When raising capital for an Opportunity Zone project, there are important practical and legal considerations for OZ project sponsors and Qualified Opportunity Fund managers to understand.

On today’s show, OZ Insiders founder Jimmy Atkinson details the implications of offering an investment security, and the five critical things that every sponsor needs before offering a Qualified Opportunity Fund to investors.

Episode Highlights

• A high-level overview of how Opportunity Zone deals are typically structured to accept capital from investors.
• How the Howey Test can be used to determine whether a Qualified Opportunity Fund rises to the level of an investment security, subject to the Securities Act of 1933.
• Best practices for limiting your liability as a GP (or OZ project sponsor), with PPMs and Subscription Agreements.
• Examples of how to structure sponsor fees and waterfall distributions.
• Securities offering exemptions compared: Reg D 506(b) vs. 506(c) vs. Reg A+ vs. Reg CF.

Featured On This Episode

• OZ Insiders
• OZ Insiders Upcoming Events

About The Opportunity Zones Podcast

Hosted by OpportunityDb founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

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Show Transcript

Welcome to today’s webinar, sponsored by OZ Insiders. I’m Jimmy Atkinson, the founder of OpportunityDb. I’m also host of the “Opportunity Zones Podcast,” and co-founder and host of OZ Insiders, and today’s webinar is “How to Offer a Qualified Opportunity Fund to Investors.”

So, if you have an Opportunity Zone deal that you’re looking to raise equity for, and you want to know how to put together a fund, and actually offer it, the practical considerations, how to structure it, and the legal implications of offering a security to investors, this webinar is for you. So, before this webinar ends, you’re going to learn a lot.

I’m going to show you, among other things, top-level overview, though, these are the main things I’m going to show you, some best practices for limiting your liability as a sponsor or as a GP, using private placement memorandum, and subscription agreements. You’re also going to learn about how to structure sponsor fees and waterfall distributions. I’ll walk you through a couple of examples.

And then we’re going to take a look at the different types of securities offering exemptions. We’re going to compare and contrast Reg D, versus Reg A+, versus Reg CF. Spoiler alert, you’re probably going to want a Reg D. And then I’m going to give you an overview of my Opportunity Zone mastermind group, in the second half of the presentation today, and also show you why OZ Insiders might be a good fit for you.

Chances are, if you’re here, you care enough about OZs to learn about this topic, you may be a very good candidate for joining OZ Insiders. It’s not for everyone. But I’ll kind of walk you through it, and tell you a little more about what we do there. Quick legal disclaimer before we officially get going. As always, nothing we do here is considered investment advice or legal advice or tax advice. Please consult with a professional before making any decisions.

Let’s dive in. This chart shows the S&P 500 over the past five years, up until about an hour ago. I pulled this just a little over an hour ago, at 10:59 a.m. Eastern Time. You can see, this is why I’m so excited about Opportunity Zones, or I should say, this is one of many reasons why I’m very excited about Opportunity Zones, in the present, here and now.

The stock market is hitting new highs. It’s up 82% over the last five years. Think about all the capital gains that are locked into stock market investors’ portfolios over the past few years. We’ve had a few dips here and there, but unless you have your head in the sand, you probably are aware of the fact that the stock market’s doing very well.

It’s trading at all-time highs and that leads me to believe there’s a lot of gains out there. If you, as an Opportunity Zone deal sponsor, can tap into some of those gains, there’s plenty to go around to help get your deal funded. Thank you to Ashley Tison for letting me borrow, or steal, however you would term it, this slide from OZPros.

Many thanks to Ashley Tison and OZPros. This is Ashley Tison’s famous, or infamous, Opportunity Zone cheat sheet, Opportunity Zones on a page, as he calls it. And if you’re attending this webinar today or you’re listening to this podcast episode later on, you’re probably down here, right. You have some sort of Qualified Opportunity Zone business property.

You have an Opportunity Zone asset. You have a deal that you need to get funded. Maybe you own vacant land and you’re going to do ground-up construction on a new building. Maybe you have an old building you’re going to do a tear-down or a substantial renovation on. Maybe you have a startup business, or some sort of venture capital-based business that is located in an Opportunity Zone.

You need funding, you need equity, and you want to know, well, how do I offer an OZ deal to investors? So, at the very top here is investors. This is where the investors come in. And investors are incentivized to invest in OZ deals through Section 1400Z, which outlines the Opportunity Zone tax incentive. I won’t get into the details of what that is.

I’ll assume you already know. And if you don’t, you can go through some of my previous recordings, listen to my webinar, listen to my podcast, about the basics of OZ investing. But investors here at the top, who trigger capital gains, are highly incentivized to invest into these deals. They have to do so through a QOF, or a Qualified Opportunity Fund. And that fund then holds a portfolio company, a QOZB, which then holds the actual assets, the deal or portfolio of deals that you want to raise equity for.

But the big question is, and a large part of what we’re going to be discussing today, is going to pertain to securities law, and securities law implications on you personally, and on your fund. So, when does a QOF or a QOZB offering rise to the level of a security? When do you actually have to start thinking about securities laws?

