you today. Thanks for taking some time out of your day to spend with us on the podcast here. So to dive in, why do you recommend Opportunity Zones for Ultra High Net Worth individuals, families, and family offices?
Bob: Well, as a CPA and a long-time tax advisor to Ultra High Net Worth individuals and families, I recognize the 1400Z-2 tax benefits for long-term tax and investment planning. Long-term investment planning is strategic to family offices and Ultra High Net Worth individuals. They think in terms of a 50-year plan. What will my grandchildren be invested in? So when they make investment decisions, the 10-year holding period is absolutely no concern of theirs. In fact, one of the questions I get most often is, how long can we keep it up in the fund to get the most tax-free benefit of the investment? So OZ funds really are very consistent with family offices, especially those in the second, third, fourth generation, which are set up specifically for generational wealth accumulation and maintenance.
Jimmy: And what is your answer to that question by the way? How long can they keep it? And I think it’s a great philosophy to have because a lot of investors do ask, “Well, geez, 10 years, that’s a long time. How soon can I get it out?” I think the other way is the better way to think about it. How long can we let this thing eat? How long can we let this thing compound returns that have huge tax advantages associated with them? There’s that end date of December 31st, 2047 that’s built into the regs. Is that typically what you advise people on, or is it more ambiguous than that?
Bob: The 2047 end date is…and let’s assume that the OZ provisions are not extended, and nobody can tell right now. I’m involved with the Opportunity Zone Working Group, which is a national organization that meets every two weeks and discusses Opportunity Zone tax implications and proposed legislation, etc. At this point in time, I don’t think any of us can say that there’s anything bad or good gonna happen to opportunity funds. So we proceed as if the existing legislation is what we’re gonna work with. In 2047, that’s the last time you can sell the asset and receive the benefit. That’s very attractive to our Ultra High Net Worth clients because during that period of time, not only can you buy and sell within the fund, but they can continue to drive a business strategy of accumulating more Opportunity Zone investments along the way. They see opportunity fund investing as a business asset class.
What a lot of people don’t realize is that the Ultra High Net Worth family offices and families are not all invested in stocks and bonds. In fact, it’s somewhere around 20%, most of their wealth was built on a single privately held company. They ventured into other private equity deals. They prefer direct investing than passive investing, although they do do that. They allocate some money to passive say private equity investing, but they do like club deals. They like direct investing, where there is no waterfalls and the fees are transparent. And that’s what we do.
We created a social impact asset class that links private capital in the hands of High Net Worth individuals and they can invest directly in high social impact investments, primarily in the residential, some in mixed-use real estate asset class, and receive a risk-adjusted market return that’s very attractive. And at the same time, they’re fixing a lot of social problems that otherwise would not be addressed by government because government just simply isn’t set up to fix these kind of problems.
And at the same time, we can help scale not-for-profit affordable housing corporations to do more good. They see this as a new asset class. And this is specifically what we wanted to create, an asset class, which is an opportunity fund, tax-qualified opportunity fund, that will invest capital gains income from other sources within the family office or high-net-worth individual into social programs that provide a low-risk, transparent, low-fee direct benefit to the family office. It is unique. No one else I know in the country is doing what we do.
We represent the investor. We’re not real estate developers or sponsors. We represent the investor. And in many cases, we represent a family office that generated $2 billion net worth based on retail stores and real estate and items, and other investment classes that they’re comfortable with. We’re now helping them as they roll over their capital gains into a new asset class that allows them to not only defer, but the real benefit is at the end of the fund period to recognize, and here in New Jersey, we’re a conforming state to exclude the gain from taxation, no matter what the capital gain rate is.
Our clients are not concerned about the 10-year hold, just the opposite. They wanna hold inside the fund as long as possible. So the outside time period of 2047 is very attractive to them. They see that as, “Wow, I can shelter all my gains inside of this fund for 25 years.” And so this asset class is extremely attractive to this type of client.
Jimmy: And you perform a lot of that work through your company, Ellavoz Impact Capital. Give us a little bit of background on that firm. What you guys were all about when you got started.
Bob: Sure. Well, I spent 40 years as a tax partner and working on sophisticated tax strategies for income and estate tax minimization. I started with Pricewaterhouse. I had my own firm. I built that up to about 40 people. Eventually merged into a regional, now national firm, and retired out of the public accounting and set up an impact investment fund, taking impact investing and putting it inside of Opportunity Zones census tract entities, which makes it a much stronger asset class. Now through my experience as a tax advisor, I’m very well aware of all the tax credits and census. I have extensive background in entrepreneurship. So I’m familiar with the due diligence process, etc. I was an intermediary for some high-net-worth families in assessing private equity deals, as well as angel deals. And we have an angel network here also that we look at some impact investment, seed investment impact companies, which are separate from our OZ funds.
