The IRS Opportunity Zone Ticking Time Bomb, With Kirk Walton

Is there a ticking time bomb that may disqualify more than $1.3 billion of funds raised by Qualified Opportunity Funds?

Kirk Walton, co-founder and managing partner of GPWM Funds, joins the show to discuss potential solutions to QOF filing errors and his approach to Opportunity Zone investing.

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Episode Highlights

  • How the novelty of the Opportunity Zones program and IRS Form 8996 led to a huge number of improperly filed QOZBs in 2019, putting hundreds of QOFs and over $1.3 billion of capital at risk of losing OZ qualification.
  • Potential solutions to improperly filed Qualified Opportunity Funds.
  • Why there may be potentially billions more dollars at stake in 2020 and 2021 tax returns, which have not yet been tracked for this issue.
  • How the new legislation would completely solve this issue, if enacted.
  • The importance of correctly using the special gain code box on IRS Form 8997, and generating accelerated depreciation using cost segregation and qualified improvement property.
  • Why investors should think about Opportunity Zone investing as a “Super Roth IRA,” not stopping at just the 10-year bare minimum, but instead seeking to hold OZ investments for as long as possible.
  • How a pre-certificate of occupancy play can satisfy new use, offering a shortcut to obtaining a stabilized, cash-flowing Opportunity Zone asset.
  • Opportunity Zone strategies that Kirk Walton likes, and what he’s investing in at GPWM Funds.

Today’s Guests: Kirk Walton, GPWM Funds

Kirk Walton on the Opportunity Zones Podcast

About The Opportunity Zones Podcast

Hosted by 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 Jimmy Atkinson. Is there a ticking time bomb with regards to improper filings done by a large number of qualified opportunity funds? Joining me on the show today to discuss this topic and more is Kirk Walton, co-founder, and managing partner at GPWM Funds.

A group of private equity real estate funds with expertise in tax-advantaged real estate investing. Kirk joins us today from Eagle, Idaho. Kirk, how are you doing? Welcome to the show.

Kirk: Thanks, Jimmy. Great to be on your show. Appreciate the invite. Doing great.


Jimmy: Absolutely. Kirk, great to have you here with me today. We first met a while back at the Novogradac Opportunity Zones Conference in Long Beach earlier this year. We were sitting together at lunch I remember eating our lunch in that room with all those tables there.

I got seated at your table and you described a pretty major problem to me that I was unaware of. And it was a problem that you described at the time, as I remember this, a ticking time bomb. And the problem deals with Qualified Opportunity Funds improperly filing their returns, specifically their forms 8996 with the IRS, or they were improperly filing the underlying Qualified Opportunity Zone Business entities with the IRS.

And these improper filings can have huge negative consequences for investors in these funds. And investors can oftentimes be caught completely unaware of these issues until many years later. So Kirk, can you…I kind of hinted at it a little bit, but can you describe the problem in greater detail and characterize the nature of it?

Kirk: Sure. Thanks, Jimmy. Great intro. What happened was the IRS issued the form 8996 and 8997 for the first time just before the 2019 tax return filing season. And I’m sympathetic to the CPAs and other tax professionals who are in this spot. I prepared tax returns for more than 20 years as part of our wealth management practice and family office practice.

And I sympathize with this. And opportunity zones are a little bit complicated and at the time of the 2019 returns still very brand new. I’m sure your listeners to the podcast know that there’s a QOF, Qualified Opportunity Fund that invests in a QOZB, the Qualified Opportunity Zone Business. Almost all of those are partnerships.

So when the tax preparer goes to fill out the tax return for the Qualified Opportunity Zone Business, and he comes across a brand new form the 8996, the top of which has this question, “Is this entity organized for the purpose of investing in Qualified Opportunity Zone property other than another Qualified Opportunity Zone Fund?”

The answer to that question if you are a Qualified Opportunity Zone Business is yes. And that’s the confusion. The form 8996 is the IRS’s mechanism for certification that this entity is a Qualified Opportunity Fund. But the way the form was drafted is misleading and confusing.

A CPA could read that question number two and go well, this is a Qualified Opportunity Zone Business entity return I’m working on the answer is yes. The Qualified Opportunity Zone Business entity has to own qualified opportunity zone property. So he or she might check yes, on that form in an abundance of caution to try to tell the IRS that this is a QOZB.


There is no comparable form for QOZB. There is only a form for a QOF, not a form for QOZB. If you file QOZB return correctly there’s no mention of qualified opportunities zone property, there’s no 8996 form to attach. But this is the first…

Jimmy: You essentially have to just file a QOZB as though it’s just a regular partnership or corporation, whatever it’s structured as typically a partnership, right, you just file it as a normal entity? Okay.

Kirk: Correct. I’ve spoken with CPAs who in an abundance of caution to try to tell the IRS that this is a QOZB return that owns qualified opportunity zone property check the box. The consequence of that is now this QOZB return and the EIN associated with it ended up on a list inside the IRS’s database of QOF, Qualified Opportunity Fund entities.

