OZ Pitch Day - March 7, 2024
Ashley Tison of OZ Pros joined OZ Pitch Day last month to field live questions from our attendees. Over the past three years, Ashley has helped form well over 1,000 Opportunity Zone entities. On today’s show, Ashley answers questions about rental properties, trusts, raw land, grants, and more.
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- Why Ashley started OZ Pros, and how his group can help Opportunity Zone investors.
- Ideas for taking advantage of rental properties owned in Opportunity Zones, including conducting a ground lease to get around a potential related party issue.
- How irrevocable trusts, grantor trusts, and underlying beneficiaries can participate in Qualified Opportunity Funds, and how Opportunity Zones can become a “poor man’s” estate planning tool.
- Some of the basic requirements and other considerations for forming a self-directed Qualified Opportunity Fund.
- How raw land and vacant property are treated for the purposes of substantial improvement or original use.
- How grants can be stacked in the capital stack of an Opportunity Zone project, and how grants are now prioritized for Opportunity Zone projects.
- Qualified Opportunity Fund tax filing obligations during 31-month working capital safe harbor period.
- Why personal use of property and triple net leasing are limited for Qualified Opportunity Fund investments.
- How sales prior to 10 years can be rolled over into new OZ investments.
- An example of a QOF investment in a wind farm.
- How corporations with capital gains can invest into a Qualified Opportunity Fund.
- How other tax credits at the federal and state level can help amplify returns on an OZ deal.
Featured On This Episode
Today’s Guest: Ashley Tison, OZ Pros
- Ashley Tison on LinkedIn
- OZ Pros
- Schedule A Strategy Call With OZ Pros (Special Offer For 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: This session is going to be Ask the OZ Expert with Ashley Tison. He’s the co-founder of OZPros. I’m also one of the co-founders over there at OZPros. And once again, Ashley seems to be joining us from the Caribbean. I think you’re in Puerto Rico this time. And again, a great look with the hat, Ashley. How are you doing today, man?
Ashley: I tell you what, you know, I hope it’s not getting old me showing up from a Caribbean island with my Caribbean hat and Hawaiian shirt on, but, you know, it’s almost like it’s gotta happen now. So, you know, on your pitch days from now on, I’m gonna have to schedule some kind of event down in the Caribbean. We just came off of the Puerto Rico Investing Mastermind that was put on by OZworks Group and it was a fantastic event. And so I’m stoked to be here, Jimmy. It’s beautiful outside, you know, like a perfect, like, 85 and breezy as opposed to up in Charlotte right now. It’s probably 100 and stifling. So, I don’t know. It’s probably about the same there in Fort Worth, right?
Jimmy: Yeah. I think it’s about 105 here in Fort Worth. So, here is how this session is gonna work. If you have a question, any type of question about opportunity zones, about QOZBs, about forming your own fund, about making an opportunity zone investment, about anything OZ under the sun, use the Q&A tool in your Zoom toolbar. We’re gonna do rapid-fire Q&A here with Ashley Tison. Again, Ashley is the founder of OZPros. He’s an attorney licensed to practice in North and South Carolina. And his sole focus these days is on opportunity zone deals. So, Ashley, before we get to the questions, why don’t you give us a quick rundown on who you are and what OZPros can do?
Ashley: Absolutely. So, like you said, I like to call myself a reformed attorney because I try to practice law as little as possible and instead do cool events like down here in Puerto Rico. But, you know, since May of 2018 when I was sitting in CLE and I heard about a guy talking about opportunity zones, I ran him down in the hall afterwards and I was like, “Man, that sounds like 1031 and private equity got married.” And he’s like, “Oh, yeah. And they had a beautiful baby named opportunity zones.” And so literally we, you know, all in…I don’t know that it was the next day, but it was shortly thereafter, you know, back in 2018, and since then I eat, breathe, and slept opportunity zones, and even vacationed opportunity zones, right, as I’m down here in Puerto Rico and just got back from a trip out west where we visited Hall Labs and we did some other stuff.