There was a U.S. Supreme Court case from 1946, SEC v. Howey, that defined exactly when an investment becomes a security. And I’m going to read this entire quote here. It’s from the legal decision, from 1946. “An investment contract, for purposes of the Securities Act,” and that’s the Securities Act of 1933, “means a contract, transaction or scheme whereby a person invests his money in a common enterprise and is led to expect profits solely from the efforts of the promoter or a third party.”

And this is known as the Howey Test, and there’s four criteria, or four prongs, of the Howey Test. And if you’re offering equity in an OZ deal, to investors, and it meets each of these four criteria, then congratulations, you have a security. And the four criteria are, one, an investment of money, two, in a common enterprise.

Now, how that’s defined is a little bit murky. I won’t get into that. Three, with the expectation of profits, and four, those profits are derived from the efforts of others. So, if you’re raising capital from an outside investor, and he’s giving you his money, he writes you a check for $100,000, he’s expecting you to run a business, you’re going to be the one putting in the effort, and that business is going to profit, or at least there’s an expectation that there will be profits, you have a security.

So, the only time, really, I think, when a QOF doesn’t really rise to this level of security, doesn’t really rise to the level of you needing to worry about securities laws is if it is a self-funded Qualified Opportunity Fund. If you and you alone, or maybe it’s you and your wife, are doing a privately-funded, closely-held Qualified Opportunity Fund, you’re funding your own deals, you probably don’t need to worry about this stuff.

Once you get friends and family involved, then it becomes a little bit of a grey area. Legally speaking, technically speaking, even with friends and family, you have a security. And you should probably go to some extent to protect yourself against legal liability from being sued by your friends and family if something was to go awry.

So, it kind of depends on, well, how close are you with these friends and family, this friends-and-family raise? If you’re raising from outside investors, you have met before, or you’re raising through registered broker-dealers, you absolutely have a security, and then you definitely meet these four prongs, and you need to adhere to best practices, because they can keep you out of trouble, they can protect you from legal liability, and they can keep you out of jail.

And in fact, just a couple years ago, about a year and a half ago, in 2022, fall of ’22, a QOF fund manager, Joshua Burrell was indicted and sentenced to 48 months in prison for defrauding investors. Now, I highlight this just to show you, as Andrew Doup did, on his OZ Insiders master class last month, I actually got this from Andrew Doup…

Great master class, by the way. Joshua Burrell, this is an extraordinary case. He did more than fail to cross his Ts and dot his Is. He defrauded investors of millions of dollars. But I only highlight it just to drive home the point of, the securities laws are serious, they’re meant to be taken seriously, and if you have an investment that passes the Howey Test, and rise to the level of security, you definitely need to be paying attention.

So, in order to protect yourself from legal liability, you really need to have your QOF, which has passed the Howey Test, really needs to have these five things: An LLC agreement, some sort of reporting to your investors, and I’ll talk about minimum standards, and then higher-level standards.

You absolutely need to have a private placement memorandum, a subscription agreement, and federal and state securities filings. So, let’s talk about the LLC agreement first. Now, Andrew Doup, in his OZ master class presentation that he gave last month, for our OZ Insiders group, he went deep into this topic, for quite a while.

I’m going to spend maybe less than a minute on it. So, this is, again, this whole presentation I’m giving on securities matters here is really just a chunk of a much deeper presentation that Andrew Doup gave in his OZ Insiders master class last month. So, your LLC agreement needs to really have a lot in it, but these four things: A state of formation.

You’re going to need to pick a state to form your entity in. Economic rights will be spelled out, management and voting rights will be spelled out, and your information and transfer rights will be spelled out in this doc. I’m only going to go over the economic rights briefly.

I do want to discuss fees and distribution waterfall, because this is one of the biggest questions that I get, both from sponsors and investors. “Hey, what are the fees?” Or, “What fees should I charge?” So, I want to talk about fees and waterfall structuring. When you put together a QOF, and, you know, I failed to mention earlier, a QOF is really just an entity that you create and file with the IRS, as a QOF. It’s almost always an LLC.

It doesn’t have to be an LLC, but for the purposes of our discussion today, I’m assuming that it’s an LLC. The vast majority of them are set up as partnership LLCs. So, what fees can you charge as a sponsor of a Qualified Opportunity Fund? There’s a lot of different fees you can charge. These are the main ones, is an investment management fee, and then a sponsor promote, or a carried interest.

There’s other ongoing fees that I’ve seen get charged, or one-time fees that I’ve seen get charged, development fees, acquisition fees, distribution fees, property management fees, you name it. There’s a lot of different fees, but let’s just focus on the basics right now. And the two main fees that act as the levers for you to help profit in being the sponsor are the investment management fee and the sponsor promote.

So, the investment management fee is typically, I’ve seen anywhere between 25 basis points up to 2% is the typical range of, basically, an annual fee that you charge on assets under management. In our example here, let’s use 1%. Sponsor promote is, the sponsor’s share of profits, after a certain return of capital and pref hurdle has been met.

And in this example, I’m using a preferred return of 7%. This is also sometimes called the pref, or the hurdle rate. It’s the amount of money that needs to be returned to an investor before the sponsor can begin to participate in the profits, his share of the profits, which, in this example, is 20%. Sometimes you have a 10% carry.

Sometimes it’s a 30% or a 40% carry. And then sometimes, it’s a little more complicated than that. Sometimes you have a waterfall structure. Here’s an example of a waterfall structure. A waterfall structure means it’s, you know, at a certain percentage point, I, as a sponsor, get this much of the profits. Up to the next level, I get a little bit more. Up to the next level, get a little more.