One of the rules about Qualified Opportunity Zone Funds is you cannot have a QOF invested in another QOF. Then there was that report that came out just before we got together in 2022, in February of ’22. There was a report, an audit report that went through and looked at opportunity zone fund returns for the year 2019, the first year that this form was available.

And it found 6.4% of the QOF returns from 2019 reported investments in other QOFs. That was over 340 QOF returns for that year. And that covered $1.3 billion of gains that people had reported as qualified gains rolling over into a QOF that the IRS had basically said would be disallowed potentially because the QOF reported holdings in another QOF.

That was the ticking time bomb is the IRS had reported this finding in this report but had not yet announced any mechanism to try to correct this. We became aware of this issue because one of the QOZBs that we invested in unbeknownst to us, their CPA did what I described.

In an abundance of caution checked the box to report the QOZBs as QOFs. They got notices. They sent us the 2019 K-1s but not the full return. The K-1s don’t mention anything about this being a QOF or, you know, certification that it was a QOF. So we didn’t know anything about this. But unbeknownst to us, they did that. And then they got a notice from the IRS and then they tried to correct it by requesting a private letter ruling.

And the IRS sent the private letter ruling request back along with a refund of the fees, saying there is no regulatory election involved in certification to become a QOF. And so there was no regulatory election that could be reversed or granted through a private letter ruling avenue. So you have this problem where QOFs, QOZBs elected, you know, or check the box certified that they are QOF, and how do you undo that?

And that was the issue we talked about over lunch at that great Novogradac Conference in Long Beach. Since that time, in April of this year, the IRS mailed out a ton of letters, 6501 letter and 6502 letter to the individual investors and to the QOFs affected by that that basically said, “Hey, your QOF reports holdings in another QOF.

Maybe you didn’t fill out this form correctly, you know, here’s a phone number to reach out to try to correct it. Or you might consider filing an amended return, or an administrative adjustment request or an AAR,” which is a cumbersome and lengthy process. We don’t yet know how many returns from 2020 or 2021 have this problem. All we know is at least 6% of the returns in 2019 had the problem.

And that’s $1.3 billion from just 2019. I suspect there’s even more from 2020 and 2021. Anecdotally, I’ve heard some people in the industry who were able to reach the IRS through that phone number on the form would get a call back within a couple of weeks and have their errors corrected.

In our situation, we still do not have confirmation that our situation has been corrected. The situation with the project in Washington that I mentioned. They have tried to reach the IRS, they’ve sent multiple requests for relief and getting that, you know, certification revoked.

But there is no…currently there is no mechanism to revoke a certification of becoming a QOF. Just you know, the regulations say like, you know, they’re going to come out with those rules later, but they still haven’t. So we’re confident that the IRS will see that just because someone elected or checked this box isn’t the only factor that goes into whether an entity is a QOF, or not.

All of the other factors about these entities show that they are in fact QOZBs, their operating documents say they must be a QOZB. The sole purpose is formed to be a QOZB, the holdings are QOZB. So there’s all of these other facts and factors that show these entities are in fact QOZBs, the only factor that shows they’re not is an erroneous checking the box on the 2019 return.

And they didn’t include those forms on the 2020 return or 2021 return. So, you know, that should be an indication that they did not, in fact, want to certify as QOFs. Nevertheless, I think that problem is widespread and I don’t think it’s being talked about too much.

And I think the IRS needs a better avenue for correcting that type of clerical mistake, especially on a complex area where it’s a brand new form. You know, if you opened up a new national park and sent out instructions and paths of where to go hiking and, you know, 6% of the hikers fell off a cliff to their deaths.

That would be a problem I think with the instructions and the signposts rather than an example of human error that needed to be punished by complete disallowing of the gain being an eligible gain. And that’s really what you’ve got going on. So I think there needs to be a better mechanism an easier mechanism to correct that.

But we’ll see.

Jimmy: Yeah, it’s a huge issue as you point out over I think it was $1.3 billion is in jeopardy.

Kirk: From just 2019.

Jimmy: Yeah, I was going to point that out. That’s just 2019. So if you extrapolate from there, there wasn’t a whole lot of fundraising in 2019, compared with 2020 and 2021 as this program continued to grow. And, you know, I’ll throw up a link to the Novagradac report that shows how that fundraising has increased.

I mean, maybe I might speculate that the percentage of funds filing may have gone down as CPAs became more familiar with filing. But the sheer quantity of funds being filed, probably more than made up for the percentage going down. I would assume that there’s far more capital in jeopardy of being disqualified as eligible under the opportunity zone provision to receive all the tax benefits based on what we might see coming through ’20 and ’21.

Is that right?

Kirk: That’s right. I absolutely think there’s billions of dollars at stake. And I think that the IRS owes it to the investing public to have a mechanism to correct that type of mistake, which, you know, frankly, they caused by having a question on the form. You know, a QOZB should answer that question yes. Accurately, answers the question yes, a QOZB is formed for the purpose of holding qualified opportunity zone property.

That’s the first question on that form that causes this issue.