So, OZPros is a full-service advisory firm. We started out with the goal of becoming the legal Zoom for opportunity zones so we could democratize access to it. And since then we figured out that not only do people need the forms, but they need, you know, advice and counsel about how to set up the forms, about how to run their money through stuff, about how to keep in compliance, creative strategies about, how if they want to do their own fund, about how they want to do their own fund and maybe do some deals on their own and then invest into funds like Origin and Chris’s deal like that. And we’ve helped them put that together. And then we’ve got an ongoing compliance, you know, tool that we use in order to help them stay in compliance and then just get their general questions answered.
So, we do a similar kind of rapid-fire question and answer session just like this in the OZPros Compliance Bootcamp that happens inside of the OZworks Group, which is an online virtual community about all things opportunity zone. And then we took that online component and we’re actually doing in-person events like we just did down here in Puerto Rico. So, that’s kind of the OZPros, OZworks Group community in a nutshell. But the big thing that we’re passionate about is helping people understand these things enough so that they can actually do them. And so that’s what our goal is here today. Let’s fire…let’s get some rapid-fire questions going. I wish I had that dunk tank that we talked about so that that way if I can’t…if I don’t know a question or an answer to a question, I could get dunked, but I don’t know. I think I’ve done pretty good thus far, so let’s see if somebody can stump me today.
Jimmy: Yeah. I think we ran through about a dozen questions last time and I think one of them may have half-stumped you, but maybe next time you can take this from the beach and you can just dive in backward and [crosstalk 00:04:27]
Ashley: I’ll just jump off, right?
Ashley: I could actually be down on the little platform down here. We were walking by that after breakfast this morning, I was like, “That’s actually a great idea.”
Jimmy: There you go. Well, maybe next time. We do have a handful of questions already coming in. If we don’t get to your question and I don’t think we’re gonna get to all of them, we apologize. You can reach out to Ashley at [email protected]. I’ve posted a link to ozpros.com and Ashley’s email address in the chat. But let’s get to Mr. Dan asked this question, actually, while Chris was still speaking, but I think it’s relevant to this discussion today, Ashley, a general OZ question. Mr. Dan asks, “We own a residential property in an OZ in California. It currently has one older rental home on it. What would be our best option with this property?” What are some of your advice there for this investor, Ashley?
Ashley: Well, it kind of depends on if they owned it prior to 2017 and how they owned it. I’m assuming that they either owned it individually or it was prior to 2017. And so if that’s the case, it’s going to be considered a related party. And so if they were to try to transfer it into a qualified opportunity fund or a qualified opportunity zone business, that’s gonna make it so the property is not qualifying. And then if they did improvements to the individual rental property that’s there, then those improvements would not be qualifying either. And so it presents this kind of weird conundrum. And unfortunately, that’s the way that the regs came out is that it doesn’t allow you if you owned it previously to kind of sell in.
And so one of the solutions that we’ve come up with on a fairly regular basis is just doing a ground lease. And so a related party can ground-lease to itself if…so, you can ground-lease that property to your qualified opportunity zone business if you do it on arm’s length terms and there’s no prepayments and there’s not an agreement to buy it for less than fair market value down the road. And so he could take that individual residential property. He could actually improve that one and then the improvements would qualify, and if he was gonna build something next to it, that would qualify as well. The one drawback to that is when you go to sell it 10 years down the road, you have to apportion between the new improvements and the existing stuff. But you can get creative with that when you go to apportion that at the end of the day, you know, 10 years from now.
Jimmy: Perfect. Let’s fire off the next question here from Mitch. Mitch asks, “If an irrevocable trust has a capital gain, does the irrevocable trust have to make the QOZ investment or can an underlying beneficiary make the investment?”
