On March 23, 2023, OZ Pros founder Ashley Tison joined OZ Pitch Day for another round of “Ask The OZ Expert.” We peppered him with live Q&A from our audience of High Net Worth investors, and he didn’t skip a beat.

Today’s podcast episode is a replay of this segment wherein Ashley covers a wide range of topics, including multiple tax incentive stacking, the impact of the banking crisis on OZs, insurance risks of OZ developers, and much more.

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Episode Highlights

• The treatment of pass-through earnings from business activity in OZs.
• The impact that the collapse of Silicon Valley Bank and Signature Bank may have on the Opportunity Zones marketplace.
• How to borrow from a QOF.
• The interplay between 1031 exchanges and Opportunity Zones.
• Main exposures and insurance risks for Opportunity Zone developers and investors.
• Plus, many more topics.

Guest: Ashley Tison, OZ Pros

• Ashley Tison on LinkedIn
• OZ Pros – Special Offer For OZ Pitch Day Attendees

About The Opportunity Zones & Private Equity Show

Hosted by OpportunityDb and WealthChannel founder Jimmy Atkinson, The Opportunity Zones & Private Equity Show features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in Opportunity Zones and the broader private equity landscape.

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Show Transcript

Jimmy: Mr. Ashley Tison at OZPros. He’s also affectionately known as the OZ Sherpa. That’s a great moniker. I didn’t give it to him. I wish I had. But Ashley’s rejoining right now. And this segment is “Ask the OZ Expert,” or sometimes I like to refer to it as “Stump the OZ Attorney.” Ashley looks like he’s joining us from the forest or the mountains. Where are you today, Ashley?

Ashley: So, it’s funny, Jimmy, is that, you know, we used to play “Where in the World is Carmen Sandiego?” And I know that we talked about “Where in the World as Ashley Tison?” Today, I’m not in any place exotic or anything like that. I’m at a golf course. I’m gonna show you guys the background of that, which is actually not in an Opportunity Zone, because it would be a sin business. But I can’t get there to show you guys the, you know, the fantastic sunshine here in Charlotte at the golf course, but my background is the proverbial tax savings mountain, right? That everybody on this call wants to get to the top of, to the summit, right there. And so, that’s where we’re leading everybody, sherpa-style today.

Jimmy: I love it. So, this segment, we’re getting started a little bit late. We’re gonna end it on time, though. We’re going until 1:45 p.m. Eastern Time, so we’ve got exactly 21 minutes. We have a lot of questions already that have been coming into the Q and A throughout the course of the day. There’s a couple dozen questions in there already. If you do have any questions on any OZ topic that you could possibly conjure up, send it into the chat or into the Q and A, and we’ll throw it at Ashley. First question for you, Ashley, I’m gonna try to stump you right away.

Ashley: I was just gonna say, I’m gonna make good on my dunk tank, at some point in time, where I shoot this in a dunk tank, and if somebody actually stumps me, it drops me in the water. But all right, let’s hit the first one.

Jimmy: Oh, I also wanted to mention, I did get a message from Michael not long ago that said that he did hit OZ Pitch Day Bingo on his OZ Pitch Day Bingo card. We’ve distributed some bingo cards to the first 25 people who got here this morning, and Michael’s our winner. He hit bingo. Maybe we’ll get a screenshot of that at some point later. But question from David. “If you have an OZ that is also in an Enterprise Zone,” I don’t know if you know about those, Ashley, “and you’re gonna turn it into a metro district, are there additional tax incentives that can be offered to investors to lower the tax burden? Can you stack multiple tax credit programs and tax investment programs?”

Ashley: Absolutely. And so, we actually work closely with Gordon Goldie inside of the OZworks Group, and he’s gonna be doing a webinar on the New Market Tax Credit program, and how you go about applying for that, how you can lever and layer the incentives. And so, the answer is absolutely yes. The thing you need to be careful from in the New Market Tax Credit, relative to the Enterprise Zone, is that you really need to have a substantial commercial component to it. And so, it can’t just be, like, a pure residential play. But assuming that, you know, I think he said he was gonna do a discotech or something. So, you know. I think that that’s what he said he was doing, but that would be fantastic.

Jimmy: Well, this question did come in from Super Dave, so that wouldn’t surprise me.