Jimmy: Yep. Understood. And yeah, there’s just a huge amount of funds being impacted by this. I think essentially, what you’re advocating for Kirk is there needs to be some sort of easy way for a QOF to elect to decertify. Is that what you’re getting at?

Kirk: Or to go back in time and say that was an erroneous election, you know. If you make a mistake on a return, you can file an amended return to correct it. That’s a cumbersome process for a partnership that’s an AAR, and that’s a lot of AAR request. But maybe that’s what the IRS wants.

That’s what we’ve encouraged people to do because that’s the best I can come up with.

Jimmy: Maybe this is why they’re adding an additional 80,000 plus agents. Is that right? I jest, but…

Kirk: Who knows? The other fix is you’ve spoken at length about the pending legislation that’s been introduced to extend and enhance the opportunity zone tax legislation. One of the provisions in that pending legislation is to allow a QOF to invest in another QOF and that would be retroactive to day one.

So this issue would also go away if that legislation passes, which we hope it will.

Jimmy: Yeah, that’s a great point. If that legislation passes as currently written… they would just completely dissolve this problem entirely. Is that right?

Kirk: That’s right.

Jimmy: Okay, good. So there’s some potential solutions out there, but it’s still a little bit hairy in the interim period, especially if you’re an investor who’s gotten one of those letters from the IRS. When might investors or funds be made aware of these potential mistakes that were made in tax year 2020 or 2021?

Do you have any indication?

Kirk: I would assume next year assuming they’re on a similar cycle. We’ve got the notices from April that went out to all of the investors and funds late April so the end of April or 1st of May when those 6501 letters went out. So if you’re listening to this podcast and you got one of those letters, that’s what it’s about most likely.

And most likely it’s an easy fix when you can get the attention of the right person inside the IRS to fix it. But I can understand the consternation and anxiety that an investor would have when they get a letter that says your gain that you thought was eligible gain is at risk of not being allowed as eligible gain, you know.

Which means you owe tax from way back when you rolled over the gain and penalties and all of that on top of it blowing up your QOF investment. I mean, the consequences are draconian if you read, you know, the black and white on the letter. But it’s an honest mistake made in good faith by CPAs and tax professionals who are trying to tell the IRS these are QOZBs who own qualified opportunity zone property.

Jimmy: Sure, sure. But I’ll bet it still resulted in a lot of angry phone calls to fund managers and CPAs. And I guess I would encourage if you’re a QOF investor in 2020 or 2021, or this year, maybe, you know, feel free to call up that fund manager and ask him, “Hey, did we file this stuff correctly? Did we file the QOZBs as QOZBs or as QOFs? And how do these letters potentially impact me?”

Make sure you have this conversation before you get a letter. But again, hopefully, there’s some solution. I’m hopeful that there’s going to be some solution to this at some point. But as I mentioned a moment ago, it’s a little bit hairy in the moment, right?

Kirk: Yeah, I am too. You know, the other issue from tax compliance and reporting these forms correctly that I think is often overlooked, is the special gain code box on the form 8997. I don’t know if you’ve talked about that on one of your podcasts before. But we get a lot of investors who rollover capital gain from stocks, but also a lot who roll over capital gain from sale of passive activities like real estate.

You probably know when the gain comes back on your ’26 return, or potentially the ’28 return if we get the legislation passed, that’s pending as drafted. When that gain comes back it has the same character as the capital gain that was originally deferred into the QOF. The way to track that kind of character of gain is on a special gain code box on the form 8997 that you attach to your 1040 every year that you maintain your holding in any QOF.

And if you mark that box B that indicates that the gain was from the sale of some depreciable property such as from the sale of a passive activity. Why that is important is because on your ’26 return, if the gain that comes back is from the sale of passive activity, you can offset that gain with any passive losses that you may have from any sources whatsoever.

We also talked in the past about how our projects we do a lot of rehab projects. We do some new construction, but most of our projects are rehab projects. And we like rehab projects because we’re able to get more depreciation deductions in the early years through cost segregation studies and through qualified improvement property, which generate an enormous amount of passive losses in the early years because of the accelerated depreciation deductions.

And if you’re an investor and that QOF that does rehab projects and generates a lot of passive losses and you don’t have other passive activities, well, then those passive losses roll forward, roll forward, roll forward. And 126 return comes around the capital gains from the sale of passive activity comes back, but your passive losses have piled up from the early years and they wash against each other.

So it’s potential for real estate investors to sell real estate, generate the capital gain not pay any tax now by rolling it into QOF. And also not pay any tax or very little tax in 2026 because of the passive losses that are generated between now and then.

And then own the real estate for 25 years, generate additional depreciation deductions which have real monetary value, and then not pay tax on the depreciation recapture. That’s one of the hidden gems that you’ve talked about on your podcast. And one of the hidden gems is there’s no depreciation recapture. But there are ways to utilize that depreciation and accelerate it into the early years like I said through cost segregation studies and through QIP deductions and things like that.

To generate those losses in the early years, so you can offset the gain that comes back on your ’26 return if it’s gained from the sale of rental real estate or passive real estate. That is possible only if your tax preparer marks the special gain code box B on the form 8997. That’s how you tell the IRS this is that type of gain.