Ashley: So, that’s a great question. And there’s a big difference between revocable trust, which is treated as a grantor trust, and irrevocable trust, which are treated as non-grantor trusts. And if the irrevocable trust has the gain, then that’s the entity that’s going to be the taxpayer that needs to make the investment into the QOF because it’s gonna be treated almost like a separate person. And so it’s actually really kind of a cool tool that you can use in order to do some really advanced estate planning because the great thing about the opportunity zone is that you’re not gonna get taxed on the increase, right, over 10 years. That’s one of the biggest challenges with an irrevocable trust is that they pay taxes at the highest rate. So, if you can hold for 10 years and not pay taxes, it’s a beautiful thing. Similarly, and this is kind of a not-well-known fact, is that if you transfer to a grantor trust, right, a revocable trust, the cool thing is, is that the only amount that’s gonna go against your lifetime exemption is the amount that you originally contributed to the QOF. So, if you put $1 million into a QOF and then you were to die between now and 2047 and your estate still holds that interest, your estate is gonna step into your shoes at the original amount you put in, not at what the amount is at your death, the value of it at your death. And so that’s really cool because it allows you to freeze your estate for tax purposes, freeze the amount that goes against your lifetime exemption. So, that’s a great question.
Jimmy: Yeah, great thoughts there.
Ashley: And not something that a whole lot of people are talking about, but opportunity zones kind of become a really cool poor man’s trust and, you know, estate planning tool.
Jimmy: Well, Mitch is talking about it. You’re talking about it.
Ashley: …de facto. There we go.
Jimmy: There you go. Zefer asks a pretty basic question. And just to preface it, Ashley, you’ve helped structure and start up hundreds, I think, of qualified opportunity funds and qualified opportunity zone business entities over the last several years. Zefer asks, “How can I start a fund? What are the qualifications? How much capital do I need? Are there any other basic requirements?”
Ashley: So, that’s a great question. And I think we’re over 1500 now, Jimmy, which is awesome. And it’s great to see that this is really catching on and that there’s this many people putting it to work across the United States. But basically, a fund, all it is is a partnership or it’s an LLC or a corporation. If it’s an LLC, it needs to be taxed as a partnership. It can’t be a single-member entity. So, literally, you just need to set up an LLC and then you need to know who you’re gonna have as kind of that 0.1 or 1% partner. That could be an adult child, that could be a brother, sister, cousin, parent, whatever. And then you just need to have enough capital gain and deposit that into a qualified opportunity fund within 180 days.
There’s something that you were smiling about there. I can’t wait to hear what that was. My best friend’s boyfriend’s sister’s roommate’s dog, right, that could be your partner in your qualified opportunity fund. And then you just need to be able to invest 90% of it into qualified opportunity fund assets. The easiest way to do that is to set up a QOZB underneath it, drop the money down into a QOZB, and then you need to have 70% of your tangible property be qualified opportunity zone business property, which means that it’s either original use or substantially improved. Substantially improved means that you’ve doubled the basis of the value of the buildings. So, if you’re buying a property that’s worth, you know, $500,000 and the buildings themselves are worth $270,000, and so the land would be worth $230,000, you get to exclude the land and you need to do another $270,001 of improvements to it. That’s opportunity zones, literally, in a 90-second blurb. But, you know, there’s some nuances to it based upon your individual situation. That’s why we do strategy calls. We’ve done about 2000 of those, you know, right now. And we help people unpack the specifics of their situation to see if this is gonna work for them.
Jimmy: Terrific. That’s a lot of time to spend on the phone. So, Gary caused me to break character a moment ago with a comment he made in the chat. He said, “I just saw a documentary on America’s Last Little Italy, the St. Louis Hill district. I think you guys have more hand gestures than the guys in that documentary.” So, thanks, Gary, for mentioning that and getting me to crack a smile.
Ashley: I always talk with my hands. I’m terrible. My wife gives me such a hard time about it because I was talking with my hands on the plane one time, I completely knocked over her ginger ale all into her lap. She was soaking wet and sticky the rest of the flight. It was terrible.
Jimmy: I can see that…
Ashley: So, I should be better. I’m like the guy in “Hitch.” I need to stay right here.