So, in this example, we’re considering a preferred return of 7%. And, by the way, there are different ways to consider a preferred return. I won’t get into details, but there’s what’s called a true pref, and then there’s also a pari passu pref. Congrats if anybody has pari passu on their bingo card. Pari passu pref, the sponsor is participating in the profits, at a certain extent, throughout this preferred return.

In a true pref, the sponsor gets nothing until the pref is met. There’s also different ways that the pref can be compounded. I won’t get into detail on that. Let’s just keep it simple today. Preferred return, 7%. In this example, the LP is getting 90% of the profits. The GP’s getting 10%.

Once that pref is met, then there’s a GP catch-up. GP gets 20% of the profits. This is the carried interest here. And then things kind of graduate, or they waterfall. If the deal or the fund achieves a 9% return, then…up to 9%, excuse me, we’re still at this 20%, but once it gets to the 12% mark, then the GP/LP split goes 70/30, and then, up and above that 12%, then it’s split 50/50.

This is one example, by the way. This is not… I’m not saying this is the only way that a waterfall can be structured. I’ve seen all sorts of different waterfall structures. Some funds don’t have a waterfall. Some funds just have, “Hey, we have an 8% pref, and then a 20% GP profit split after that.” It’s as simple as that.

There’s a lot of different ways to skin this cat, essentially. That’s it on fees and on sponsor promote. Now, let’s talk about the next aspect that all QOFs should have, and this is reporting. It’s very important, before you offer an investment opportunity in a QOZB or in a QOF, that you’re able to meet some minimum reporting requirements, and at the very bare minimum is you need to be able to issue an annual K-1 for every investor.

Now, your accountant can help you with this. Your accountant who prepares, your CPA who prepares the tax filing for your LLC partnership, will have a capital table of all your investors, and he or she will be able to generate annual K-1s for every investor.

But that’s just the bare minimum so that your investors can do their taxes properly. An even better reporting mechanism is, you should probably be in communication with your investors regularly. I’m invested in a number of different Qualified Opportunity Funds as an LP, and, in most of them, I get a quarterly summary from management.

And I love those quarterly summaries. So, I would encourage you to stay in touch with your investors regularly, in an ongoing fashion, and promise to do so before you take their money. And make sure you can convey to them, “Hey, by the way, we’re going to be in communication about the steps that we’re taking, and the progress that these different assets, these deals, are making.”

It doesn’t have to be every week. It doesn’t have to be every month. I like the quarterly cadence. And then, if you can offer annual financials, whether they are prepared completely in-house and unaudited, or if you want to go the next step, the extra mile, and offer audited annual financials, that would be the gold standard, I would say.

The third big thing… So, remember, the first big thing was the LLC agreement. And then I talked about fees, and sponsor promote. The second thing was reporting. The third big thing that you need to have in order to offer an investment opportunity in an Opportunity Zone deal to investors is you absolutely need to have a private placement memorandum.

If your investment rises to the level of security, if it passes the Howey Test, you need to have a PPM. This is also sometimes referred to as a private offering document, and essentially, what this document is is it’s a securities disclosure document. It discloses all of the risks.

It also outlines the terms of the investment, and the fees. Again, it’ll specify all the fees, very clearly. It’ll outline all of the risk factors associated with the investment, or at least the material risks that you’ve been able to identify, with your attorney. It’ll specify any conflicts of interest. Usually it’ll give some background on the company, and the management bios on the president and the CFO and the CEO, any other principal shareholders.

There will be a little bit of information about each of those individual people within the PPM as well. And then, this is critical. There must be no misstatements or omissions of material fact in this PPM. This PPM document, I’ve seen them 100 pages. I’ve seen them 200 pages long. They’re long because they disclose all of the risks associated with investing in your particular Qualified Opportunity Fund offering.

This helps protect you from legal liability down the road if something were to go wrong, if an investor was to become unhappy with his investment in your deal. Subscription documents is the next big piece that you need, and the biggest piece of the subscription documents is the formal subscription agreement.

But these are the documents that you send, or it’s the package that you send to an investor once he is ready to actually wire you money and become an investor in your fund. The subscription agreement is a formal agreement between the fund and the investor that you’re taking money from. Now, so, a PPM, going back to the PPM, your fund, your offering, it has one PPM that you distribute to any prospective investors.

The subscription agreement is a one-to-one agreement. You’ll send a different one to every single…it’ll be individually-tailored for every single investor. It can come from boilerplate, obviously, but it’ll actually have the investor’s name and personal identifiable information on it. And this ends up getting completed and signed by the investor when he sets up his account with you, when he sends a capital contribution into the fund.

It specifies the terms of the investment, including any fees that that investor may be paying, because you may have a graduated fee schedule, where, and I’ve seen this a lot, if you invest up to $100,000, you’re paying this fee. If you invest above $100,000, you’re paying a little bit of a reduced fee. If you invest more than $1 million, you pay a much lower fee. You know, that’s one thing that I’ve seen with a variety of funds.

One other thing is if you’re offering, we’ll get to Regulation D in a minute, but if you are offering as a Reg D, under Rule 5O6(c), you will also need to verify your investor’s accreditation status, and his status as an accredited investor. That will usually happen at some point during this subscription package, in these subscription documents.