Ashley: That’s right. So, yeah, you can absolutely stack those tax incentives.

Jimmy: Good. Will asks, “I’ve read that the pass-through earnings from business activity in OZs is also tax privileged. Is that true? Can you clarify that point?”

Ashley: So, I’m assuming that you’re talking about income, and unfortunately, no. So, the income that’s coming in off of your Opportunity Zone deal is gonna be taxed at normal rates. Now, one of the things that is available inside of that is that once you get money behind the Qualified Opportunity Fund veil, like, once you get capital gains into that entity, any money that gets generated, whether it’s through a refinance or whether it’s through cash flow, is eligible to be reinvested. So, if your pass-through entity is generating income, you could reinvest that into Qualified Opportunity Zone property, and be able to take advantage of channeling that income into tax-free assets, and then exit it all, you know, capital gains-free in 10 years.

Now, important about that is, is that you’re effectively going to be generating phantom income through that, because it’s a pass-through entity. And so, whatever taxes happen are gonna come up to the investors inside of that entity. But it’s certainly an option, certainly something that we’ve explored at length in the bootcamp, because I think that savvy folks realize that this it’s kind of, because you don’t get all of the income on it, but it’s like a super Roth IRA. And so, how can you take the Opportunity Zone and make it more walk and talk like a Roth IRA? And that’s one of the strategies.

Jimmy: And we’re gonna be talking about that very topic, the concept of the super Roth IRA, in our afternoon discussion, “Wealth Development Strategies with Opportunity Zones.” We’re gonna be talking about that quite a bit. Silicon Valley Bank, I know that was a term on the Bingo card. Let’s talk about SVB and Signature Bank and the other banking pressure or turmoil, you may term it. Do you have any thoughts on how that may affect Opportunity Zone investment, either positively or negatively? Another question there from Super Dave.

Ashley: Yeah, I think that, I mean, you know, it’s just like anything else, right? It creates a hubbub and concern for folks relative to the liquidity that Opportunity Funds and QOZBs have on their books as they raise money, and what they’re doing relative to strategies with respect to protecting that liquidity. And so, as a sponsor, you wanna make sure that you’ve got your ducks in a row, and that you’re communicating with your investors and your prospective investors about how you’re mitigating that risk.

And so, I know that most of the sponsors, and certainly I think the ones that are on here today, have really robust programs for how they balance their funds across multiple accounts, even if it’s not technically in multiple different banks. They’ve got it set up so that it will get FDIC protection. And I think that that’s a crucial element. I think that one of the opportunities here is for folks to be able to point out to this stuff, and point out how you’re dealing with this issue, and utilize it as an opportunity to reach out to your investors and your perspective investors about what you’re doing in order to potentially mitigate this risk.

Jimmy: Excellent, Ashley. Well, let’s keep moving along with the questions here. Can I do a 1031 exchange into an Opportunity Zone fund? What’s the deal with the interplay between 1031s and OZs?

Ashley: The answer is no, because you either 1031 or you elect under Section 1400Z, which is the codification of the Opportunity Zone program, and you can only make one election for a capital gain. And so, one of the things that Opportunity Zones presents, though, is for a failed 1031 exchange, if somebody’s gone into a QI, and they’ve failed to be able to close on their property, or, and this is where it gets a little bit tricky inside of that, is if you’re going to plan on doing that and you want a backstop hedge of using the Opportunity Zones, only designate one property, because then your QI will refund the balance of it to you prior to the 180 days. Because the 180 days that they’re required to keep your money is literally a day past the 180-day requirement of when you invest inside of an Opportunity Zone.

The Opportunity Zone starts the day of the sale, the QI starts the day after. And so, that’s really relevant for computing that out. Now, the great thing about the Opportunity Zone program is that you don’t have to use a QI. Money’s fungible. And so if you’ve got money tied up with a QI, and you’ve got other money that you can pull in order to be able to put it in there, then you can offset that and drop it in if for whatever reason it doesn’t look like your 1031’s gonna happen. But you cannot twine the two.