Jimmy: I can see you doing that, for sure. John asks, “Will today’s event be available to review and watch again later?” John, yes, we’re recording everything. We’re gonna get the recordings up on the OpportunityDB website over the next few days. Let’s move along to Scott’s question here. Scott asks, “If you start your own fund and acquire bare land to build, must you double your basis? If so, in what timeframe can you then loan your money to do that? At what reasonable rate?” What are your thoughts there, Ashley?
Ashley: Great questions. So, if it’s land, if it’s raw land, that’s gonna be original use. Or if you demolish it, that’s gonna be original use. Or if it’s been abandoned for three years prior to when you purchased it, that’s gonna be original use as well. Or if you buy it as a municipal foreclosure. So, those are the carve-outs where it’s original use and all you have to do is just do something to it and then put it in a trade or business. So, the follow-on to that is, is, can I loan money in to do it? So, yeah, absolutely. You can loan non-capital gains money into your deal in order to do the improvements or to do whatever, to make the acquisition, as long as… And there’s nothing in the regs that say this, but we typically recommend that you have at least 10% capital gains in the deal, so 10% of the aggregate project cost is capital gains. And then you can execute and you can do that.
Jimmy: Great answer there, Ashley. We’ve got about… Let’s see. We’ve got close to 10 minutes left. So, we’ve got several more questions. We’ll try to get through as many as we can. Pierre asked a question in the chat a moment ago that caught my eye. “Can you seek funding through grants? Can you talk about how grant dollars are prioritized for projects in opportunity zones possibly?”
Ashley: Absolutely. So, you can absolutely get funding through grants. So, that’s the great thing about opportunity zones is that not only do they allow you to take advantage of lots of other stuff, so like LIHTC, low-income, you know, housing credits, affordable housing credits, historical housing credits, you know, mill renovation credits, community development block grant credits. There’s so many credits that are available out there. And the really cool thing about opportunity zones is that it became a fulcrum. It became an inflection point for communities to rally around and to say, “Listen, we’re gonna prioritize opportunity zone projects for the allocation of funds for these grants.” And it, you know, unlike any other program, got a lot of different groups working together.
So, a takeaway from that is, is call your economic development folks, call your chamber of commerce, call your state-level, you know, business and economic development departments of trade, that kind of thing, and commerce, and call them up and ask them, “Hey, what are you guys doing about opportunity zones? What kind of grants are available? What kind of things can I do additional inside of opportunity zones?” And they’re usually gonna be readily available and ready. They’ll have somebody that they can connect you with.
Jimmy: Fantastic there, Ashley. Question for…
Ashley: Let me hit the anonymous attendee one right now. Do my own personal QOF and QOZBs have to file taxes during the 31-month working capital safe harbor? Absolutely. So, all the 31-month working capital safe harbor does is protect you from that nonqualified financial property test. So, when you put your money into your fund and then down into the QOZB, you’ve got 30 months to basically get your substantial improvements done. And during that time, you have to meet those five tests, including that you can’t have more than 5% in cash, stocks, bonds, accounts receivable, that kind of thing. And so what the working capital safe harbor does is it exempts the money that came from your capital gain and any cash infusion that you put in that you have a plan for how you’re gonna spend it, it exempts it from that 5% limitation.
Jimmy: Back to the grants question. I just wanna mention grants.gov, you can head there to do a comprehensive search for a bunch of federal grants. And they even have a filter for opportunity zone benefits as one of their filtering options. So, play around with that website. You might stumble upon something there that could possibly help. Let’s see. We got a few…we got several more minutes, actually. So, let’s go to Daniel’s question here. Daniel asks, “Ashley, I invested in my own op zone rental property two years ago. Can I use that property for personal residential use?” I don’t know if Daniel is gonna like this answer.
