Case Study: 1031 To OZ Investment, With Lawrence Jatsek

The Section 1031 exchange has been around for over 100 years. Much like Opportunity Zones, chaining together a series of 1031 exchanges can offer an incredible tax incentive for real estate investors. But when might an OZ investment be a better option?

Lawrence Jatsek, managing partner at CRE Development Capital, joins the show to discuss how Opportunity Zones compare to 1031 exchanges, and when to make use of one or the other as a real estate investor.

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Episode Highlights

  • How one prominent family office rethought their traditional Section 1031 in order to do an OZ deal.
  • The biggest differences between 1031s and Opportunity Zones.
  • How a lot of High Net Worth investors, family offices, financial advisors, and even CPAs are missing out on Opportunity Zones and other tax mitigation strategies.
  • Updates on CRE Capital Development’s luxury hotel in downtown Phoenix and multifamily development in Las Vegas.

Today’s Guest: Lawrence Jatsek, CRE Development Capital

Lawrence Jatsek on the Opportunity Zones Podcast

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.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m your host, Jimmy Atkinson, joining you on-site at the IMN real estate family office summit here in beautiful Dana Point, California. And I’m joined today by my good OZ friend, managing partner at CRE Development Capital, Mr. Lawrence Jatsek. Lawrence, how are you doing today, buddy?

Lawrence: Doing great, Jim. It’s great to see you. It’s been a while.

Jimmy: Great to see you as well. Yeah. We ran into each other at the Cleveland Browns game at the Novogradac conference. When was that, last October?

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Lawrence: Yeah. That’s right.

Jimmy: I didn’t know you were gonna be here today, but happy to bump into you and you were nice enough to come on the podcast with me, so.

Lawrence: Yeah, it was a great surprise.

Jimmy: It was.

Lawrence: Absolutely.

Jimmy: Yeah. It definitely was.

Lawrence: Yeah.

Jimmy: So, we want to cover a couple of things today. One, I think we want to get some project updates from you on how your projects are going. You’ve got projects in Phoenix and…

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Lawrence: Las Vegas.

Jimmy: Las Vegas.

Lawrence: Yep.

Jimmy: But before we do that, let’s talk about 1031 exchanges vs. Opportunity Zones. It’s a topic we’ve covered on the podcast a couple of times in the past, but you have a very specific case that you wanted to tell me about. And I’m a little bit in the dark here. We haven’t really talked about this. So, go ahead. Tell me what’s going on here.

Lawrence: It’s been interesting, you know, we’ve been getting a lot of requests to have 1031 money come into our deals and if we would accept that. And in particular cases, we can do that, but most of the time it makes it very difficult to structure a deal, particularly even when you have OZ and you have 1031 and you have non-OZ or non-1031 investors. So it can be done, but it’s difficult. And so you know, we just had a case where you have a very well-known family office is coming into one of our deals. And it was interesting, they wanted to be 1031 money into the deal. And I said, “Sure, we can do that in this particular deal, but why would you wanna do that?” And they said, “Well, because that’s, we have this property, we wanna roll it. And that’s just what we traditionally do.”

And, you know, after learning a little bit more about what they’ve done in the past, I mean, they didn’t even look into OZs. And, I said, “Why not OZ? Why don’t you cash out now?” And, we talked about the examples of, you know, pulling cash off the table now, rolling it into an OZ, paying a small amount of tax, if you even have to, and then being able to pull a larger portion of cash out later on. Where a 1031, where you’re just basically kicking the can down the road forever if you have to. And that just keeps getting bigger, bigger, and bigger. Eventually, if, you know, it gets all the way to inheritance time, massive tax. Massive tax. So why not pull out cash now, pay it a little tax, and then be able to have tax-free income or a tax-free gain in 10 years?

Jimmy: Right.