You’ll include wiring instructions, how to wire the money to the fund. You’ll probably want to get the bank account information from the investor as well, where you can wire the distributions down the road, and then also K-1 delivery options. Ask the investor, “Hey, do you want us to mail you a paper copy? Is it okay if we just post it to our portal? You can download it. Do you want us to email it to you?”

That’s typically handled in the subscription docs as well, the subscription package. Let’s talk about, this is the final thing, the final thing that all Qualified Opportunity Funds that are being offered to investors need, which is a securities exemption. And there’s a few different ways to file for a securities exemption with the Securities and Exchange Commission, the SEC.

Reg D, honestly, is the standard for private placement real estate funds. The vast, vast majority of Qualified Opportunity Funds on the marketplace today, if you visit my website, opportunitydb.com, if you ever follow our OZ Pitch Day events, all of those funds, or 99.9% of them, are offered under Regulation D.

Now, when you choose Reg D, with your securities attorney, you really have two options, two routes you can go down with Reg D, and I’ll walk you through the pros and cons of each. But they are Reg D Rule 506(b), as in Bravo, and Reg D Rule 506(c), as in Charlie. There’s a lot of differences between these two different types of filings with the SEC, to exempt you from registering with the SEC, but I’ve highlighted the two main differences.

With a Reg D Rule 506(b), you have to have mostly accredited investors. You can have up to 35 non-accredited investors. I will say this, though.

I have seen 506(b) funds who kind of disregard this 35 allowance, and they just say, “We’re not taking any non-accredited investors. We only accept accredited investors.” Rule 506(c), on the other hand, absolutely every single investor in the fund has to be an accredited investor, and that accreditation status must be verified. That’s really important.

So, again, during the subscription agreement kit, before they wire you money, you need to verify that each investor is accredited. It’s a rather simple process. There are services set up to help facilitate this. Usually it’s just a letter from their CPA or their attorney, signifying yes, this person is an accredited investor.

What is an accredited investor? I get that question sometimes. The SEC defines an accredited investor as anyone who has annual income of at least $200,000 annually, or $300,000 annually if that investor files jointly with a spouse. Or, so, that’s criteria one, and then criteria two, either one of these has to be met, or, the investor has a net worth of at least $1 million, not including his primary residence.

There’s a few other ways you can qualify as an accredited investor, but most people qualify under either one of those two methods. This is the big one, though. The big difference between these two is general solicitation, whom I have put in the bottom right corner.

Okay, that’s a joke. General solicitation. Get it? General solicitation, or advertising, is prohibited for Rule 506(b) filings. The only way that you can find investors to invest in your offering is through pre-existing relationships, or you are working with or hiring a registered broker-dealer to sell the fund for you.

That’s Rule 506(b). You cannot advertise at all. So, I mentioned a moment ago, all of the funds that present at my OZ Pitch Day event, they’re all filed under Regulation D. Not just that, but none of them fit under Rule 506(b).

In fact, they’re all Rule 506(c). Because OZ Pitch Day, I believe, does rise to the level of general solicitation. Rule 506(c) does permit general solicitation. So, if you have a deal that you need to advertise to the world, you don’t have a huge Rolodex of existing investors, or you don’t plan on working exclusively with broker-dealers to sell the offering, you really should be looking at 506(c).

And I see this problem a lot, by the way, because Rule 506(c) is fairly new. It’s only been around for about 10 years. If you have an older securities attorney, who’s been doing Reg D filings for 20, 30, 40 years, oftentimes, those securities attorneys just automatically file these types of offerings as Rule 506(b).

They’re just more familiar with them, they’re more comfortable with them. It’s how they’ve always done them. And I can’t tell you how many times I’ve had a fund come to me, wanting to use our marketing services at OpportunityDb, only to find, well, your securities attorneys set you up as a Rule 506(b). He should have set you up as a Rule 506(c). So, make sure you double-check that with your attorney before you proceed, because if you need to advertise the offering, if you need to perform general solicitation, you really ought to be using a Rule 506(c) filing.

Very quickly, now, two other types of filings that I’ve seen, but I’ve seen very sparingly. I think I’ve only seen one Reg A+, and I’ve seen, I believe I’ve seen zero Reg CF offerings. These are a couple of other type of crowdfunding exemptions. These types of filings can raise from both accredited and non-accredited investors. General solicitation’s permitted for both of them, but they have lower caps.

Especially Reg CF is capped at $5 million raising per year, lower compliance requirements, but if you have a deal that you need to raise more than $5 million for, you can’t even look at that one. Reg A+, probably more trouble than it’s worth. There’s additional compliance work and filing requirements. Frankly, I don’t truly know all the ins and outs between Reg A+, Reg CF, and Reg D.

All I know is, Reg D is the gold standard for private real estate funds. Almost every single QOF is a Reg D. Talk with your securities attorney, or your attorney, before making that decision, though. We are about a half an hour past the top of the hour.

We’re at the bottom of the hour, I guess you could say. By the way, I do want to save some time for questions at the end of today’s presentation. I see I’ve got one question, and I haven’t looked at it yet. I don’t want to get distracted, but if you do have any questions, please use the chat or the Q&A tool to submit any questions. We’ll get to them toward the end.

