In October, GTIS Partners hosted their GTIS Investor Day at their headquarters in New York City, which included market insights panels, followed by an Opportunity Zone project tour in New Jersey.

Today’s podcast episode a recording of that event’s Opportunity Zones panel, featuring Jimmy Atkinson from OpportunityDb, Peter Ciganik from GTIS Partners, Joseph Scalio from KPMG, and Kunal Shah from iCapital.

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Episode Highlights

• Background on Opportunity Zones and the evolution of the policy to its current status as a large, well understood program.
• Estimation of the size and scope of the Opportunity Zones program.
• A thorough breakdown of the Opportunity Zones reform legislation and its chances of being enacted.
• The most important factors to consider when underwriting an investment in a Qualified Opportunity Fund.
• How financial advisors consider Qualified Opportunity Funds for their high net worth clients.
• Pros and cons of forming and investing in diversified multi-asset Qualified Opportunity Funds vs. single-asset Qualified Opportunity Fund deals.
• Whether the 10-year holding requirement is a hinderance or benefit to Opportunity Zone investors.
• How exclusion of not just the gain, but also the depreciation recapture, leads to many Opportunity Zone investments having tax-free cash flow.
• Live Q&A from the audience.

Featured On This Episode

• New Legislation Would Extend and Improve Opportunity Zones (OpportunityDb)
• Novogradac QOF Fundraising Data (OpportunityDb)
• Kennedy/Wheeler Paper: “Neighborhood-Level Investment from the U.S. Opportunity Zone Program: Early Evidence”

Today’s Guests: Peter Ciganik, Joseph Scalio, and Kunal Shah

• Peter Ciganik on LinkedIn | GTIS Partners
• Joseph Scalio on LinkedIn | KPMG
• Kunal Shah on LinkedIn | iCapital

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

Peter Ciganik: Great pleasure to have our amazing pool of speakers today. Joe Scalia is the senior partner in charge of tax at KPMG and lead of the Opportunity Zone practice. KPMG is our tax advisor, and full disclosure, for the Opportunity Zone Fund. Kunal Shah, Managing Director and Head of Research at iCapital Network, which works with financial advisors to connect them to managers like us. And Jimmy Atkinson, founder and CEO of OpportunityDb, which is an online network of investors interested in real assets, alternative investment strategies, and Jimmy produces an amazing content for all the alternatives and particularly Opportunity Zones. If you haven’t seen his blogs and webinars, do check it out.

So, with that, if you guys wanna say a few words about how you came to this, that would be great. And then we’ll get into the substantive discussion about regulation and any updates that there are to the policy. We’ll talk a little bit about manager selection and the criteria that go into selecting investments. And we’ll talk a little about the landscape. Jimmy will start us off just talking about how much has been invested in this space, where is it going, which markets, which strategies. So, with that, why don’t we start with Jimmy, and if you wanna say a few words about yourself, but really focus on the big picture of Opportunity Zones.

Jimmy Atkinson: Sure. Excuse me. So, I’m Jimmy Atkinson, founder and CEO of OpportunityDb, as Peter just mentioned. I founded OpportunityDb in 2018. I learned about Opportunity Zones, right after these zones were designated in July of that year. And I went to the internet immediately upon first learning about it because I thought, this sounds like a great program, I wanna learn more about it. And there really wasn’t a lot of information about it. Probably some really geeky articles, maybe written by Joe or some other accountants or attorneys, but there wasn’t anything that was directed at the retail high net-worth accredited investor.

That’s kind of my bread and butter, is catering content to that audience. And fast forward four years later, I can claim that we’re the largest independent media and events organization that is solely focused on the Opportunity Zones industry. And I’m happy to further promote education of what I think is possibly the greatest tax policy that’s ever been created, the greatest tax incentive that’s ever been created at the very least. So, that’s a little bit about me.

Kunal Shah: Yeah, I can go next. So, Kunal Shah. I’m a Managing Director, Head of Research Intelligence at iCapital. We are a FinTech platform so we connect high net-worth investors looking for alternative investments through technology layer where, you know, you transact essentially online rather than doing the paper trails and sub-doc processing.

We have 11,000 financial advisors signed up on the platform. So, we are a B2B business where we directly serve the advisors who serve the end clients, so we don’t directly go to the clients. And about three or four years ago when the Opportunity Zone first came out, we started looking at it as an opportunity for our clients, right? Which is, we have a lot of wealthy clients who have a lot of gains and they all should benefit from this really unique and creative program that was introduced.

And so that piqued our interest, so we started digging into it, we started building a pipeline, we started understanding the regulation, and we are an existing investor in GTIS Opportunity Zone Fund I. So, we have been part of it. We have underwritten Peter and Tom and the team at pretty significant length and excited to sort of offer the same product again to them. We are working with them on their Fund II right now as well. And, you know, we did a lot of heavy lifting on our side to understand how the law impacts our clients and look forward to discussing some of our sort of findings as well.

Joe Scalio: Thank you. I’m Joe Scalio. As Peter was saying, you know, I kind of approach this from the tax side, and how I got involved with this is kind of, you know, a little bit interesting, is when the tax act came out in 2017, there were certain areas that everyone, like, wanted to focus on. And then there was this little weird provision back there called Opportunity Zones, and everyone at least initially poo-pooed it and treated all that, we’ve had enterprise zones, we’ve had empowerment zones, we had all these things. This is just the next iteration of it. And after a period of time it became clear that this was, you know, not, you know, placing lots of restrictions, but really just where do the dollars go and where do they get deployed. And then, you know, I think as you said, once the zones got designated, people started to say, oh wow, you know, if I’m going to invest in certain areas that I’m sure Peter can talk about, you know, these benefits can be, you know, availed for my investors, and the answer was yes.