Lawrence: So we had a great conversation with this family. And we come to find out that they just, they didn’t understand OZs, but nobody properly educated them on that. And so we brought in one of our OZ attorneys, talked to their family attorney, who understood OZs, and between the two attorneys and their CFO and myself, we were able to convince the matriarch to, you know, go OZ route. And so now they’re coming into actually our fund on an OZ level, and it’s gonna make the deal so much easier. And, you know, when we looked at the returns, instead of them kicking the can down the road, where they might get a $10 million gain that they would actually have to kick down the road again, which actually gets even more difficult, now they’re gonna have a $10 million gain, potentially that’s tax-free.

Jimmy: And they get to trigger that gain in 10 years or so, as opposed to kicking it down the can until it passes on to their heirs.

Lawrence: That’s right.

Jimmy: After they pass on.

Lawrence: Right. Who knows what the capital gains tax will be in 10 years, 20 years? Who knows what that’s gonna be?

Jimmy: Well, the other thing is…

Lawrence: That’s a risk.

Jimmy: You know, the current administration and/or maybe a future administration, may kneecap the 1031 exchange to the extent where they limit the amount of gain that can actually be written off, right?

Lawrence: That’s right.

Jimmy: For that basis step up to heirs upon death.

Lawrence: That’s right.

Jimmy: So the future’s a little bit less certain there, I would say. The other nice thing about it, and you touched upon this a little bit is, with a 1031 exchange, you have to roll over the principle and the gain, whereas with an OZ fund, you only have to roll over the gain. You can take that principle off the table and then do whatever else you want with it. So it’s a little bit more flexible in that regard, less flexible in terms of the geographic restrictions. And some of the types of projects that you can invest into, the 1031, you can come into a stabilized cash flowing property, right?

OZ, it’s a little bit more speculative. It’s more opportunistic because you’re looking for ground-up development typically or a huge redevelopment with a big gain on the back end, potentially. But it’s a little bit more speculative. And, and maybe one other thing I would throw out there is the 1031, you don’t have to be quite as patient with your capital. You don’t have to stay in that 1031 deal for, you know, for 10 plus years.

Lawrence: That’s right.

Jimmy: You can get out after two or three years if you need to. Whereas with an OZ, you’re in it for at least 10 years, if you want that full benefit, anyway. Any other thoughts there, Lawrence?

Lawrence: Yeah. I mean 1031s have their place. Don’t get me wrong. I use them, you know, I’ll do them. And it just has to make sense, but if you’re a long-term player and, you know, you look to get into real estate and do a long-term hold, then why not go OZ? Particularly today. Who knows how long the whole OZ incentive will be around? But you might also use it while it’s here, right?

Jimmy: Sure, sure.

Lawrence: And you know, the 1031s been getting, you know, kind of beat up and picked on since the day it was, you know, initiated how many years ago, you know, back in…

Jimmy: Almost a hundred years ago.

Lawrence: Right.

Jimmy: About a hundred years ago.

Lawrence: Exactly.

Jimmy: Yeah.

Lawrence: And it’s still around. So, and it’s probably still gonna stay around, you know, like you said, There could be modifications. You never know.

Jimmy: Sure.

Lawrence: There could be modifications to the OZ program.

Jimmy: I think there likely will be modifications.

Lawrence: There will be. I mean, we’re very, you know, in the early… We’re still in the early stages of OZ.

Jimmy: Absolutely.

Lawrence: And we’re learning a lot. I mean like, well, the first projects are gonna start to show the value of their returns, you know, by when, 2027?

Jimmy: Yeah.

Lawrence: So we still got some time.

Jimmy: Yeah.

Lawrence: I mean, you know, we’re only in ’22, so.

Jimmy: Right.

Lawrence: We get five more years to see real results. But I think they’re [crosstalk 00:07:08].

Jimmy: Just for that initial wave.

Lawrence: That’s right.

Jimmy: Right. Yeah. So yeah. Long time to still play out here. And, well, I think that’s also why that particular family office – and this surprises me a little bit, but maybe it shouldn’t – there’s a lot of high net worth individuals, family offices, even, you know, expert CPAs and financial advisors who haven’t really cottoned on to Opportunity Zones.