Gain from the sale of stock or collectibles or cryptocurrency, you don’t get this offset. You’ll get the benefit of the depreciation deductions eventually, either from other stuff you’ve got if you’ve got passive activity, you know, income from other holdings. Or at the worst-case scenario, you get the benefit when the asset is finally disposed of, then these passive losses that have been accelerated and generated over time, they get freed up when you sell the asset.

So everybody gets the benefit of the depreciation deductions at some point in time. But the people who roll over gain from sale of real estate. That’s a huge benefit in that it reduces if not eliminates the ’26 tax bill.

Jimmy: Yeah, that’s an incredible tax mitigation strategy there. And, you know, I want to talk more with you about that strategy and some of the other investment strategies that you’re using it GPWM funds in a minute. But you mentioned one other thing there which was you casually slipped in a 25-year hold period, which I thought, huh, that’s a long time, I thought this is only supposed to be 10 years.

What’s with the 25? That seems like way too long. But that kind of leads me into my next topic I wanted to talk with you about Kirk. And I’ve mentioned this on my podcast in the past, which is this concept of thinking about qualified opportunity fund investing as a super Roth IRA. And essentially, it’s tax-free growth for 10 years. But why stop at 10 years?

Can you tell us more about your thoughts on that?

Kirk: Yeah, thanks, Jimmy. You know, I’ve been advocating for that from day one. And I remember before COVID KPMG reached out to me and invited me to come present at one of their conferences an opportunity zone conference at their San Francisco offices. And I remember this vividly because I was on a panel at this KPMG conference and the guy to my left answered all the questions very similarly to me, in terms of rehab projects, or grades, cost segregation studies are important.

This is a great estate planning tool it dovetails so nicely with the multi-generational wealth transfer strategies. And their game plan was 10 years in a day and then exit. And mine was let’s hold it for much longer. And I remember a guy in the audience raised his hand is like, “I’m confused why Kirk your answer is, hold it so long, and your answer is, you know, go only 10 years.”

And the guy to my left answered and said, “Well, that’s what our PPM says so that’s what the investors signed up for.” And I said, “That’s fine there probably are some investors who only want 10 years of tax-free growth but our investors want longer than that.” It’s like if you open a Roth IRA, and your investment advisor said as soon as you have owned this for five years and attained age 59 and a half, our plan is to liquidate the Roth IRA because we can totally liquidate it tax-free at that point in time.

Nobody does that with Roth IRAs. But five years and age 59 and a half is the bare minimum needed to completely cash out tax-free. Similarly, for an opportunity zone fund, the bare minimum to completely cash out tax-free is 10 years of holding. But from a financial planning or wealth management approach why would you liquidate something when you hit the bare minimum tax timeline if it can continue to grow tax-free if it can continue to throw off depreciation deductions that you don’t have to pay depreciation recapture on?

Why stop at 10 years when you can go for 25? As long as you liquidate this before the end of 2047 all of those additional depreciation deductions are tax-free. All the growth between now and 2047 is tax-free. If you cash out at year 10, you’ve missed 15 years of additional tax-free growth. You know, I’ve seen presentations from opportunity zone funds where they talk about when you pay the tax, you’re at a fork in the road.

You can go down this one road and pay your tax now, and then you have less money invested, and where you invest it, it’s also going to be subject to tax. Or you should invest in opportunity zone fund because it can grow for 10 years and not be subject to tax and that’s better. Well, when you hit the 10-year mark essentially you’re at a very similar fork in the road. You can choose to cash out and it’s tax-free after 10 years, but where you invest it is going to be subject to taxation.

Or you can use the logic that you used from day one and continue to hold it in an opportunity zone fund where it won’t be subject to tax and it will generate depreciation deductions that are not subject to depreciation recapture. The smart money goes for the longer-term hold. A lot of investors get scared though when they think of something that long. They think I’m never going to see any money between now and 25 years, you know, that’s not right.

And people forget that the opportunity zone fund can generate cash flow, it can return money to the investors tax-free, an incredibly tax-efficient stream of cash flow, long before the 25 years, long before the 10 years. We have one project where we bought an old Sears building and it came with this huge parking lot that we didn’t need.

We sold off the pad or the parking lot and did a cash-out refi. We’ve already returned all of our investors’ money from that project within two years completely tax-free. Now each of our investors had the choice of whether to take that money out of their fund when it went from the QOZB back to the QOF. If they wanted that money they could have taken that money out to their checking account completely tax-free and done whatever they wanted with it.

All of our investors elected to defer that cash flow, keep it inside their QOF and reinvest it in another opportunity zone project and another opportunity zone project. That’s another wrinkle where it’s a super Roth. It’s not just the long-term hold potential of 25 years it’s also the reinvestment strategy. As far as I know, we’re still the only ones that are talking about the impact of reinvesting.