Ashley: Oh, man. Unfortunately, no. And we deal with this a lot because people are like, “Hey, I’m gonna buy a triplex and then I’m gonna renovate it and I’m gonna put two people in one and I’m gonna live in the other one.” Personal use is not considered a trade or business, and so you’ve gotta dive deep into the personal use rules and you gotta make sure that you’re not running afoul of those. Typically, it’s more than 14 days of use. Or if you’re working on it, that’s an exemption as well, but you gotta be careful with that. Now, there’s some limitations to that relative to whether it will be considered your personal residence or not depending on those specific personal use rules. And so if it’s gonna be treated as a second home, that’s gonna take it out of the opportunity zone program because it will not be considered a trade or business. That’s the crucial thing, is that you gotta run a trade or business. So, not only personal use is not allowed, but triple net leases are not allowed either. So, if you, you know, have a triple net lease or you do a ground lease, that’s not going to work if it’s just being…if it’s treated as an investment for IRS tax purposes, it’s not a trade or business, and so you gotta be careful with that too.
Jimmy: I think you can do some minimal amount of triple net leasing, but it can’t be substantially…it has to be substantially not triple net leasing. Is that right, somewhere along those lines?
Ashley: Exactly. So, the example that they used is if you had a three-floor building and you had one of the floors triple net leased, and then the remaining two floors where you were not triple net leased, so you were gross leasing, you were taking care of the building, you were managing it, and you had an office there, then that would be okay as long as it was incidental to the other use.
Jimmy: Yeah. There’s not a clear, bright line test there.
Ashley: There’s not. And so we’ve had to get real creative about how we’ve done it for some folks that are doing more traditional type like restaurants. So, like, I did a chicken restaurant and the chicken restaurant wanted to triple net lease from it, I said, “No, we can’t do that. We gotta take care of the common area maintenance. We gotta pay the taxes. We gotta pay the insurance. And we need to be involved in this.”
Jimmy: Well, let’s go to Matthew’s question next, next one up on our list here. Matthew wants to know, “If you sell an OZ investment in 2022 at break-even made from a 2021 gain, can you roll it into another OZ investment to defer the ’21 gain?”
Ashley: Yeah. I get this question all the time, right? So, if you sell prior to 10 years, basically, it’s just like a partnership deal with the one caveat that you get to reinvest the basis of the QOF within 12 months. So, even if you were to sell at a gain, you would just pay capital gains on the gain, but you could take that basis and reinvest it at the QOF level within 12 months. Or if you do have a gain, right, you would have another 180 days to reinvest that gain if it’s prior to December 31st, 2026.
Jimmy: Good. An anonymous question here comes in. This person says, “Can I invest in a wind farm to be built in an OZ leased land for, say, 20 years? And if the wind assets are sold to the property owner, how are capital gains protected?”
Ashley: Yeah. So, I don’t know if this is the property owner that’s asking if they can invest, but that would be the only one caveat that I’d be concerned about because it’s circular cash flow issues, but absolutely you could do that. And so you could invest in a company that’s just leasing, like, from a co-working space. And even if the lease is only like three years, presuming that they’re gonna, you know, continue a lease in another opportunity zone space, that would absolutely be fine. So, in this case, a 20-year lease for the wind assets, you know, for the wind turbine and that kind of thing is totally fine. And then if they sell, you know, the wind assets, I’m assuming that they’re selling the electricity to the landowner, then that’s totally fine. Or if they even sold at the backend where they sold the windmill to the landowner as their exit, then that would be fine as well.
Jimmy: All right. Great question here from John. John wants to know, can a corporation that has a capital gain invest that gain into an OZ fund and defer it?
Ashley: Absolutely. So, once again, it just depends on whoever the taxpayer is, right, has to make the investment, whoever the ultimate taxpayer is. So, down here we had this guy named John Heier who’s a renowned attorney that does, like, solo 401Ks and stuff like that. And he said, “Remember that corporations are like Vegas. What happens in the corporation stays in the corporation.” And so inside of the corporation, that’s treated like an individual. And so just like that irrevocable trust, what happens in the irrevocable trust stays in the irrevocable trust. So, it would then need to be the taxpayer that makes the investment into the QOF and could thus defer. So, yes.