So, sort of came about, you know, by elimination that no one really wanted to do it at KPMG, and they said, well, why don’t you go ahead and start to do it? And I said, sure, we’ll put together a team, and since then, you know, over the last three-plus years we’ve put together a national team in different offices and areas and, you know, we have a leadership team of myself and two other people that lead that team nationally. And it’s grown. And, you know, we’ve been excited over the last couple years. And, you know, I think, you know, this program has been a little bit cursed. You know, it had a little bit of runway before it could come up because of regulations. The final regs came out in effectively January of 2020, COVID hits. But I do think over the last year and a half or so, I’ve really seen where the program has now got good foundation, it’s got good regulations, relatively good regulations. It’s got, you know, ways where, you know, people have all kind of acknowledged in the industry you can do it. So, there is a methodology for doing this, especially in real estate. But we’ve also started to see a lot of companies and tenants start to utilize these benefits. So, that’s kind of my history in Opportunity Zones.

Peter Ciganik: And you’re having the last laugh, right? Because the program has actually taken off quite large by magnitudes larger than some other tax increment programs. So, why don’t we start with a little bit of background and, you know, Jimmy, if you can say a few words on the basics and how it works and how much capital has been raised.

Jimmy Atkinson: Sure, sure. So, well, first I’d like to incorporate the audience if I could, by a show of hands, who here has made at least one investment into a Qualified Opportunity Fund to date? I’m just curious. Okay, so we have a pretty experienced crowd here, so I don’t know that we need to go over…belabor the basics too much, but just in case anybody’s relatively new to the program. By the way, what I really like about the Opportunity Zones program is that it’s a place-based tax policy that’s designed to incentivize capital flow into typically underinvested communities. But unlike some of its predecessors, there isn’t a lot of bureaucracy involved. There isn’t a lot of red tape. It’s not a tax credit program you have to apply for or jump through a bunch of hoops. It’s really just a framework, I like to think of it as, that sets up this tax advance. So, you have to start with a capital gain and it can come from any source, unlike a 1031 exchange, which has to come from real estate, this gain can come from sale of stock, sale of Bitcoin, collectibles, whatever.

Within 180 days of realizing that gain, you roll it over into a Qualified Opportunity Fund that then deploys capital eventually into a qualifying investment, into a Qualified Opportunity Zone, one or more of 8,700-plus census-tracked locations all over the country and including our overseas territories in Puerto Rico, in particular, you get access to a handful of incentives. One is you get to defer recognition of that initial gain until the end of 2026. And we’ll talk about that a little bit later in the panel because that date might change pending some legislation that’s on the table right now.

Benefit number two, which has actually expired, but you did get to reduce the amount of gain that you recognized in ’26 by either 10% or 15%. I won’t get into the details of that because it takes too long.

But benefit number three is really the biggest one is you get to eliminate all capital gains tax liabilities on the subsequent Opportunity Zone investment after a 10-year holding period. So, it’s really phenomenal, powerful tax incentive. And… Oh, you wanted me to talk about the capital flow? That was the second part of the question.

Peter Ciganik: That too.

Jimmy Atkinson: Right. So, to date… Well, I should also first say, when this program was first rolled out early 2018, Secretary Mnuchin, the treasury secretary at the time under President Trump, estimated that this would be a $100 billion program. And just to put that into context, the second biggest economic development program in the United States is probably the New Markets Tax Credit program, NMTC, and that program’s typically capped at $3.5 billion per year. So, already to date, and I haven’t even reached the end yet, we haven’t even reached 2026, ’27 when this thing’s gonna sunset and wind down. I’ve estimated that we’ve already eclipsed that $100 billion mark based on a handful of estimates that are floating around out there. I don’t know if you gentlemen feel differently or am I in the ballpark?

Joe: Yeah.

Jimmy Atkinson: Okay, good. So, I think this has potential to be much bigger than anticipated. A lot of capital’s flowing into the program already, for sure.

Peter Ciganik: Great. You already mentioned the potential extension, it’s one of the regulatory questions out there. Joe, what are you hearing about that? And can you describe what might happen with this piece of legislation?

Joe Scalio: Sure, I wanna go out on a limb and say it’s 50-50. So, I wanna go way out there. But I mean, the act that has bipartisan support that’s been floating around now, will deal with a variety of things. One, as you were saying, would extend the deferral date to December 31, 2028, and by extension would then allow investors to both get the 10% and 15% benefits for investments that are made in 2022 and 2023. So, you know, if you deferred $100 in 2022, you would only pay tax on $85 on December 31, ’28. So, we have one… Which is pretty valuable when people start to model this out, that two-year deferral with higher interest rates, you know, got some juice to it from an IRR point of view. So, that’s one of the main benefits that we would have in this.

The second, you know, one is, you know, they would additionally allow kind of a fund-to-fund structure. Basically now a QOF can invest in another QOF, and it’s just the way they structured it initially, they would allow the pooling of capital from one QOF to maybe invest in another QOF. So, you would have potentially, you know, more of like, I think, the normal fund-to-fund structure we have. We’ve struggled with having to create certain mechanisms where we can’t invest in another QOF we have to kind of invest below the QOF into the Qualified Opportunity Zone business. But that I think is also going to be, you know, potentially valuable for large investment funds that want to pool capital together and invest jointly.