Jimmy: Good to know. Ashley, I just scanned your QR code. You’ve really upped your game. This is impressive. It’s an offer for…

Ashley: I tell you what, man, I got special deals going on for everybody that’s at OZ Pitch Day, so scan that sucker, go to the zone, and schedule your strategy call. We got webinars on there. We got other resources. I think we’ve got links to some of our other, you know strategic partners that are doing really cool tax mitigation stuff. And so, Jimmy, I’m trying to play in your world, man. Your game is unbelievable on online, and so, I’m aspiring to Jimmy Atkinson’s status.

Jimmy: No, it’s a big step up from giving us a link that didn’t work, which I think happened a year or two ago when you did one of these segments.

Ashley: It would not surprise me.

Jimmy: Now you got a QR code, the link works, it looks great. Wallace asks, “If I wanna borrow from my QOF, is there a limit, and when does it have to be paid back? What’s that process look like exactly?”

Ashley: Awesome question. There is no limit. But the thing you need to be concerned about if you’re borrowing from your QOF, is that when you invest your money into your QOF, you’ve gotta hit a 90% investment standard. And you get a six-month break on your first test, but it’s effectively gonna shift you to the next six-month test. So, if you’ve invested between January 1st and June 30th, then your first test is gonna be December 31st.

So, if you’re funding it right now, you would be able to effectively borrow against your QOF until December 31st of this year. If you fund it after July 1st, that’s gonna kick you to June 30th of next year. And so, you could borrow it from, until June 30th of next year. You wanna make sure that you’ve got it in something liquid enough to put it back into your fund, so that that way, you can drop it down into your QOZB, and so, you can effectively hit that 90% standard. So that’s the crucial piece of that when you’re borrowing from your fund.

The other piece is, is that if you’re borrowing from your QOZB, if you were planning on… So, number one, I don’t recommend… So, I’m the OZ Sherpa. I’m gonna try to give you middle-of-the-road advice, and don’t do it back-to-back. So, technically you got 31 months inside of your QOZB that you could borrow the money. I highly recommend not doing that. Do it for the first 18 months. If for whatever reason you have to do it for a follow-on, and you wanna get the remaining 12 to 13 months out of that, make sure it’s at different terms, because the IRS could impute it as an extension of the original loan.

Jimmy: All right. Great answer. Jack’s got a good question here. Let’s turn to Jack. He asks, “From a developer standpoint, what are the main exposures and insurance risks that you face, as well as just insurance risks for Opportunity Zones in general?”

Ashley: Yeah. And so, that’s a great question, and I’m glad he asked it. So, there’s all of the stuff that you have relative to just doing a development. You got property risk, you got the storm risk, you got terrorist risk, you got COVID, you know, pandemic risk, all that kind of stuff. But then on top of that, you got the risk that the stance that you’re taking could be invalidated by the IRS, or that something in the nuance of that could be an issue that comes up later. So, number one, if you can get insurance for that, that’s clutch. I do know that there’s a number of insurance providers. There’s one main one that actually has a policy that insures exactly that.

The other piece is, is that you wanna make sure that you disclose all of the Opportunity Zone-specific risks in your private placement memorandum, because you wanna make sure that your investors are aware that there’s extra risk associated with doing an OZ.

Jimmy: All right. Michael has a question here. Michael, I’m gonna reword your question a little bit. If I’m interpreting it incorrectly, please let me know. He says he’s already deposited some gains, he’s deployed some gains… I’m sorry. He’s invested some gains into his own Qualified Opportunity Fund, and he’s deposited those gains into his QOZB from the QOF. Can he still invest more funds from his QOF into a different QOZB?

Ashley: So, that’s unequivocally yes, right? So, he could take money, if he’s got it from his QOF, and he’s got extra cash or he puts new money into his QOF, that can absolutely go into another QOZB. What he could also do is if, for whatever reason, he doesn’t have new money, he could take the money out of his existing QOZB, pull it up to his QOF, and then invest into another QOZB. We see that happen all the time, because business plans change, right?

The risk dynamic has substantially changed, where you’re like, hey, listen, I don’t wanna do this myself anymore. I wanna put it with a professionally-managed fund, who’s operating the QOZB, and who’ll accommodate a direct investment. And so, you can put it straight into their QOZB. If for whatever reason they can’t accommodate it, and you wanna put it into their deal anyhow, what we’ve had people do is distribute the money up to their QOF, then out to themselves, and then make the investment into the new deal.