If you have a Roth IRA, and you have a stock that pays a dividend, you can tell your broker to send that dividend check to your checking account, or you can invest it somewhere where it will be subject to tax. Who does that? Nobody. Instead, when the holdings inside your Roth IRA generate cash flow in the form of interest or dividends or capital gains, you hold it and you buy more stock or mutual funds or ETFs inside your Roth IRA.

The opportunity zone fund regulations explicitly allow for that. In fact, they give you 12 months to come up with a game plan for what to do with the cash flow from like I mentioned from the sale of a pad or something like that. You can then hold it inside your tax-sheltered QOF and go into another opportunity zone project and another opportunity zone project.

So an example of that, you know, former Sears building I mentioned, we still own that. It’s now a self-storage building, nearly complete, going to be operational. It’s going to generate cashflow going to generate depreciation deductions, going to appreciate over 25 years. We still own that, but we’ve taken all of our money out and put it into another project that’s also in the opportunity zone.

I’m going to do the same thing, fleece it up, do a cash-out refi, recycle the money into another project and into another project and another project, all within the same opportunity zone fund. So the original investor…you know, for each dollar of an investor that goes into one of our funds, if they don’t need the cash flow, they can recycle into another and another and another project and generate this wide footprint of properties that are diversified that will continue to grow tax free and depreciation deductions throwing off tax free with no depreciation recapture for 25 years.

Much more tax efficient than the typical structure, you see where somebody throws in money, and the fund manager returns the money out. You know, it’s like taking the dividend check out of your Roth IRA and sending it to your checking account.

There’s no need to do that. And the smart money doesn’t do that.

Jimmy: Yeah, that’s a great way to think of it with regards to a Roth IRA and a dividend coming back you don’t want to hit in your checking account, you want it to go back into the IRA. I love that concept. And I think sometimes it’s a tough sell the opportunity zone program because a lot of capital coming in is from investors who aren’t used to holding periods that long.

This program is meant for patient capital really. I mean, you need to be aware of the fact that it’s illiquid, you’re not going to get your money back for 10 years, or you’re not going to get your principal back for 10 years, I should say. But it can spit off cash flow, as you mentioned, you can do refinance distributions there are ways around that even too, so…

Kirk: Don’t forget the cash flow from operations can also be distributed tax-free. So we have two…we’re raising capital now for our 10th opportunity zone fund. So we’ve been doing this from day one. And we have two types of funds, some that are single-family QOFs where, you know, if you’ve got $25 million in gain, we’ll set up a single-family QOF for you.

And at each fork in the road, the family gets to decide what to do with the cash. So when there’s a cash-out refi event, or sale of a pad, or check that comes in from operational cash flow, they can sit on the cash in their QOF for up to 12 months, but at some point, it either needs to be distributed to satisfy the 90% test or, you know, be invested in another qualified opportunity zone project.

But they get to decide at each fork in the road whether to take the money out. So if the investor needs the money and needs cash flow, the money can go out tax-free when it’s generated at the project level. If they don’t need it, it gets recycled into another project and another project and another project. And they get to weigh in on which types of projects. We have some clients who are more conservative and would like a tenant or a certificate of occupancy play.

I think you’ve talked about that where you can get new use. You can go buy a building in an opp zone that’s almost complete, you’re paying top dollar for it but it’s less risk, there’s no developmental risk because it’s nearly done. You get your certificate of occupancy, you put it in play and it’s cash flowing within, you know, 9 or 12 or 18 months.

Jimmy: It’s essentially like a 24 or 36-month shortcut in many cases where you don’t…

Kirk: That’s right.

Jimmy: Right. And you get to bypass the construction risk completely.

Kirk: That’s right. So it’s less risk, less return, but that’s the right thing for some families and some investors so we can do more of those projects for them. Other people like new construction other people like rehab. Most of our projects are rehab projects. You can go to our website and check them out we’ve got projects across the country from the state of Washington to the state of Florida and all over.

But we like rehab for the tax efficiencies I mentioned at the top of the program. But in single-family, QOF, the investor family gets to weigh in on portfolio composition of which projects, and which types of projects, and which geographic, and which developer. Unlike most opportunity zone funds which are operated by developers for their own projects, we have a broad network of real estate developers that we have a long-standing working relationship with and that’s who we’re utilizing for deploying the capital.

Most of our projects, we are providing the sole source of capital through our family of 10 QOFs to control all of it and control the costs and try to keep the expenses down. Some people don’t have a $25 million of capital gain. So our other option is we have multi-investor funds where we’ll do every year, but we’ll have almost like twins.

Where one strategy reinvests and the other multi-investor fund distributes the cash flow. And we’ve had some investors that have split, you know, put half their million dollars gain into one and a half into another whatever. Some people need the cash flow, some people don’t. But we do have the option even if you have as little as $100,000 in gain to put it into an opportunity zone strategy where the dividend checks aren’t sent out to you.

Or rather they’re reinvested and reinvested in another project and another project, which we believe we can do at least until 2027 or early 2028. After that, then the money just gets distributed out because, you know, the opportunity zone program is going to sunset.