The third thing is a, you know, they are going to want to put some amount of transparency into this. So, right now, you know, there is limited reporting that a QOF has to do and anyone who’s had to fill out certain forms knows the limitation on those forms, which is basically, you know, what zone, what census track did you invest in, and what’s the entity you invested in in that census track. There’s really not too more about it, but they would put some more parameters about disclosure and the impact that that has on the community. And then they would, which is not a great thing, they would also want to re-look at potentially certain census tracks that were originally designated. So, there’s going to potentially be a redo on certain census tracks. There’ll be a grandfathering of investments that occurred, but maybe going forward future investments would not be able to be done in certain census tracks.

And those are mainly around those tracks that meet the definition from an income point of view, generally around the fact that they have, you know, large student bodies there. So, the one that always comes up, you know, is technically the area around Stanford University, and anyone who’ve been out there knows, you know, the wealth out there. But that area around Stanford University technically meets the definition because when you factor in the students, so there will be a relook at certain census tracks to see if they still should qualify going forward.

The majority of this would be very beneficial for the industry, especially the couple-year deferral and especially with the fact that we could have more kind of feeder funds that are created. I use the word 50-50 that this would, you know, potentially be out there. Most people believe it will get attached to, and there’s a lot of term, it’s called the tax extenders, and that is generally something that happens with bipartisan support at the end of the year. We’ll see how the election goes and everything else, but assuming, you know, there’s some level of bipartisan support and the extenders act is gonna get done sometime after the election and most likely before the Christmas break, what they will do is this will get attached to it and both the real estate roundtable and the economic innovation group seem to be lining up this, so that we’re hopeful that it will get passed. And as I said, we’re thinking there’s probably at least a 50% chance it will get passed by this year. I’m not sure what you’re hearing, but that’s…

Jimmy Atkinson: I think I’m hearing the same stuff you are hearing, Joe, because I think we’re both in touch with former members of Senator Tim Scott’s office. I’ve been speaking with Shay Hawkins who actually helped draft the legislation while he was Senator Tim Scott’s tax policy advisor, and he’s been telling me much the same thing. He says, this really does have bipartisan support. By the way, the initial Opportunity Zone legislation had broad bipartisan and bicameral support. That got lost in the mainstream media from day one. In 2018 and 2019, the New York Times and other mainstream media publications unfairly branded the Opportunity Zone provisions of the legislation as a terrible Trump policy that was just helping his real estate friends get rich. And by the way, yeah, it is unapologetically a great tax cut program for investors. That is for sure. That’s what it’s designed to do.

But it does have broad bipartisan support. The legislation was actually initially drafted while President Obama was in the White House. It took a few years to eventually get pushed through, and then it did get passed as part of the Tax Cuts and Jobs Act at the end of ’17 under President Trump. But Shay seems to think that, you know, because it is bipartisan, it’s kind of hard to pass anything too bipartisan this close to an election. This legislation was introduced in April, the reform legislation that Joe just outlined for you, and what I’m hearing from Shay and from others and what you’re hearing as well is this type of thing typically does get passed after the election day, once the swords get put away, as Shay mentioned to me last week we were on an Opportunity Zone panel at a different event.

And so I think there’s a very good chance that it does get passed before the end of the year. Some other people on the panel seem to think that it might still be too politically charged a topic. Maybe it’s gonna be saved for the Congress in 2023, and that might depend on what the balance of power shapes out to be. So, it’s speculation at this point. I’m hopeful that at some point down the road we do get an extension, because currently this thing is gonna expire at the end of ’26, is the last day that you can realize a capital gain and have it eligible for rolling over into an Opportunity Zone fund. So, depending on how you accrue the gain, I think you’d have until potentially mid-September of ’27, I always have to look over to the tax prof…

Joe Scalio: September 9th for [crosstalk 00:17:50.012].

Jimmy Atkinson: Yeah, I think that’s right. Yeah. I’ve even heard 11 sometimes too. It depends how you start counting the 180 days after March 15th, right? Yeah, so at that point, the whole thing just ends. So, as an industry now we’re trying to push for this to get extended in a permanent fashion the way that other tax policy programs and tax credit programs oftentimes do over time.

Peter Ciganik: That would be great.

Joe Scalio: It would be great, and the one thing I will point out is if there is this, we will…you know, I think a lot of people did not understand the designation process that happened in early 2018, which was really delegated and completely given to the governors. And in this case, you know, if a zone is taken away, a new zone can be designated. So, you know, there probably will be some local and state horse training that goes on. The other part that I think is kind of a real sleeper in there when this designation process hopefully occurs, is there was a lot of zones that when you think about it, and probably more from an industrial point of view in the cities or maybe where manufacturing was, where they were, what they were called zero-population zones. And those zero-population zones were unable to be designated.

So, if you think about, you know, somewhere on the Newark waterfront to talk about bipartisan support and Corey Booker’s support, you know, there’s probably an area there that, you know, could not be designated because no one lived there, or an old refinery where no one lived there. Those areas will be able to be additive and be designated and, you know, that could be some huge large development for that community if they’re going to turn what maybe was a refinery or a large industrial facility that now could be designated into, like, a big community or a manufacturing facility or whatever, that is quite in there, but I do think that’s something, if this does go through, you know, could be very important for those local areas to look at. And we’ve talked to a couple states and localities that, you know, originally said, I wish I could have had a chance to designate this area in 2018. We said, well, you might get a second shot at the apple here to designate it.