Want to shift gears now, and talk about OZ Insiders a little bit. If you enjoyed, if you are enjoying this presentation today, just know that this is just a small chunk of a larger presentation that Andrew Doup gave at his presentation of an OZ Insiders master class last month. We do these types of webinars very frequently, every month, in fact, at OZ Insiders.

We take a deep dive into different topics pertaining to Opportunity Zone investing. Opportunity Zone Insiders, or OZ Insiders, was founded by myself, I’m Jimmy Atkinson, again, and my partner, Andy Hagans. There’s the two of us. Now, a disclaimer, by the way.

I’m going to tell you all about OZ Insiders, and the type of stuff that we’re doing in there, but a couple disclaimers before we get going. I do just want to make it very clear. The whole OZ ecosystem, the whole OZ concept, the whole OZ tax benefit, it doesn’t take a bad deal and make it good, right? You’ve heard that before, probably, right? Doesn’t that make sense? Like, if you have a bad deal, if you don’t have profits in the deal, the OZ incentive doesn’t do anything.

That makes sense, right? OZ Insiders, same thing. OZ Insiders, we can consult with you, we can help coach you, we can help make connections. I’ll outline how we do that in a minute. But we can’t take something that’s bad and make it good. We can take something good and make it better. Does that make sense?

So, you’re not going to instantly close your capital raise if you decide to form an Opportunity Zone Fund, and you’re not going to instantly close your capital raise if you decide to join OZ Insiders. That’s just intuitive. That makes sense, right? So, what can OZ Insiders do? What do we do? Why do we exist? Why did we start OZ Insiders toward the end of last year?

We started it to help you drive your Opportunity Zone strategy forward, and unlock new growth. Just like every play on the foot…not every play on the football field… If you watch the Super Bowl, this weekend, not every play is going to result in a touchdown. But the goal is to just to move the ball down the field. We help you move the ball down the field more effectively, and a little bit faster.

And we help you do it without wasting time on dead ends. There’s three challenges, oftentimes, that I hear, related to executing an Opportunity Zone strategy, whether it’s placing an investment or raising capital, or, maybe you’re a professional, and you’re servicing investors, or you’re servicing funds, three challenges. And by the way, we hear these challenges because, early on in our email sequence, we actually send an email to anybody who joins our email newsletter.

We send them an email a few hours after they join, ask them, “Hey, what’s your number-one Opportunity Zone challenge?” And we get back all sorts of feedback on that. I’ve gotten a ton of feedback over the last, how long has it been? Almost five years. No. More than, almost six years since I started OpportunityDb. Challenge number one we hear a lot is, “No one else is facing my unique OZ problems.”

Okay. Channel number two, Opportunity Zones are confusing, it’s hard to find the true experts, and everything takes too long. It’s just too complicated. And then challenge number three is, it’s hard to stay in the know on the latest OZ trends and best practices. This is a new program, there’s not a lot of coverage about it. Hard to stay in the know.

Let’s tackle challenge number one first. “No one else is facing my unique OZ problems.” We’ve been there. We’ve done that. Like I said, we’ve got over 20,000 people on our email list. We send out that email when you first join, “What’s your number one OZ challenge?” We’ve seen just about every question, every challenge, every problem about Opportunity Zones that you could possibly imagine.

We have a lot of expertise in that area. Challenge number two we hear, again, Opportunity Zones are confusing. It’s too hard to find the true experts. Everything takes too long. It’s too complicated. I’ll admit, that is true, by the way. But it’s not true for us.

Finding the right professionals, for us, is easy. If you’re first starting, it can feel overwhelming, I know. That’s why we’re here, though. We’ve been operating in the Opportunity Zone space for nearly six years. I started OpportunityDb in the middle of 2018, just a couple weeks after all of the zones were designated. So, we’ve been there, we’ve done that. We have the largest Rolodex…I think it’s the largest Rolodex in the Opportunity Zone industry.

So, we are essentially a shortcut for what used to take a long time. If you’re just entering the space five years ago, nobody really had their stuff dialed in yet. We have our stuff dialed in. We have the connections that you need to help take your Opportunity Zone to the next level. Challenge number three we hear a lot is, “It’s hard to stay in the know on the latest OZ trends and best practices. Not a lot of people are covering this. It’s a new industry.”

And that’s true, by the way. But that’s, again, why we exist. We’re the largest and oldest media organization covering Opportunity Zones, and we’ve taken all of our collective knowledge, within our heads, and within the heads of all of the experts that we’ve curated over the past six years, and we’ve formed this OZ Insiders network, a community of experts, that’s there to help everyone in the network stay in the know.

Let me ask you a question. Do you want to hear more about what’s inside OZ Insiders? Anybody want to hear about the details, all the nitty-gritty, what happens inside OZ Insiders? Anybody? Anybody want to hear it? Got a few yeses.

Few yeses from the back. Here’s what you’re going to get when you join OZ Insiders. And a lot of the stuff you’re going to get, I’m going to go through them one at a time. You’re going to get access to our Rolodex. What does that mean? There it is. There’s the Rolodex.