But the holdings you have will be grandfathered in and you can continue to own and operate those programs until 2047. But we will not be able to recycle more cash flow, which is another reason to shorten the timeline and do rehab over new construction. Because you can get to the finish line faster on rehab just like…you know, because you’re cutting out…you know, like I don’t know how long it would take to build 26-storey towers But we’ve talked about…you know, one of our projects in Reno, it has three towers, 26 stories, 24 stories, and 18 stories.

They were hotel rooms. We’re converting them to apartments. But the timeline to make that existing structure into apartments has to be, you know, years shorter than the timeline would be to build that brand new.

Jimmy: Right from the ground up. Yeah, I was going to ask Kirk, can you tell us more about GPWM Funds that you haven’t already shared with us? I’d love to hear a little bit more about your approach, what you do exactly, and who are your investors, typically.

Kirk: Our first wave of investors came from our family office. We ran a family office where we did taxes, estate planning. I’m a tax lawyer by background. We would do even the employment agreement. If you were CEO of some tech company and moving to some other, I’d negotiate the employment agreement for my clients, and multiple clients who are venture capitalists and CEOs several times over in Silicon Valley in the tech space going back to the 1990s.

And those same families are our core family set, you know, started out around the time that the second batch of proposed regulations were being promulgated. Coincidentally we had three clients who had monetization events triggering over $100 million in capital gain.

And I was aware of the statute and I was aware of the first batch of regulations. And we were looking at every opportunity zone fund out there to try to find a way to not pay tax on over $100 million in gains. And every opportunity zone fund we looked at was a tenure and a day strategy, really missing the boat on the potential for long term.

They also were not reinvesting cash flow, they were all sending money back out. These are super wealthy families that don’t need the cash flow, they have plenty of other liquid assets they don’t need the cash flow from that. So that was also minimizing the opportunity. They were missing the big opportunity in the opportunity zone fund which was 25 years and reinvestment of cash flow.

And they were also charging exorbitant fees. So my partner and I, when we saw the second batch of the post regulations, and we saw how the Treasury Department had made it even more friendly to the investor, and we saw where the momentum was heading. And we guessed right on that the final regulations made it even more friendly for the investor still, we said we can’t right waste this opportunity so we pivoted.

I no longer do tax returns. I no longer handle conventional investments like stocks, bonds, mutual funds. I no longer do the comprehensive wealth management for the family office clients. Instead, all I do and all my partner does is the opportunity zone funds space. And like I said word spread about our approach about how long-term hold was better than 10 years, about reinvesting cash flow was better.

I’ve never been a KPMG client and I have a lot of respect for the firm, but they heard about what I was doing and, you know, they invited me long before COVID hit to do a presentation at their San Francisco opportunity zone conference. My phone’s been ringing ever since. So our first wave were tech investors that we had known since the ’90s. After that, it’s just been people who have capital gains and don’t want to pay tax, and also want to maximize the opportunity that this legislation presents.

And so that’s where…and like I said fast forward to today, we’re raising money now for our 10th fund.

Jimmy: And you mentioned a while ago earlier in the conversation that oftentimes your QOF is the sole provider of capital or a very large provider of capital into some of these developments. How does that help you negotiate preferred terms or core GP shares? Or what are you getting when you come in swinging that big bat sometimes?

Kirk: We significantly reduce the fees and the cost to the investors. We’re familiar…you know, we’ve been on the side of evaluating funds and read PPMs for, you know, decades. We’re familiar with the tricks of the trade and we’re all about what’s in the best interest of the client. So our developers like working with us because we’re repeat customers bringing a big check so they can do more projects, more projects, more projects.

But in exchange for that, we insist that, you know, their compensation is reduced on each project because they don’t have to deal with dozens of random investors. They don’t have the risk of doing their dog and pony show and trying to raise capital, and the uncertainty of are they going to be able to raise capital for their project. We also like being in the catbird seat where we look at dozens and dozens and dozens of projects from all types of developers all across the country.

And we can really be picky and pick and choose just the right ones, you know, for our investors. The other thing that gives the investors peace of mind is as we’re continually raising capital, which we will do as long as the opportunity zone legislation allows us to. We can put capital from the current fund that we’re raising money, side by side with capital from operations or cash-out refi, or sale of pad, you know, some early fund we’ll get cash flow back into their fund from some event at the QOZB level.

Well, those dollars can go side by side with the new investor dollars that are coming in into the projects. And so even if we’re raising money now and, you know, there’s a project that hits our desk that we really like we can drop money from five different funds if five of them have cash available to be deployed.

And so they all take advantage of the pipeline of projects that we’ve got through our outstanding network of developers. And only if we pass on the deals to our developers take those projects to the street and go raise money for it.

Jimmy: Got you. That makes sense. We talked a little bit about your strategy, you like rehab, you like qualified improvement property. We talked a little bit about cost segregation. By the way, I just actually discussed cost segregation in detail on the previous episode of this podcast. My interview with Valerie Grunduski and Jeremy Sompels at Plante Moran just last week.

So very timely here. But what other investment strategies do you like when it comes to opportunity zone investing Kirk, can you expound on your investment strategy a little bit more? And maybe you tell us a little bit about some more of your pipeline deals. You mentioned Reno, I think you’ve got South Bend in the works as well. Spill it all for us.