Peter Ciganik: I was gonna say, that would be great. You would get a 15% discount looking back even if you invested last year or this year. But we’re not pinning our hopes on it. And partly the reason is, is we don’t get that discount, you do as investors. We really look at this as a real estate investment, and frankly, what we’ve been doing as a firm for 17 years, when we came to it, we just happened to have a number of projects in these zones and we figured out, it’s quite interesting for investors to claim the tax break.

Kunal, that theme really selecting this as a real estate or real assets investment if you will, you look at a lot of private markets, a lot of strategies. How is this different and how is it interesting or maybe challenging when you compare Opportunity Zone investments and manager and investment selection to other private market opportunities?

Kunal Shah: Yeah, look, there are many factors that goes into that, right? So, as we discussed, we talked about the tax out of equation. There are a lot of benefits from a tax perspective, but it means nothing if the investment ends up being zero, right? And yes, there has been a lot of capital raise and, you know, Jimmy and Joe both talked about sort of 100-plus million dollars. So, it’s a successful program, but you don’t see as much institutionalization of the underlying sort of quality of managers or sort of developers, right? And so you don’t see large asset managers rushing to raise billions of dollars in this channel. And so from what I see is you have to be careful of who you partner with. Just because the capital raise and capital has been deployed doesn’t mean 10 years later you’re gonna get a great IRR on that.

And so we profess to our clients, the first thing we need to focus on is the quality of investment, which is a real estate and how you go about it. There’s a lot to unpack. You obviously have to make sure that you have the tax law completely sort of under your control. You have to manage your deal flow. You know, one of the things that we spend a lot of time with you guys is understanding that the capital is coming in, you’re to match the incoming capital to essentially right properties because you only have six months to deploy that capital. And so making sure that you have a very rich pipeline of new development opportunities is critical. Building and, you know, creating a structure where it’s diversified, right? A lot of things have gone into one area, which is all multifamily, which is great. But one of the things that we have enjoyed working with you guys is you have done single family, you have done industrial, there’s a little bit more diversity across different regions.

So, you know, we think that, you know, you have to think of this from a exactly the same lens as any other private investment you would make, which is long duration asset where the quality of the underlying operator and developer is gonna be the main thing. And like I said earlier, the tax means nothing if you end up getting no real investment return. There are other pieces along those lines that sort of factors in in the way we think about underwriting is, you know, we wanna make sure that you have a track record in doing something in the development area. I cannot tell you how many managers I’ve seen come to our office and say, we have a Qualified Opportunity Zone fund, and you ask them to show us their track record around what they have done in sort of development and they have nothing. Or they have done two properties and they have properties where essentially a friend of theirs who built a local sort of house or something like that.

So, there are a lot of interesting stuff that we saw that just doesn’t pass the sniff test. And so where I say the bar is higher and very few institutional quality managers like yourselves, GTIS, and few others that we are partnered with are one that we can be very happy and excited to partner with. And that matters. Again, you know, you can screw up a variety of different ways and we don’t want our clients to get screwed up on investment on the real estate side.

Peter Ciganik: Thank you. Thank you for that. The real background to it is we were managing institutional capital for 15 years before this came around, right? So, I appreciate the compliment there of being more institutional, but it really actually came from the history. This is not a hobby for us, not something we started just because of the tax break.

Kunal Shah: And I’m not just saying this because I’m on this panel, by the way. We have reviewed hundreds of managers in this category. There are a few that we sort of took a very deep dive on, but, like, I can name those on my sort of hand here, right? Which is like, there are like probably 10 or 11 that we consider to be high quality.

Peter Ciganik: Right. And one of the reasons probably is the fact that this has to be new development, right? You can’t buy existing assets for an Opportunity Zone fund. And a lot of the larger funds out there, Blackstone, Carlyle, Apollo, they buy existing properties. If they have $10 billion to invest, you actually can’t possibly shove it down into the development stage because these buildings, you know, they just don’t need that much capital. What are you seeing Jimmy, in terms of what people have invested in and where, when it comes to Opportunity Zones?

Jimmy Atkinson: Yeah, so I’m gonna rely on data from Novogradac, which is a professional services firm that has really deep experience in tax credits, but in particular Opportunity Zones. And they have actually surveyed Qualified Opportunity Funds. I think they are surveying over 1000 Qualified Opportunity Funds in their survey these days, which is a pretty large chunk in the market. They estimate it’s about maybe a quarter to a third of the total market in terms of total transaction volume that they are surveying. And I think it’s about 75% to 80% of the funds that have been raised so far to date, have at least some exposure to residential. So, that’s my long-winded way of saying, by far the most popular asset class for Qualified Opportunity Fund investing is multi-family real estate, some single-family in there as well, but just anecdotally, the types of fund sponsors that I work with typically are doing a lot of multi-family.

I saw some hotels at the beginning, but then the pandemic kind of did away with the hospitality assets. I don’t know that it’s too dissimilar from just real estate at large, fair number of industrial and warehouse deals as well. Actually I had a question for Kunal though. If I can play moderator for a second.

Kunal Shah: Sure, of course.