It’s not a physical Rolodex like that. But Rolodex is the term I use loosely to convey the concept that we have relationships with hundreds and hundreds and hundreds of Opportunity Zone investors, professionals, and other stakeholders, other practitioners who have been there, done that, and done Opportunity Zones successfully for a number of years, and we can help connect you with the right one, so you can advance the ball down the field, and get to where you need to go with your Opportunity Zone strategy.

So, you’re going to get, when you join OZ Insiders, you’ll get access to our Rolodex. You’ll also get access to our live monthly master classes. I’ve mentioned the master classes a couple times now. The presentation I just gave a moment ago was based off of a master class that Andrew Doup gave last month, on PPMs and subscription documents for Opportunity Zones.

Here’s our upcoming list of OZ Insiders events. Sorry if the text is small. We got a lot of events coming up. You can find this page on our website, ozinsiders.com. Click the Calendar link in the top right, in the top menu. If you’re on your phone, click the little hamburger icon, and you can click on Calendar there.

But just to give you a sneak peek of what’s to come inside of our OZ Insiders event series, our next event is an online event, our monthly meeting and master class. We’re going to be joined by Shay Hawkins. I’m honored and privileged that Shay would join us. He’s the former tax policy advisor to Senator Tim Scott, and he continues as the president and founder of the Opportunity Funds Association, the largest trade organization specifically for the Qualified Opportunity Funds industry.

And Shay has his ear to the ground in Washington, D.C., so his master class is going to be titled “Inside the OZ Legislation (Capitol Hill Updates & More).” We’re going to discuss the bill, the $78 billion tax deal that was just passed by the House, what was it, last week, I think. It’s at the Senate now.

And it might hit a hurdle there. We’re going to discuss, are OZs in that deal? Are they not? Spoiler alert, they’re not. Or at least they’re not yet. We’re going to discuss when Opportunity Zone legislation to extend Opportunity Zones, to extend the duration, the timeline of Opportunity Zones, may come to fruition. And then we also want to discuss what could a second version of Opportunity Zones look like, an Opportunity Zone 2.0?

So, we’re going to unpack a lot during that master class. Also…that’s coming up next week, by the way. I might have said next month. It’s coming up next week, Monday, February 12th. So, if you join OZ Insiders today, you’ll get access to this live class, on Monday, February 12th. Next month, we’re hosting our first in-person meeting and dinner of 2024. It’s not a big conference or anything.

It’s just a meet-up and a dinner at a steakhouse. You’re going to get a nice steak dinner at Al Biernat’s, in Dallas, Texas. Dinner is on OZ Insiders, so if you join today, you’ll also get access to this dinner and meet-up in Dallas. We’ve got another in-person dinner coming up in Chicago, either late spring or early summer of this year, which we’re going to host at Gibsons in Chicago.

So, we like our nice restaurants, right? Some other OZ Insiders master class topics that we’re going to be hitting on in the future, next month I’m doing a class on raising OZ equity. Jill Homan’s going to do a class on diligencing OZ funds and deals. Mike O’Mara, we’re still dialing in his topic, but he’s going to have some sort of discussion on OZ investing, what investors need to be on the lookout for before they invest in a deal.

Title TBD. Brett Siglin in June is going to be doing a master class on financing OZ deals. What does the capital stack look like? And then Gerry Reihsen’s going to kind of round out our current list. In July, he’s going to be presenting on Opportunity Zone development joint ventures. We’ve got a lot planned for our OZ Insiders over the coming months.

And again, we do the monthly master class every month. It’s usually on the first Monday of the, second Monday of the month. Sometimes it’s on the second Tuesday of the month, as you can see. Check out ozinsiders.com. Click the Calendar link in the top right. OZ Insiders. Here’s what you’re going to get when you join.

You’re going to get access to our Rolodex. I discussed that already. You’re going to get access to our live monthly master classes, where you, by the way, they’re interactive, too. You can participate in them. You’ll get access to all of those. But you’ll also get access to all of the stuff that we’ve already done in the past. We put up on our website, this is our members-only dashboard, past OZ Insiders master classes.

They’re available on demand. Here are the most recent two that we’ve done. As I mentioned, Andrew Doup gave a presentation last month on OZ PPMs and subscription docs. His presentation was very beefy, and did a deep dive on a lot of the stuff that I kind of just glazed over really quickly. He did a deep dive into that topic. And then Ashley Tison, the aforementioned Ashley Tison, gave a presentation on structuring Opportunity Zone deals, in our December event.

So, you get, yeah, you log in, you can click the play button, you can watch those master classes. You can also download the deck, too. We’ve got the decks from those master classes available for download. OZ Insiders, you join today, you’re going to get access to our Rolodex. I talked about that already. Live monthly master classes, our on-demand library of all previous master classes, but then you also get 24/7 access to our private group chat.

What the heck is that? It’s a Slack app. We have a Slack app that we use to stay in touch with our members. Our members stay in touch with us. It’s available on your phone. You can also use it on your web browser on your desktop. You may already use it, by the way.

A lot of our users already have experience with this. This is just our private communication that we use to stay in touch with each other. This is a screenshot from a little while ago. I should update this. This is from November, when I was at the Novogradac event. This is me and Ashley recording our interview there. Thanks to John Vachon for sending in that photo, and then I posted it to the group chat.