Lawrence: That’s right.

Jimmy: Because they’re still kind of, they’re new, they’re a little bit exotic, but once you kind of peel back the onion a little bit, you realize, “Hey, this is actually a potentially really good deal here.” And it’s not for everybody, right? There are certain advantages and disadvantages to Opportunity Zones just like there are with 1031s or any other type of tax-advantaged investment product. But I think as time goes on, you know, I’m hopeful that more and more folks – financial advisors, family offices, high net worth investors – will realize, “Hey, Opportunity Zones are here to stay.” And this ain’t such a bad deal. Might be, I’ve called it in the past many times, possibly the greatest tax incentive ever created.

Lawrence: I agree with you. I’ve said the same thing. It’s really amazing. And you know, family offices really predominantly and traditionally have been long-term thinkers, you know, they’re talking about preservation of wealth and passing that on to generations. I mean, I’ve been to conferences and sat down with eighth-generation family offices. Eighth generation. I mean, you know, you don’t get that far by not preserving wealth. And you know, if you have new tools to preserve wealth with, create wealth with, why not use them? So it’s really important to be getting educated on this program.

Jimmy: Absolutely.

Lawrence: You know, and again, sometimes 1031 makes all the sense in the world, but a good point you made earlier, you’re pulling cash off the table 10 years from now, whether, you know, you’re in your 70s, 80s, or 90s as the matriarch or patriarch of the family office, you’re gonna pass that wealth on. That’s, you know, that’s generation planning, right? And, you know, then you can pull that cash out. You can invest that into other assets. Other, you know, you can put it in Venture, you can put it into startups, you can put it into, you know, secondaries, whatever your mantra is at that point in time as you’re building your family’s wealth and continuing that. So it’s a great tool. We’re using it. We’re using both, we’re using it all. We encourage all the other family offices. We talk to them about it. We talked to… In fact, I’ve talked to more family offices that didn’t know about Opportunity Zones and how they work than do, and…

Jimmy: Which is surprising, but hopefully that trend reverses over the next few years here.

Lawrence: Right. That’s exactly right.

Jimmy: Before it’s too late.

Lawrence: That’s exactly right. I mean, like, you know, I’ve even had conversations with my own CPA. You know, they said, “Oh, you’re gonna have a tax, you know, implication here.” I said, “No, we’re not. And here’s why.” And I had to educate them. And to their surprise, like, “Oh my gosh, I didn’t realize this.” And you’re talking about, you know, full-blown CPAs. They’ve been in the business for 20, 30 years, and they just haven’t gotten educated on it. So, you know, Jimmy, an opportunity to be, they’ve done an amazing job. That’s how I started to learn about Opportunity Zones. And you know, it’s a great place to get your education, to get your tools. OZ Works is another great platform, too. It’s a community that’s learning from each other.

Jimmy: You just got stuck on a phone call with Chris Cooley for a little while.

Lawrence: I did. You know, another great person to go to. And Ashley Tyson has just been amazing at helping people and educating people in this space as well. So you know, I would highly suggest reaching out to these folks if you have any more questions and want to get more advice and get connected with others who know the program really well.

Jimmy: Great plugs.

Lawrence: Yeah.

Jimmy: Love that, thank you.

Lawrence: You got it, man.

Jimmy: Let’s talk about CRE Development Capital a little bit. You guys have been on my OZ pitch day events at opportunity DB a handful of times. Can you give us some updates on what you guys are working on, projects? There’s a luxury hotel in downtown Phoenix, and you’re also doing some development in Las Vegas, Nevada.

Lawrence: That’s right.

Jimmy: Can you give us the update there?