Jimmy Atkinson: I wanted to get back to your iCapital platform and ask you, how many advisors did you say you…

Kunal Shah: Eleven-thousand.

Jimmy Atkinson: Eleven-thousand. That’s impressive. And you have a wide variety of different alternative assets that you list on your platform. Probably a lot of DSTs, energy, maybe some conservation easements even.

Kunal Shah: Not much in energy or conservation.

Jimmy Atkinson: Okay. Well, I’m going on a limb here, but certainly Opportunity Zones as well. How do these advisors think about when and where to put their clients into Opportunity Zone products as opposed to any other type of real estate product or other type of alternative asset?

Kunal Shah: Well, tax is a critical factor of how to think about that, right? So, if you have a client who has a decent amount of low-cost basis shares in some other stock, right, or has significant profits, it is very clear that they will look for a certain portion of that capital to go towards Opportunity Zones, right? So, if you’re a Moderna employee from 2015, and even those stock has gone down by half in the last one year, you still are sitting on a significant amount of low-cost basis for example, right? And let’s say now all of a sudden you decide to get out of it and you have millions of dollars of gains, it’s not unreasonable for that client to consider some portion of that money to go towards sort of Opportunity Zone real estate transactions. And so it’s a conversation, right?

When we have our sales reps call the clients and say, what are you looking for? Understanding their portfolio, understanding their needs, liquidity, and how recent the wealth creation has been, will be all of the conversations we’ll have, right? And so our team is prepared to position products accordingly. We are not just pushing Opportunity Zones all day long or DST, it has to be sort of in line with what the market essentially does.

The other factor, sort of going to one of the comments that you made about the market though Jimmy, which is, yes, most clients are used to getting a lot of multi-family, some industrials, but I do see there is a bit of a change happening in people’s perception around certain categories right now. And it’s partly a contrarian play, but a lot of people think that, you know, they feel like they are underexposed right now to segments such as office for some people that it’s a contrarian play as well as hospitality, right?

We have been under-building in that area for now many years. Pandemic didn’t help. The current sort of inflation environment is not helping either, but, you know, for the long term, most of these assets survive well and if you find the right zone, you talked about student housing, but there are a lot of interesting sort of Opportunity Zone development opportunities in student housing for student hotels. You go to many of the major sort of college towns and the quality of hotels is not there, and you have an opportunity to build something that is well, and many of them are Opportunity Zones because of the income sort of ratio of students. So, there are some contrarian opportunities that clients are asking for increasingly, and I think that there are some opportunities that people like yourselves may consider putting them in the portfolio as well.

Peter Ciganik: Yeah. And we have done student housing. There is one in the first fund, there will probably be more in the second. To us, it’s kind of anything you can live in, and if it falls into a great university campus and there is dire need for housing it’s just an apartment in a different format, but certainly fulfills that niche.

Maybe we switch topics a little bit to the format of the funds themselves and talk about diversification versus single deal. What’s kind of the landscape there, Jimmy, in terms of single asset versus fund investment?

Jimmy Atkinson: I’ve seen both work really, and fund sponsors come to me and they ask me that question, “Hey, should I pitch this portfolio we have as one huge multi-asset fund or should I break it up and, you know, pitch each project separately and take in money directly into a single asset fund?” And I don’t know that I have a magic answer really. I think it kind of depends. Different investors have different needs. If you have some sort of coherent strategy or investment thesis that you can weave across all of the assets, I think it might make sense to do a multi-asset fund. And certainly some investors want to be diversified into…you know, across, maybe it’s the same property type, but maybe it’s in different locations, maybe it’s in different city blocks in the same geographic location. Either way you get a little bit of diversification across multiple buildings, but then some investors really wanna know which specific building am I going to own a piece of?

So, I don’t really know if I have a really good answer there. There’s pros and cons either way, but you know, as an investor know that you do have options. There are multi-asset funds and there are single-asset funds. Oftentimes, a fund sponsor will present a multi-asset fund offering. Maybe you’ll really only like one or two of them, one or two of the deals in there. You can oftentimes go to that fund manager and ask them, hey, would you consider a sidecar deal on just this one building or just that building? And, you know, it depends on the fund sponsor, it depends on how much you’re bringing to the table, but they can oftentimes work with you to put together something where you’re coming in just on one deal. That’s what I’ve seen anyway.

Peter Ciganik: Yeah.

Kunal Shah: Yeah, and if I can jump in there. I agree both has worked and we have seen both sort of kind of deals. Our preference is the multi sort of asset portfolios of fund structure, it’s partly because, again, goes back to the investment fundamentals, right? One single property risk is much higher than diversifying that risk across multiple properties. You know, if you invest that across 10 to 12 assets, again, if you think from an investment perspective, you’re reducing the risk and that’s the number one focus of ours. We also like the fund structure from an exit perspective, right? When you are thinking about an exit of a multi-fund, in your case a REIT structure, right? You have more optionality. You can sell single individual assets when the tenure expires. You can potentially do a portfolio sale, a sale of like four or five properties together. You can go IPO if the markets are conducive.

So, there is just far more flexibility, you know, trying to IPO single assets or trying to sort of create a sales plan around one asset is gonna be very limiting. You are gonna have a very finite number of buyers and very finite sale process. So, we think that additional optionality is even more important because we don’t know what the speculation… We are speculating about tax laws. What will happen six months from now? If we don’t know what the hell is gonna happen in 6 months from now, we sure don’t know what is gonna happen 10 years from now. And so why even speculate on the risk there, let’s try to diversify and give ourselves more options and make sure that our clients have the best possible outcome depending on the conditions at that point. The tax law could change, the IPO market could change, but we know that more options leads to better returns.