Recently, we’ve discussed that $78 billion tax deal and the impact that it might have on Opportunity Zones. We also discuss off-market deal flow from time to time, and anything else under the sun that’s OZ-related. We field questions in there, too. If you have a question you’re not sure of the answer to, maybe it’s a securities matter, maybe it’s deal flow, ask the question in there.

You’ll get an answer, if not from one of our members, Andy and I are very active in there. We chime in all the time, and help point you in the right direction. This is a great way for all the members to stay in touch between those monthly meetings. So, when you join OZ Insiders, you’re going to get access to Rolodex, you’re going to get our live monthly master classes, you’ll get a on-demand library of all of our previous master classes.

You can click the play button and watch at your leisure, download the deck, peruse through those. You’ll get 24/7 access to our private chat group, in the Slack app. But then you’ll also get invitations to our private in-person events. I mentioned, steak dinner, Al Biernat’s. Here’s a couple of our previous events that we’ve hosted in person. Private dinner, here it is.

Here’s the invitation. Private dinner at Al Biernat’s steakhouse, in Dallas, Texas, Monday, March 11th. Just a little over a month from now. Looking forward to this one. This is available for our OZ Insiders members only, but you’ll get to wine and dine with me and a lot of our other members. Not sure how many are coming. I know we’ve got a few of our members are in the greater Dallas-Fort Worth area that will be there.

We’re still kind of crossing the Ts and dotting the Is on that one, but it should be a pretty good group, and hope you can come. Dinner’s on me. So, here’s what you’re going to get. Total recap. You’ll get access to our Rolodex. We can help plug you in to the right people that you need to take your OZ strategy to the next level. You’ll get access to all of our live monthly master classes, ongoing.

You’ll get access to all of the past stuff that we’ve done, our on-demand library of previous master classes, 24/7 access to our private chat group. Send a message, read a message, whenever you want. Plus, invitations to our private in-person events. We’ve got two dinners planned for this year. We might add a third in the fall, TBD.

Total value, we estimate, of all of this stuff, is at $27,800. Now, obviously, I’m not going to charge you $27,000 today. But, let me ask you a question. If all OZ Insiders did was give you access to our Rolodex, for instance, help plug you in to the right connections, help provide that shortcut to finding the right professional or the right investor that you need to take your OZ strategy to the next level, would it be worth it?

If all this did was provide you with invitations to the in-person meetings, with leading professionals, with myself, with other investors in the space, would it be worth it? And if all this did was if it just simply gave you access to the highest-quality educational content in our industry, the master classes, the live ones, but also the past archive of recorded master classes, would it be worth it?

I told you I wasn’t going to charge you $27,000. This is just $299 per month, and you can get started now, by heading to ozinsiders.com. Not only that, but we’re so confident in our ability to deliver that $299 per month of value that we back each new membership with a 60-day, no-questions-asked, money-back guarantee.

So, we don’t do a free trial. We get your credit card and charge you on day one. But if you don’t like it, if you try it for a few days, if you try it for a month, or even if you try it for a full 60 days, and you decide, “Hey, this isn’t working for me, I’m not getting anything out of this,” or “I’m not able to commit the time to attending the once-monthly one-hour meetings,” that’s fine.

Just say, hey, just send an email, [email protected], saying, hey, I’d like to cancel. Or if you have my personal email, send me an email, say hey, I’d like to cancel, no offense. No hard feelings, no questions asked. We’ll give you your money back. We’ll cancel your membership. You have 60 days to do that. So, again, just to recap what you’re going to get, you’re going to get access to our Rolodex, going to get access to all of our live monthly master classes, going to get access to our on-demand library of previous master classes, all the stuff we’ve previously done.

It’s all in there. Click the play button, download the deck. You’ll get access to me 24/7, kind of. I’m not in there 24/7, but I do chime in every day. I check it every day, multiple times a day, usually, in our private chat group. You’ll also get invitations to our private, in-person events. Got a steak dinner coming up in Dallas.

I hope you can join us. Total value, $27,800. Get started now. Head to ozinsiders.com, or scan that QR code on your screen. It’ll take you right there. $299 per month. We also have an annual plan. That’s $2999 per year.

You can save 17%. If you’re very confident, like, “Yeah, I definitely want to do this for a year,” go ahead and save 17%. You’ll get billed for the full year, but with a 17% discount, on day one. That also comes with the 60-day, no-questions-asked, money-back guarantee. You sign up for the annual plan, you decide you want to cancel after a month, go ahead.

We’ll give you your money back. It’s fine. Scan the QR code on your screen or head to ozinsiders.com to learn more. I’ve got a lot of questions. And we have, we got 12 minutes left in the hour. So, let’s see if I can get to these questions here. All right.

Question… Keep the questions coming, by the way. And do we have anybody, has anybody hit a bingo yet? I don’t see anybody in the… Let me open up the chat. We don’t have a… Oh, here we go.

Let’s see. I’m way behind on the chat, I see. Let me get caught up here. Oh. Steven asks, “I jumped on late. Did Jimmy mention we will get a copy of this presentation?” Steven, great question. Yes, I will make this presentation available to everyone who attended today.

I don’t have it up yet. Let me get that uploaded to our website, and I will email all of the registrants for today’s webinar, and anybody who’s here right now, with that link later today. Let’s see. I don’t think we have any bingo.