Lawrence: Yeah. So Las Vegas is, you know, it’s a traditional multi-family development in Las Vegas and it’s right in a path of growth. And, you know, we look for projects that are in a path of growth and re-gentrification whether they’re in OZs or not, but a lot of them end up being in OZs, particularly these days. And you know, we found a wonderful project we’re closing on that deal, and we’re fast forward. We have a, you know, like I mentioned earlier, a very good awesome family office that’s coming into the deal with us. And you know, they’ve just been wonderful to work with. And you know, that’s what we like to do is work with great partners and we’ll bring partners into deals as we need them. Our our hotel and condo project in downtown Phoenix, Arizona just had its press release from the Fairmont, or the core group, for a Fairmont hotel. So it is a Fairmont hotel with Fairmont branded condominiums, it’s the first and only category seven, or five stars as what most people know in Phoenix, Arizona, and…

Jimmy: Right downtown.

Lawrence: Right downtown, I mean, smack dab right across the street from where the Phoenix Suns play their basketball games. And about two blocks…

Jimmy: Close to the ballpark there.

Lawrence: Yeah. From Chase Field. Yeah. And about two, three blocks from where the convention center is. So you know, it couldn’t be better located. And I just found out this morning, actually, just before this podcast recording that from that press release we’ve already had 160 people already lining up to purchase the condos apparently. So it’s crazy.

Jimmy: That’s great news.

Lawrence: That’s great news.

Jimmy: Yeah.

Lawrence: Yeah. So we’re really excited. That project is gonna be one of the pinnacles of downtown Phoenix.

Jimmy: That’s great.

Lawrence: For sure.

Jimmy: When’s the expected opening date?

Lawrence: 2025.

Jimmy: Okay.

Lawrence: Yep.

Jimmy: Have you broken ground on that yet?

Lawrence: We will be breaking ground at the end of this year.

Jimmy: Fantastic. Well, let’s talk about the IMN conference that we’re at here briefly before we wrap things up. There’s, I don’t know, like 300 or 400 people upstairs, a lot of family offices, a lot of sponsors, vendors, pretty good crowd, a pretty good mix. Pretty good panel so far on alternative investing. And I’m speaking on the qualified Opportunity Zones panel in another couple of hours here. So I’m looking forward to that. What brings you to the conference, Lawrence?

Lawrence: You know, we’d like to network with other family offices, high networked individuals, and you know, it’s… We learn a lot from them and they learn a lot from us, obviously, as we’ve stated earlier, and you know, it’s really about bringing value to ideas and projects and developing relationships. I mean, you just don’t develop a relationship in five seconds with a family office or a high net worth individual. You don’t throw a deal on the table and say, “Hey, how does it look? Do you wanna invest?” They’re not gonna do it. I wouldn’t do it either. And so it’s about relationships, and I get to see a lot of the same people. We’ve become friends with a lot of these individuals and family offices. And we’re learning from them again, like I said, and they’re learning from us.

And this one is predominantly focused on real estate and alternatives assets within the real estate world. And that’s predominantly what we do. And so you know, when these panels come up, you know, Jimmy’s gonna provide a lot of expert advice on Opportunity Zones, and I can guarantee you that probably at least half of these family offices in here aren’t really getting their arms around it yet. And I know the more that these things occur and get in front of these family offices… Because they’re all here to learn, too. They’re all here to network. They’re all here to find deals, and meet people and create relationships. And so this is a great place for it.

Jimmy: Agreed. Well, Lawrence, it’s been a pleasure speaking with you today. Hey, before we go, can you tell our listeners and our viewers where they can go to learn more about CRE Development Capital?

Lawrence: Yeah. For sure. Just look us up on the web at www.credevelopmentcapital.com and/or shoot us an email at [email protected]

Jimmy: And as always, for our listeners and our viewers out there, I will have show notes for today’s episode on the Opportunity Zones database website. You can find those show notes opportunitydb.com/podcast, and there you’ll find links to all of the resources that Lawrence and I discussed on today’s show. And also, please be sure to subscribe to us on YouTube or your podcast listening app of choice. Lawrence, t’s been a pleasure speaking with you today, buddy.

Lawrence: You, too.

Jimmy: Thanks for coming to the show.

Lawrence: Thank you very much for having me. It’s been a pleasure.