I know that there’s another substantial fund that’s out there that’s actually doing mergers. If it’s a single-asset QOF and QOZB, and they don’t have any real estate, it’s just been money that they’ve deployed, they’ll actually merge your entity into theirs. And that’s a really cool result, because then, you’re like, hey, listen, I don’t wanna fool with this anymore. I wanna go with somebody that’s professionally managing this, and effectively, they don’t restart your 10-year clock. If you go the route where you distribute from your fund and trigger an inclusion event, that’s gonna restart your 10-year clock, but for some folks, it’s worth it.

Jimmy: Great answer once again, Ashley. I don’t think I’ve stumped you yet. Let’s see if I can find one that might stump you here. Let’s see. Harold. We’ll go to Harold’s question. Harold asks, “If we own a parcel in an Opportunity Zone fund, and want to develop it, how can we structure something so that we can roll over the step-up in basis as a gain into the QOF created to develop the property? Did you get all that?

Ashley: So, the answer is you can’t, right? Because the legislation specifically precludes circular transactions, with the exception of one arrangement and one way that we’ve been able to solve this. If you were to sell the land to a third party ground lease company, and that third party ground lease company was to lease back either to your QOF, or even better, to a new QOZB that you form to do the improvements on it, you’ll be able to have a third party, from a capital gain from an unrelated party, that you can drop into your QOF. And now, the property is going to be, it’s gonna be qualifying as well, because you’ve ground leased it from a third party.

And then if in the terms of that ground lease, you wanna buy it back at some point in time for some kind of premium, you can absolutely do that because it is a third party. Now, if you’re gonna ground lease it yourself, which you could theoretically do, to, like, a new fund, it’s a little bit trickier, then you need to make sure that there aren’t any prepayments, that it’s at arm’s length and that kind of thing. But the third-party piece of that solves that problem.

So, we were really excited when we came across that. There’s some folks that are in our OZPros bootcamp that are actually working on establishing a third-party ground lease company in order to solve this problem, which continues to come up, right? On the 2000 strategy calls that I’ve had, I can’t tell you how many times this has come up, Jimmy. And so, hopefully we’ll have that ready to roll. But in the meantime, if you’ve got somebody that you could plug into that spot, you could do it that way.

Jimmy: That’s a lot of strategy calls, Ashley. Hey, Alex asks the question about 2026. There’s a lot of deadlines flying around out there. So, he asked, “Does all Qualified Opportunity Zone business capital need to be deployed before 2026?” Maybe you can speak to some of the deadlines and the dates.

Ashley: No. So, December 31st, 2026 is when you have to generate the gain. That’s when gains can be eligible to be reinvested, which, if it came through a K-1, you could have all the way up until September 10th of 2027 to actually put into a Qualified Opportunity fund. So then, once you get into a fund, then the fund’s got between six months and a year to put it into a QOZB, and then the QOZB has 31 months to deploy that cash.

Now, once you have capital gains inside of a fund, there’s nothing that precludes you from borrowing money, from loaning money into your QOF or QOZB, to do additional deals. There was some confusion about the zones expiring in 2028. I specifically asked that question to Dan Kowalski, who is responsible, is the chair of Treasury who wrote the regs. And he said, “No, man. We took care of that. We took care of that issue. You don’t have to worry about that. You can continue doing deals.” I was like, all right, it’s from the man himself. I’m going on Dan’s word.

Jimmy: Dan’s the man, as we like to say.

Ashley: That’s right.

Jimmy: Let’s talk about non-qualified financial property. And if you wanna introduce a Naughty by Nature reference, I think, Ashley, you and I did a rap about “NQFP, yeah, you know me,” at one point?

Ashley: Yeah, you know me.

Jimmy: So, the question here from Scott is can you speak to the kinds of securities that can and can’t be held in that 10% remaining in a QOF as an investment after pushing 90% down to the QOZB level?

Ashley: So, there’s actually nothing inside of that 10% at the QOF level. There’s no restriction. You could put it into anything that you want. Now, the question is, is whether or not, and as you put it into that, whether you have purchased it or whether you have contributed as capital. So, once again, Gordon Goldie and the experts inside of the compliance meeting that happens once a month inside of OZworks Group, which is a great organization. If you guys haven’t heard of it, you’re not a part of it, Chris Cooley runs that, and it’s a chance to kind of get involved with other Opportunity Zone folks and that kind of thing.