Joe Scalio: Yeah. And the final regs that came out, as I said in January of 2020 really provided that maximum flexibility, which creates multiple different vehicles that you can have as your investment, single asset, multiple assets and we’ve seen all different types, and we deal with people who have specific funds like you do, Peter, but also people who’ve raised capital for specific asset deals. And you know, both have raised capital, both, you know, have worked from a capital deployment point of view. Obviously, we’ll know in time, you know, when we get to the exit, what the end results are on some of these. But, you know, we’ve seen capital flow in both cases and capital flow efficiently in both cases.

Jimmy Atkinson: Peter, I’ve got a question for you.

Peter Ciganik: Yeah, of course.

Jimmy Atkinson: Actually, I like playing interviewer sometimes.

Peter Ciganik: You’re the professional.

Jimmy Atkinson: I caught a lull in the conversation.

Peter Ciganik: Definitely.

Jimmy Atkinson: I want to hear what pushback do you get from your investors regarding the Opportunity Zone rules, the platform itself, especially the 10-year hold and how do you reframe that for them potentially. Because I think the 10-year hold oftentimes is looked at as a hindrance, but I think it could be kind of turned on its head and looked at as a big benefit potentially sometimes.

Peter Ciganik: Yeah. And that is most often the question, it’s easy to get into these, it’s harder to get out, and a 10-year timeframe, you know, it passes quickly, but seems like a long time. And my answer actually to that usually is that the government is paying you for that, the underlying investment, the real estate is what needs to make the return and hopefully it’s an opportunistic type return commensurate with the risk of development, which is what we’re doing.

But normally we would exit out of an investment like that in four or five years when the asset is completed, leased, what we call stabilized and sold. And that should deliver a 17%, 18% IRR, 1.8 times equity multiple. But with this legislation we have to hold it for another seven or so years. It’s a different asset because it’s a core like property that has already been built, doesn’t have risk in it, you know what the yield is. So, usually people pay something like 5% or 6% for that. And if you add 17% return over the first 5 years, and then 5% return over the next 7, you kind of come up with the return profile of this investment, which is 12% to 14% IRR.

Now when people say…when they look at that and say 12%, 14% 10-year horizon, it seems, you know, I should maybe be getting paid more. And that’s when the government comes in. The compensation for that long-term hold for that illiquidity and for locking you up for such a long time is that 3% or 4% incremental IRR that you get by not paying taxes. So, if you get a nice double-digit return over a decade, compounding is beautiful, right? You can almost triple your money if you grow something 12% over 12 for 10 years. But you have to wait a long time. They add about 3% or 4% to that. And to me that’s a fair compensation. So, that’s my answer. And it usually just goes back to, okay, well, what are the other risks? And that’s, you know, development risk, but that’s a different fundamental area.

Jimmy Atkinson: Sure.

Kunal Shah: I can jump in to answer one question as well, which is, you know, on our platform, we have 10-year products available all the time, right? When you invest in traditional private equity, real estate, distress opportunity. So, for our users, that’s never been a big issue. When they come to our platform, they expect the investment vehicle will be sort of long duration. The only caveat we had to present is there is some income coming from this, but there is no liquidity that will come. So, the liquidity is more backended. Whereas if you invest in a buyout or, you know, venture capital strategy, you may get some liquidity starting years four, five, and six. That’s an education, but to your point, that’s the only way if you want to, maybe save money on taxes, and to your point, government is paying you for that, this is the only way to do it. And so most people are fairly okay with that as long as they put less than 1% on the portfolio, right? If you’re a $10 million capital, you’re not putting a million dollars here, you’re oftentimes putting $100,000, maybe $200,000 capital.

Jimmy Atkinson: Sure.

Joe Scalio: I think the other thing that was embedded in what Peter was saying is, you know, we always talk about the gain being eligible to be excluded. The other part is it’s not only the gain, it’s the depreciation recapture. So, when people ask the question they had to Peter is, yeah, you’re holding this for a longer period of time, but you’re basically for those extra years getting tax-free cash flow. When we’ve modeled these out for the last three or four years, especially in the multi-family area, you know, what we end up telling people and usually people step back and take a second, we said, you know, pretax IRR is 12 and your after-tax IRR is 14. There is potentially, in most of these deals, absolutely no tax, not only on the appreciation, but on all your rental income and cash flows. And that’s kind of an element that, you know, people don’t think about, is this is the entire investment is potentially completely tax sheltered. And it comes out, you know, in the models we do in the multi-family area with the depreciation, because you don’t have to recapture the depreciation, that is also excluded on the backend. So, yeah, you may have to hold it for a longer period of time, but basically, you’re holding it in a tax-free bond for years 5, 6, 7, 8, 9, 10.

Peter Ciganik: So, we have about 15 minutes left. Jimmy, have we missed a question that you usually ask in your panels or?

Jimmy Atkinson: Well, I wanna talk about one more thing maybe before we turn back over. So, we’ve seen a market drawdown in the past nine months or so, I don’t know where GTIS gets a lot of its Opportunity Zone investors, you know, for other types of real estate tax programs… By the way, we kind of glossed over the fact that Qualified Opportunity Funds can invest in businesses as well, but the fact of the matter is the vast majority of Qualified Opportunity Fund investing is done through real estate.