So in putting this together for this type of client, we were able to create an asset class that’s very attractive. And our family offices are very interested in the opportunity to build an asset class that has a tax-free disposition. When you think about the fact that you can build value for 25 years and at the back end not pay tax on that value, if you’re a long-term strategist, a long-term thinker, a long-term planner, there’s nothing better. There isn’t anything else that can do that.
So opportunity funds and family offices are really a perfect match. And they’re also aligned because family offices and Ultra High Net Worth individuals do want to allocate a portion of their portfolios to social impact. They’re very social impact, whether it be climate change, whether it be social justice, and, in particular, homeownership is another area that they’re interested in. Dignified housing, affordable housing, education.
You’ll find that most of these for family offices and their allocators are allocating a portion of their portfolio to social impact. So we provide a highly tax incentivized and very strategic income and estate tax planning advisory service that they can carry out their impact investment with. It’s really a perfect fit.
Jimmy: And what’s your primary investment thesis at Ellavoz, Bob? Which asset classes, in particular, or property types, in particular, do you like, and I assume you’re doing just real estate, but correct me if I’m wrong, and what target markets do you like?
Bob: Well, we’re doing workforce housing, some affordable housing, special needs housing. We are very interested in veterans’ preference housing. One of the things we do different too is that we align ourselves with not-for-profits. The Ellavoz brand is actually a partnership with New Jersey Community Capital, which is the largest CDFI, community development financing institution in New Jersey. A CDFI is essentially a not-for-profit bank that specializes in debt financing in economically deprived communities.
So our partnership brings the power of the private sector equity investment with the public sector debt, as well as incentives such as new market tax credits, historical tax credits, in some cases, grants, community development block grants, etc., for projects that are eligible for them. And we’re able to craft a capital stack that makes sense and over long term gives a rather attractive yield to our investors at a relatively low risk.
We stay with real estate for a number of reasons. And that is that it fits our risk profile. We focus on affordability of housing. We follow the United Nations development goals. There are 17 of them. Number 11 is dedicated to safe cities and affordable housing. We think that housing is a basis for a lot of other social justice requirements like security. We try to integrate Boots on the Ground not-for-profits to provide services to our residents. We look for whether it be childcare or setting up a veterans resource center funded by a private foundation to make life better for our residents. So we actually customize the projects that we work on for some of our family office clients, so that they can meet their social impact goals by investing in these projects.
Jimmy: You mentioned a few examples a little bit earlier, but I’m curious if you have more examples of some of these high social impact projects that can still deliver returns. Maybe you can go into one or two specific examples in more detail, and I’m curious what target markets you and your clients are interested in.
Bob: So we are working in Newark. Our first fund was an investment in the old Saint Michael’s Hospital, which have been vacant for a decade or so. And it sits right on the corner… It’s actually on the campus of the new Saint Michael’s Medical Center. And we’re invested in that project converting it into three floors of workforce housing, as well as two floors of commercial, which will be made up of a glass blowing factory and the related classrooms for teaching that trade, as well as art studios and galleries because it sits right on the corner of the arts district in Newark, New Jersey. It’s known as the Arts Commons and it’s pretty exciting.
We’ve been working on that for about a year and a half. It’s still not finished yet, but we think it’s gonna be a project that will have national attention when we’re done. Because it’s being built with a lot of historical tax credits and rebuilding the chapel and a lot of the hospital, new market tax credits is creating a lot of jobs. And we particularly like that project because it sits on the campus of the new Saint Michael’s Medical Center. So it’ll provide dignified and affordable housing for our healthcare workers who served us so heroically over the last couple of years.
We are also located near New Jersey Institute of Technology and Rutgers Newark. So we like the Newark side. We’re working in Florida. We like Florida very much. So we have a couple of projects in the pipeline in Florida, West Palm Beach. We’re working in Orlando, just north of Orlando, maybe will be a veterans’ preference project, 90 units. We just recently got interested in Atlantic City, New Jersey, and we’re working on some projects that are sitting down there that we’d like to see in our pipeline. Newark has been very good to us. Patterson is an area where we’re talking to the public officials in Patterson for investment in a couple of those deals. So we’re primarily New Jersey-based, we focus on obviously, New Jersey, but we also have about half of our investments right now are directed in Florida where we’re very active.
Jimmy: Good. Some great examples there. What about trends, Bob? Trends that you’re keeping an eye on in terms of not just real estate investing, but also more specifically in terms of Opportunity Zone, particularly for the types of clients that you cater to, Ultra High Net Worths and family offices. Are there any trends that you’ve noticed or that you’re keeping an eye on for the future?