Tell us what you got, and what you like.

Kirk: Thanks, Jimmy. We’ve been having real estate investors for a very long time. In fact, if you’re a tech guy, and you’ve got $50 million in company stock from an IPO or an acquisition, and $50,000 in your checking account and you’re liquidating your first slice of the pie real estate is a great diversifier and always has been. We’re heavy into real estate.

I’ve been exposed to real estate investing forever. I grew up with it. My mom was a lawyer did a lot of work with the wealthy. She worked at a law firm in Beverly Hills [inaudible] Friedman a nice midsize firm. Some of their clients were Dr.

Jerry Buss and the Lakers and other wealthy celebrities. So I’ve heard stories. I also did a lot of work with the charitable stuff and philanthropic and setting up charitable foundations and things like that. But real estate has been a big part of our portfolio for our clients from day one. So we know a lot about real estate, we’ve got a lot of developers that we worked with for many years.

And like I said our approach is to diversify, our approach is reduce risk. We like multifamily, we like self-storage in the right markets. Self-storage in some areas has been way oversaturated so you got to be careful about that. But if you can find a market where there’s barriers to entry and not a lot of competition then self-storage is a great cash flow generator and a real stable and defensive. Especially in this inflationary environment we like multifamily, we like apartments, people need places to live.

There’s tons of cities, you have this demographic shift where people can work from home. So, you know, I live in a suburb of Boise well, you know, rents here are skyrocketing. They’ve been up 40% you know, over the last couple of years. It sucks if you’re renting, but it’s great if you’re the landlord and own the apartments.

So we have a couple of projects in Reno a couple of big projects in Reno like I mentioned, one of them had three towers. It used to be the Harrah’s Casino and Hotel owned by Caesars. And Caesars and Eldorado were in a merger. And if you know Reno, Reno is becoming this tech…it’s having this tech explosion. You’ve got Tesla there, Apple put its data storage center there in 2012.

You got something in iCloud, it’s probably physically located in Reno. All of the big tech firms have data storage centers coming in there and it’s booming. I found 150 square foot old hotel room tiny hotel room that you can rent for 750 bucks a month and had a waiting list.

That’s five bucks a foot. 150 square feet for 750 bucks a month there’s just is no inventory for housing. But they had a glut of hotel rooms because nobody is going to Reno for gambling and entertainment anymore. So we’re converting the hotel into apartments. The views are gorgeous.

It’s a block from the river, you can see Tahoe, you know, it’s literally right by the biggest little city in the world, arch sign if you’re familiar with the market. And we bought it as that merger between Eldorado and Caesars was happening. And we were the sole source of capital for this project. And we got a very favorable entry point on the price per square foot very, very, very attractive entry point.

And now we’re rehabbing it and should be done later this year, early next year, coming online. It’s a massive project with well over a million square feet. What I love about it is the apartments. We had nearly 1000 hotel rooms so we’re going to end up with between 500 and 600 apartments when all is said and done. That’s what we love about it.

But it also comes on top of a ton of square feet from where the casino floor was, where all of the restaurants were, the convention space. And all of that is commercial space, which we are converting into…you know, the restaurants are going to stay restaurants. Instead of casino floor there’ll be a grocery store and other commercial tenants, you know, there’ll be a gym there’ll be I don’t know tanning salon and nail salons stuff like that, stuff that people want to have in their area.

The restaurants are staying restaurants. All of our expenses to improve the non-residential space on the interior buildings is that qualified improvement property. And we think our first-year write-off from that on the 2022 return when that’s all placed in service will be greater than the cash in the deal.

Meaning all of the gain that was deferred that ended up in that deal, we completely written off on their ’26 return just from the first year passive losses from the QIP deduction. Qualified improvement property is that where you get 100% write-off if it’s placed in service this year. That’s the QIP deduction. It drops from 100% to 80% to 60% and 40% each year, going forward.

But it’s still an incredibly powerful tool to accelerate depreciation deduction. So, you know, that’s our project. And then when it’s leased up and stabilized, we’re going to do a cash-out refi, we think we’ll get all of our money back on the cash-out refi for that type of project. They’re building across the street from us five-storey apartments over 400 bucks a square foot.

Our total cost on this deal should be around $200 and change a square foot. So we’re pretty confident we’ll get all of our money back on a cash-out refi. Which again, if you’re one of our investors, you could have the choice if you’re a larger investor, to take the money out tax-free, or recycle it into another project.

If you’re a smaller investor depends on which path you’re in whether it gets recycled or kicked out to you tax-free. And then we own and operate for another 20 years. If we need to monetize it again and the market allows, you can do another cash-out refi in the future, return money tax-free, otherwise, you’re just kicking out cash flow from operations. But people should get their money back and then still get a dividend check, or recyclable dividend check after the cash-out refi event happens.

Jimmy: Yeah, that’s impressive how much more cheaply you’re able to do that than replacement cost that new construction building going in across the street from you. That sounds like an incredible deal too with the QIP. Just want to reiterate one more time in case someone didn’t get that you’re able to write off enough in the first year such that your investors won’t have any capital gains tax liability due for their 2026 returns.