Jimmy: Fantastic. Let’s see. Question from Gary here. He wants to know, what is your view on Historic Tax Credits, HTC, to juice the returns? He says he’s invested in a couple of Ohio OZ funds in ’21 including CBUS and Kunz. I’ve had both of those guys on my podcast. And CBUS was here earlier today on OZ Pitch Day. They seem to have done a good job on mining the HTC and the Ohio tax credits. What are your thoughts there, Ashley?
Ashley: Yeah. So, Ohio has done a fantastic job. So, it’s an example of a state that really embraced the program. And so they said, “Listen, not only are we not gonna poo-poo it,” like North Carolina did, and exempt it out, right, they said, “We’re gonna embrace this thing. We’re gonna make it even better.” And so they have an extra 10% tax credit in Ohio that I think is actually transferable. And so it allows you to even get a better return, so, either in the form of the tax credit that you can use or that you can sell and just juice the return on the deal. And so, you know, you need to talk with them about the specifics of exactly how they’re taking advantage of it, but usually, those Historic Tax Credits and investment tax credits like that are saleable. It’s kind of like the deal down here in Puerto Rico is that there’s a 40% tax credit for hospitality down here and it gets paid out over 3 years. And that’s sellable at 90 cents on the dollar. And what that does is it comes in, basically, as income, as juice to the fund that they can either use for additional construction or they can distribute out to the investors. And so it makes your pro forma really powerful because, you know, when you’re doing construction, it takes a while to get up and running and get operational. And so that extra juice of saleable tax credit makes you pro forma really sing. So, talk to the individual sponsor about it. But I love it when people layer on opportunity zones with additional tax credits.
Jimmy: Fantastic. Well, Ashley, we’ve run out of time here. We did have several people ask, “How do we schedule a strategy call with Ashley? How do we get on the phone with Ashley? How much does a call cost? What are the charges for your services?” Can you tell us just in 30 seconds how people can get in touch with you, how they can schedule a strategy call, and what you charge?”
Ashley: Absolutely, Jimmy. So, they need to go to ozpros.com, that’s…like it stands for opportunity zone, ozpros.com. And I believe we’ve got a special deal at ozpros.com/pitchday. And if it’s not there, just go to ozpros.com and you can schedule a strategy call. We’ve got a discount that you’ll be able to get. So, if for whatever reason that… I’ll make sure that that landing page is up. And as soon as I get off here, I’ll make sure that that landing page is up, ozpros.com/pitchday. And we’re really excited about talking to people on the phone. There’s a special discount code on there. We’ve got kind of different levels based upon how urgently you need to get ahold of me and have a conversation, but we’re really looking forward to answering some additional questions like this. Another really great way that they can do just this exact same thing is if they sign up for the compliance bootcamp, that’s ozpros.com/compliance-bootcamp. And inside of that, it’s $350 a month. Actually, if you use the firstmonth100 as the promo code on that, which should be at the landing page, and it also should be at that…when you sign up, you can get the first month for 100 bucks. So, for 100 bucks, you get this 4 times during the month where for an hour and a half, from 10:00 to 11:30 every Tuesday, we go through rapid-fire questions just like this and, usually, we have a little bit more time to unpack people’s individual scenario.
Jimmy: Fantastic. Well, Ashley, your pitch day link did not work. I tried it. I tried some variations of it, but ozpitchday.com works and oz…I’m sorry, ozpros.com works, and ozpros.com/compliance-bootcamp works as well. I’ve posted those links in the chat. Ashley, I’m gonna drop your email address in the chat too in case anybody wants to just reach out to you and shoot a quick email.
Ashley: Perfect. That’s great.
Jimmy: Ashley, thanks so much for being here today. Great content according to Blake Christian, our friend at HCVT, he just chimed in. We will see you later and enjoy the rest of your holiday there in Puerto Rico. Beautiful.
Ashley: All right, Jimmy. Well, I didn’t get dunked, but I’m gonna go jump off the pier here into the ocean anyhow.
Jimmy: Sounds good. Thanks so much, Ashley. Appreciate it.
Ashley: Cheers. Take care, Jimmy. Thanks again.