So, maybe we can talk about business on a different panel on a different day, or you can come find us afterwards and talk to us about it. But, you don’t necessarily have to have gains from real estate to do Opportunity Zone investing. Oftentimes, you’ll get stock investors to come in, which kind of provides them with a nice diversification method. They can get diversified away from the stock market and into potentially non-correlated real alternative asset like real estate. Right? Have you seen those types of investors, the capital coming in shrink a little bit over the last few months, or is that a concern of yours going forward because of the drawdown in the broader stock market?

Peter Ciganik: I wish I had a crystal ball here. We have not yet, but speaking of a six-month window, we are seeing investors who are deploying gains from March and April. And if they were smart and took some chips off the table, they’re looking at pretty sizable gains. It’s only six or seven months since we had a record stock market. It’s unbelievable what’s happened. So, I’ll punt on that answer, because…

Jimmy Atkinson: Maybe it’s a lagging indicator, right?

Peter Ciganik: …I don’t know. It certainly is a lagging indicator and we might start seeing much lesser flows as the gains dissipate, frankly starting in May, June. But we had a great start to fund II and have enough capital to deploy it in a diversified manner. It had a bigger initial close than the first fund. So, I honestly don’t know, but I would not be surprised given the drawdown, a lot of our capital sources came from equity markets, and yeah, we’re not looking at a ton of gain lately. There are other sources, we’re seeing business sales that either happened during the peak or are still happening, and you have well over a year to deploy that. If it comes on a K1, and Joe maybe can speak to that, you have plenty of time. It’s not just 180 days like with stocks or bonds.

If you sold real estate, really anything that comes on a K1, you have well until next year, even if it was done, you know, several months ago. So, we’re still seeing that business sales, but a lot of the gain came from equities, and that’s one of our, you know, frustrations with the program. Everything was really quite smart and well-conceived in the original legislation except for this one thing, actually two.

One, why did they have to say that it’s gotta be gains, right? Why can’t it just be free cash that you could invest for these communities and support them? And the other frustration is they said it has to be invested within six months. The word invested has caused so much heartbreak and misery because it should have said committed within six months. Developments do not invest money in the moment of time, they invest over time. And if they only had said commit within six months of gain, we would have plenty of time to call the capital. We can’t do that. We have to take the money right away, day one, because the word invested as the treasury has interpreted it means it’s gotta be put into the QOF on day one. So, those two frustrations, an otherwise very innovative piece of legislation and a great program.

Let’s then switch to the audience. If there are questions.

Jimmy Atkinson: Can you repeat his question?

Peter Ciganik: Repeat the question just so everyone’s…

Joe Scalio: Yeah. I think you’re saying the new legislation that’s potential, would it be retroactive for investments that were made? The answer is it would change the time period of when the deferral would be. So, by changing the time period, investments that were made in 2021, where people did not think they could get any of the reduction benefit, they would get the reduction benefit. So, the way they would change it would be any investments made prior to December 31, 2022 would get a 15% reduction. Any investments made from January 1, 2023 to December 31, 2023 would get a 10% reduction. But everything in the past, if you invested in 2021, and you said, oh, I missed a reduction, you would be able to get that back.

This is what was a phenomenon that happened in 2021, December 31, 2021, and I think you experienced this, is because the five-year period was expiring, a lot of people wanted to put their money into funds on December 31, 2021.

Jimmy Atkinson: There was some urgency to get it done.

Joe Scalio: To get it done. We may see that again. If this legislation gets passed, you know, there will be, I think people running to get their gains in on December 31, 2022.

Jimmy Atkinson: Assuming it gets passed this year.

Joe Scalio: Assuming it gets passed this year. That marriage that Peter talks about of, hey, if you got K1 gains, you got extra time, that is correct if you’ve got K1 gains, but the K1 gains will start December 31, 2022. So, if you had a gain that happened in earlier part of the year, that will be the first day you could invest it from a K1 point of view. And we saw this phenomenon happen in 2021, when people were rushing to get their investments in on that specific date, which is the first day they could put it in. And I think you probably experienced a lot of people putting money into your fund on that specific day of the year.

Peter Ciganik: Yep. I’ll repeat the question. If you are a New York resident today and New York is not a participating state, meaning you cannot use your New York State capital gains because they kept it out of the program, unfortunately, you can only use federal gains. What happens if you now move to Florida in the intervening period, I’m assuming in the next couple of years? How does the deferral play out in 2026 as well as, I guess the final gain exclusion if you become a Florida resident, is New York State coming to get their taxes? You paid New York already.

Joe Scalio: I think Florida’s okay. Okay. It’s more, if I think you move from, like, let’s say New York to Massachusetts, okay. There, you paid gains for New York purposes now, and now you become a Massachusetts resident, you have deferred gains that you’re picking up on your federal return, you know, are you paying it twice? That’s I think the big question.

I mean, I think it’s going to be answered. I think states are more concerned of, like, the opposite, where you defer taxes in a state like Massachusetts now and you quickly move to Florida and Massachusetts says you deferred it in 2022, and now you’re a Florida resident 2026. You know, the rules on this haven’t caught up from a state point of view. The only thing that’s equivalent is there are certain rules around deferred comp of when you earn comp in a state and then you move to another state. Most states have not applied that yet.