Is that right?

Kirk: If they are an investor who rolled over gain from the sale of passive activity…

Jimmy: If they did that special code the gain code B, right?

Kirk: Yeah. They have to gain from a passive activity. And they have to report it as gain from a passive activity with the special gain code B on the form 8997. But yes, if all of our projects are rehab projects just like that big Reno, and we have several who are…you know, I don’t know what my next project is going to be. But if every single one of my projects is like…and we have several that are with those very similar parameters in terms of amount of capital or QIP deductions that you can get.

Yeah, that’s basically the game plan. And if we continue to execute like we have then that’ll be the result. But certainly for those that are in it, if they rolled gains from passive activities in, you know, to the extent they got exposure to Reno, the gain that went to the…we have two Reno projects, very similar metrics.

Both of those are going to generate more losses from QIP than I think we have cash in the deal. And both of them should generate a cash-out refi that returns 100% of the capital. And that’s the holy grail of what you’re trying to do here is get enormous returns, transform a city, do it in a tax-efficient way.

We’re doing all of that. And what gets me most excited is the lives that are being changed too, you know. Like, there’s no housing there, there’s a lot of development happening there. One of our competitive advantages is for our workers there. So we opened up…two of our towers had asbestos but one of them didn’t and it had 390 hotel rooms that were just dormant.

So we opened up 150 of them to our workers and let them stay there rent-free. So they got their own hotel room which is now their apartment. And there’s a way to program the elevators so that, you know, they only have access to their floors. We continue to operate as Reno suites. One of the, you know, another 200 of the rooms too. If you want you can go stay there.

It doesn’t have room service, no amenities, no nothing it’s just really no frills right now but we’re generating cash flow because there’s such demand for housing there. I mean, I remember some of the workers that we hired and trained and got the certification for asbestos, lead, and mold remediation they didn’t know what asbestos was before they started working there.

But they got a new certification that we paid for. And it’s a life skill that they…they got a roof over their head that’s safe. I mean, there are people there whose lives have been changed because of that. I remember one guy who did construction work and broke his back in a mountain bike accident, lost his job because he couldn’t do construction work with a back brace, they wouldn’t let him wear the back brace.

Lost his apartment, he was living in a car near our project, and one of our shift supervisors met him, invited him to come down and apply. Long story short, he doesn’t even live on-site anymore. He got a certification, got an apartment with us in one of those hotel rooms, made more money with his specialization than he did before.

Bought himself a new car, has, you know, $10,000 in his checking account, he was so proud about that. And living in his own apartment off-site now. People’s lives have been changed from this project. And it’s transforming the core of downtown Reno. It covers nearly two entire city blocks at the heart of downtown Reno. So this is our most massive project but it’s one that’s going to have incredible returns for the investors and an incredible impact on an incredible city that I’m really excited about.

Jimmy: Yeah, that’s very impactful. We’re going really long we’re just about out of time, Kirk, but you told me a little bit about your South Bend project. I’m a Notre Dame guy so I want to hear. Give me the elevator pitch on the South Bend project. What do you got going on there?

Kirk: The latest project is another rehab project. There’s a project near South Bend near Notre Dame campus and across the street is some graduate student housing that rents nicely gets good rents. This happened to be a medical office building with this huge parking lot. And as I understand it, there used to be a hospital near there that moved away. For whatever reason, this medical office building has been vacant and dormant and no demand for it.

But it’s a great location close to campus. So we’re going to take the medical office building and convert it to apartments. Might have ground floor like retail, you know, convenience store type stuff or whatever. So we get a little bit of QIP deduction on the ground floor space. Convert it to apartments, and then build new apartments in the big huge parking lot that we don’t need.

So right by Notre Dame.

Jimmy: Fantastic. Well, I look forward to checking that one out at some point in the future. Kirk, it’s been great catching up with you and talk with you today. I’m glad we were able to make this work finally. I’ve been trying to get you on the podcast since we had lunch that one day a few months back. I’m glad our schedules finally got in sync. Before we go if we have listeners or viewers out there who want to learn more about you and GPWM Funds, where can they go to learn more?

Kirk: Best place is our website there’s a list of all of our projects there, you can see them and check them out. Or reach out to us you can put my email up in your show notes or phone number. And like I said we’re raising money now for our 10th fund and continue to look for projects and look for capital and help people find a very tax-efficient way to make an impact in these communities.

Jimmy: Terrific. Well, we will do that. We’ll make sure we share all of your contact information with our listeners and viewers. They can find those on our show notes for today’s episode, which will be available at And of course, they will have links to all of the resources that Kirk and I discussed on today’s show.

And also please be sure to subscribe to us on YouTube, or your favorite podcast listening platform to always get the latest episodes. Kirk, thanks again so much. Appreciate it.

Kirk: Thank you, Jimmy. It’s great to catch up with you and really appreciate the invite to your show.

Jimmy: Absolutely. Thank you.