Bob: Well, warehouse, you know, everything to do with logistics and the supply chain is hot. We would like to do more in economic development. We started off focusing really on affordable housing and workforce housing and building in distressed neighborhoods because not only does that create dignified housing and affordable housing, but it also resuscitates the neighborhood. When you have new construction in an otherwise distressed area, actually there are studies that show you reduce crime because as the area improves, people take more pride in their living space and the community thrives. We’re exploring more economic development opportunities. We do not invest in Opportunity Zone businesses because I don’t think businesses are that valuable inside of an Opportunity Zone.
The 10-year hold is kind of an artificial restraint. As an entrepreneur who’s built up businesses and sold them, in everything from hospitality, bioinformatics, medical device, etc, you just know when your company hits a certain point and you have a buyer, you have to sell it, that’s it. Plus there are a lot of tax codes, Section 1202, etc., that give you the same benefit or almost same amount of benefit as an opportunity fund would. So we haven’t concentrated on operating businesses, but we’re interested in real estate-based businesses, warehouse, cold storage, could be quick-service restaurants, etc. We would invest in those types of businesses that provide jobs. We just haven’t pursued that as of yet.
Jimmy: A lot of opportunity and Opportunity Zone investing for your clients and for real estate investors at large, great tax benefits, obviously. You also mentioned that there are different estate tax planning strategies with Opportunity Zones. Explain that a little bit more.
Bob: Well, if you invest…one of the pushbacks that you’ll get from an elderly investor is, “Well, you know, I’m 70 years old. I don’t know if I’m gonna live 10 years.” Okay. If you do, that’s great. And if you don’t, you can pay us on your opportunity fund investment in your will and it doesn’t trigger a recognition of the game. It is, in fact, not a trigger. Now, there are certain things you can’t do. You can’t gift it to an irrevocable trust, but you can put it in a revocable trust that becomes irrevocable at death, very common estate planning strategy that we use.
One of the things that a lot of people don’t realize is, and we do a lot of estate tax planning for closely-held businesses, which have the advantage of internal revenue code Section 6166, which allows you to pay your taxes over a 14-year period. First three years is interest only. And then you pay principle for the next 10 and it’s about a 2% interest rate.
So if you’re an estate in the $300, $400, $500 million category, that’s a lot of taxes. By utilizing captive opportunity funds drafted properly as active trader businesses, they will qualify for Section 6166 deferral. So it’s a good asset class for estate planning under 6166. Attorneys and CPAs who are nerds like me in putting these kinds of estate plans together would understand what I’m talking about. We’re getting into some of the more sophisticated estate planning techniques, but opportunity funds can be used very well in estate planning income tax, as well as estate tax planning. And if you should die before the 10 years, the deferred capital gain remains a liability of your estate. So the gain does still reduce your estate.
The other thing is that most of our deals are set up for the gains to accrue in the second five-year period. Because we’re developing over the years, you know, you’re building, you’re developing, you’re stabilizing. So if something happens to somebody within the first five years and we need to value that particular investment, more likely than not, it’s gonna be valued at a lesser amount than perhaps they even invested, or the 2026 valuation may, in fact, be at a minimum amount that could be less than what was invested. So there’s a lot of sophisticated tax planning around opportunity funds that can be used by these Ultra High Net Worth families.
Jimmy: Yeah. Very valuable strategies there for Ultra High Net Worth families and their heirs to save on taxes and estate taxes down the road. Opportunity Zones can offer quite a bit it sounds like, of course. Well, Bob, it’s been a pleasure speaking with you today. Thanks for all of your insights. Before we go, where can our listeners go to learn more about you and Ellavoz?
Bob: Sure. Our website is ellavoz.com. There are some videos, podcasts, a lot of information on there, including my cell phone number, 908-330-2029. Always happy to talk to prospective clients and investors about what we do. And as I said, we’re primarily an advisory firm in that we can customize or tailor what our clients are looking for. And we also work with our client’s attorneys and law firms and CPA firms, financial advisors to bring together a really strong investment and tax minimization strategy.
Jimmy: Excellent. That’s ellavoz.com, and I’ll be sure to link to that and all of the other resources that Bob and I discussed on today’s show at the show notes page for today’s episode, which you can find on the Opportunity Zones Database website at opportunitydb.com/podcast. Bob, thanks again for joining us today. It’s been a pleasure.
Bob: Thank you very much, Jimmy. I really enjoyed our conversation. I hope I provided some valuable information to you and to your listeners.
Jimmy: You did indeed. Thanks, Bob.
Bob: Thank you. Have a great day.