So, you can theoretically defer your gains and become a resident in another state, and if you’re a resident of Florida, when that income’s recognized, you may not pay any state tax on it. I would think that some of the states may start to maybe say, if you leave the state, you’re gonna have to pay tax on this or do something, but right now you can slip through the cracks, I guess is the best way to describe.

Peter Ciganik: California came up with a plan to text people on exit. This would be one of those that they could…

Joe Scalio: Yes, conceptually 1031 exits.

Peter Ciganik: They would say you invested when you were a resident in California. So, 10 years from now…

Joe Scalio: Yeah.

Peter Ciganik: You know, California, I wouldn’t be surprised if they come up with something that, you know, knocks on your door that you invested back then you now have a…

Joe Scalio: Now you have to pick it up.

Peter Ciganik: Any other questions or anything in your sleeve of questions, Jimmy, that we have just two or three minutes left.

Jimmy Atkinson: Oh, we got…

Peter Ciganik: We do?

Jimmy Atkinson: Let’s do an audience question there.

Peter Ciganik: I’ll repeat the question. Speaking of the proposal that would pair the extension with the recalculation of zones and potentially creating some new ones while taking some away, has anyone looked at the actual creation of employment opportunities and all the criteria that the government wanted to advance with this program? Obviously they’re giving a big tax break. They want the communities to grow, not just the managers to make a nice return.

I’ll give a really short answer, is not really at the government level at all. There just is no level right now. They don’t even have the data reporting and that’s part of what they’re trying to fix with this extension that we would be required to report. But we as managers have long ago volunteered to do that. So, we are tracking…if you look at our ESG report, we have a sustainability report for the fund last year. We have one coming out in the next few weeks. We are already tracking all the employment statistics, poverty level, job creation.

Our funds in the past have been ranked at the top of the GRESB survey, so we review the environmentals very strictly and look at things like water usage, power efficiency, waste, and all of that. It’s in the report and we are doing it for our ZIP codes, for our census tracks as to what the improvement has been. I can say that it’s already improving. Maybe that’s a factor of where we’ve invested or the economy. No one’s aggregated that. As far as I know, there’s not been a comprehensive study of the impact of these zones and what then might result in redistribution of zones because maybe some of them are not fulfilling the spirit of the problem. Have you seen any…

Jimmy Atkinson: Right. Yeah, I can add to that a little bit. So yeah, any really good Qualified Opportunity Fund manager, and Peter and his team at GTIS are doing this, they are getting ahead of the legislation. They’re already doing some level of impact reporting or transparency reporting to show that they’re creating X number of jobs or Y amount of economic impact, or delivering, you know, a certain uplift in the local tax base in these communities that desperately need this private capital to flow into it, for a couple reasons.

One, because they wanna be ready when this legislation is passed, two, they wanna show their investors that they are doing the good that the legislation intended. And I think the third one is we wanna tell success stories as an industry so that Congress has some reason why they would want to extend the program.

But there is one study that I’ve seen by a couple of professors out of Cal Berkeley, if I recall correctly, and it’s called, let’s see, the last names are Kennedy and Wheeler, and they had access… They work with the joint committee on taxation, so they were able to get access to aggregated QOF form 8996 data for the first couple of years of the program, 2019 and 2020. Their overall review of the program is rather unfavorable, unfortunately. I think they had an agenda going into it, I suspect. So, their review of the program is a little bit clouded by that, but there is some good data in there that they’re able to pull out and some good insights in there if you wanna look that up. Kennedy and Wheeler, that study. Anything else that comes to mind for you, or?

Joe Scalio: No, the only thing I think I wanted to add real quick is, when the program came out it had these disadvantages and it was your capital had to be patient, you had to have less debt, more equity. You had to have a 10-year hold. And I know in all the presentations for all your people this morning, Peter, those themes came out as kind of how you’re looking at making current real estate investments that have a little bit less leverage, a little more patience, a little less downside. And it would seem if those themes are gonna play out in the next couple years, Qualified Opportunity Zone investments in real estate are marrying up a little bit more with the way the program’s designed, of how people wanna deploy their capital. So, what was, you know, pre probably 2021, 2022, hey, we wanna be able to, you know, get out early, it’s got too long of a hold, it’s got too much equity versus debt, all those things now seem to be more positively spun in all of your real estate investments and all those themes came out in all the earlier sessions today.

Peter Ciganik: It’s true. I think investors have really appreciated the low leverage that we are deploying with our investments conservatively. And that’s something that came from the last crisis from the GFC, when you could have leveraged something 80%, debt was available back then, but then prices dropped 30%. And if you had 80% debt and your value was at 70%, the 10% is when the bank came and took your asset. And you had never had a chance to recover if you went through a foreclosure.

If you kept your debt at how we do it at about 50, it wasn’t a great time, but we got through it and it took about two years to come back and another two or three years to then double the values. So, if you can survive these turbulent periods, I think it goes back to Mohamed El-Erian’s, I love that saying, “You just can’t make a mistake that’s fatal and that ends the course.” Right? It applies to real estate. Just avoid those kinds of mistakes.

I think we just about took our time. Our panelists will be around for a little bit, so if you have any additional specific questions, please find them. We are gonna now move to review the performance of the first fund, so I’ll invite my partner Amit here and thank our panelists for being with us this afternoon. Thank you so much.

Kunal Shah: Thank you.

Jimmy Atkinson: Thank you.