And that’s one of the things that we bounced around is how does that work? How do you lock in that value, particularly if you’re investing into, like, a private placement or into another entity? And the problem is, is that if you fund it in as equity, then it’s going to adjust to fair market value every six months. And so, the key is, is that you need to purchase your interest in a private LLC, in order to lock in. And I think that that holds the same thing as it relates to your securities.

Something worth asking Gordon about is if, like, marketable securities, because there is a market value on that, if those lock in at your unadjusted cost basis, or if those adjust every six months. So, there, we finally found one, Jimmy. Stumped me on that one. I don’t know the answer to that specific one. And so, we’re gonna go to the experts, and we’re gonna find that out, and we’re gonna have that one ready to go for next time. And I would be really wet right now if I was in that dunk tank.

Jimmy: Yeah, you just got splashed in the dunk tank there, Ashley. Hey, we got time for, I think, maybe two more questions, one or two more questions. Let’s see. Alan wants to know, “Can IRA money invest in a QOF since it’s not coming from capital gains?” Question about that.

Ashley: So it could, right? So, you could absolutely invest into a Qualified Opportunity fund. You would just be a non-qualifying investment. And so, if you like a deal, that’s actually a good way to make an investment into a deal if you don’t have capital gains. But because the IRA is not gonna have capital gains, it’s not gonna get the benefit of the Opportunity Zone, right? It’s not gonna get the step-up because you already effectively have it inside of the IRA. So, if you’re investing non-qualifying, that’s fine. If you’re trying to get the benefit of it, then no, get a capital gain from somewhere else, somewhere in your non-deferred-tax portfolio, taxable portfolio.

Jimmy: Good. We had a link, I’m sorry, a question from somebody who asked, “What is the link for your bootcamp?” So, that’s gonna be ozpros.com/pitchday, or you can scan the QR code, and I’m posting it in that Q and A section right now as well. Let’s see.

Ashley: And I just posted it in the chat.

Jimmy: Perfect. Thank you, Ashley. Ashley, do you see any questions that jump out to you in the last minute or two here I’ve been moderating?

Ashley: We’ve got that one that says how do we extend the time on it? I’m an LP in a number of QOFs that have been around more than a year. So, wondering how they extend their timeframe to invest in dirt? So, if that QOF has not invested into something, either through a QOZB or directly, you need to be very concerned that they’ve actually met the 90% test. Hopefully they have. But if they were coming up to the end of that, one of the easy ways is to drop it down into a QOZB. Or, alternatively, if it’s your own QOF, and you’re like, listen, I’m done, I don’t wanna fool with this, you can distribute it out to yourself. That triggers an inclusion event, and then you’ve got 180 days to reinvest that into another QOF if you so choose.

Jimmy: All right. Perfect. Well, Ashley, we are running outta time. We have a ton of questions still in the Q and A. If you want to, you can simply turn off your camera and mute your microphone, turn off the camera, in a moment, and I’ll let you stick around as a panelist during our next presentation, so you can answer all of those questions in the Q and A if you want to. Otherwise, how can folks reach out to you? What’s the best way to get in touch with you?

Ashley: So, literally, just scan this code or go to that link, and you can set a strategy call with myself, or you can join bootcamp. And I think the bootcamp is one of the greatest values out there. There is no other place that gets together on a weekly basis with the level of brain power that we have inside of bootcamp, to be able to answer Opportunity Zone issues, to be able to strategize. And we’ve got people in there from beginner to advanced. So, we hit 101 questions to 401 questions, and you learn a little bit with everybody’s question. So, I think that that’s one of the greatest values, and you can sign up for that at this QR code or in that link that’s in the chat. And then we also set up QOFs and QOZBs for folks if they’re interested in that. And so, look forward to seeing you guys on a strategy call, and leading you to the top of Mount OZ.

Jimmy: Which is right behind you, conveniently enough.

Ashley: Exactly. It’s actually kind of a little halo right there, right? I didn’t even see that, you know. And trust me, that’s not because of anything I have been doing or not doing recently.

Jimmy: All right. We’ll save that for another discussion another time, Ashley, but thanks so much…