Did anybody hit a bingo? Nobody hit a bingo. That’s a bummer. We’ll try it again next month. Okay, Andy Bowman asks, “Some QOFs issue 1099, versus K-1, because of their structure. Which structure do you prefer?” Andy, that’s a great question. Yeah, I didn’t mention this, but most Qualified Opportunity Funds are structured as LLC partnerships.

It’s just the simplest structure. And those LLC partnerships always issue a schedule K-1 to the limited partner investors. So, that’s usually what I get, is a K-1, from the funds that I’m invested in. That’s what I’m used to. That’s what my CPA is used to seeing. There are a handful of QOFs that are structured as corporations, especially if they want to be taxed as REITs.

So, some investors like the REIT structure. Some funds are offered as, some QOFs are offered as REITs, and they will issue 1099s. I don’t know that I have a preferred structure. I don’t, quite frankly. To me, the more important thing is the underlying investment.

I can handle, my CPA can, tell you what, my CPA can handle those different types of tax forms. I don’t really care if it’s a 1099 or a K-1. Just get me something. So, I guess my answer to your question, Andy, is I don’t really have a preference. There’s pros and cons to each. But does anybody else have a preference? Feel free to chime in in the chat here, if anybody else has a preference there.

Let’s see. Wadson Espindola. Espindola. Let’s see if I can answer your question, Wadson. “Can you talk about or discuss rolling a Reg D 506(c) syndication into an OZ fund?” That’s interesting.

Okay. Let me think about that. “And discuss any pros and cons. We’re in development, and typically, a 506(c) is formed to acquire the land and complete soft costs, and generally take in non-capital-gains dollars. Curious to hear your thoughts.” That’s really interesting, Wadson. That might be problematic. First of all, I will just reiterate, I’m not a securities attorney. I highly recommend you get a real answer from an attorney.

The problem with acquiring it in a 506(c), acquiring the, what is it, the land? Acquiring the land in a 506(c), that isn’t structured as an OZ fund, is that at some point, you have to get that into the OZ fund.

And then the OZ fund has to acquire it from an unrelated third party. So, you might trigger an unrelated third party rule there. Ideally, you have the Qualified Opportunity Fund set up from the get-go, Wadson. And I suppose that Reg D 5O6(c) syndication could possibly be the underlying QOZB investment.

But that’s one issue that you want to discuss with an attorney, Wadson. You want to figure out how to structure that. There are some issues with timing. And in an ideal world, you have the Qualified Opportunity Fund set up as a 506(c) before you acquire the land.

It’s usually just a lot easier that way. But that question, a little bit above my pay grade, and I would encourage you to get in touch with a securities attorney. Let me know if you need any recommendations, though, on securities attorneys. Okay, Steven has a question. Steven asks…how are we doing on time here? We got seven more minutes. “As SMEs, does OZ Insiders provide a checklist of OZ readiness for new entrants?”

Steven, no, we do not have a checklist, so to speak. That said, you know, that’s part of what we can do on the strategy call, is I can, I kind of have a mental checklist, I guess. That’s actually a really good idea, to have a checklist of OZ readiness for new OZ entrants.

I suppose, in many ways, this presentation is kind of a checklist. I went through those five things that every Qualified Opportunity Fund needs. You know, some things we didn’t discuss is how to actually go about marketing the deal, how to raise that OZ equity. That’s actually the focus of my master class at OZ Insiders next month, is going to be focused on that topic. Okay, you’ve got everything structured.

You’ve got these five things in place. You have your PPM, your reporting, etc., etc., etc. How do you actually go out into the marketplace and raise the equity now? What are some best practices for marketing or advertising, or, you know, performing general solicitation on the deal? Oh, yeah. SME equals subject matter experts. Thanks for that.

I kind of glossed over that. “Does OZ Insiders provide a checklist of OZ readiness for new entrants?” So, I guess we don’t have an explicit checklist, but I like that idea. Let’s develop that. We can probably develop that, and put something together. That can be something that I can do pretty easily, and we can talk about that on our strategy call, and discuss that ongoing in the private chat group.

That’s a good question, Steven. So, thank you for that one. Answered that one live. There we go. Kevin Bloom asks, “Any QOZ/QOF benefits to the principals, besides the capital raise?” So, there are no direct benefits to the QOF itself, other than, it helps you stand out in a crowded marketplace.

Two real estate deals, both raising equity from the same pool of accredited investors nationwide. One of them is an OZ deal. The other one isn’t. All else being equal, the OZ deal is far more enticing, right? The after-tax returns are just going to be much better for your investors.

So, it’s more than a marketing gimmick, but it’s… It is a marketing gimmick, right? I mean, and I use that term a little bit loosely. It is a huge, very powerful way to market your deal. “I’ve got this great real estate deal that I’m raising equity for. Oh, wait. There’s more. Not only that, but you’re going to get all of these tax benefits associated with Opportunity Zone investing if you have capital gains that you can roll over into the deal.”

Besides that, Kevin, if you have, maybe you, as the principal, you have your own capital gains. You can put your own capital gains, put your own skin in the game in your own fund, and participate directly that way. So, that’s how I would answer that one. That is how I answered that one. Kevin, let’s see. Another question here. “Any restrictions to the principals investing in their own QOF?”

Oh, I just answered that. No, absolutely not. In fact, all of the QOFs that I have invested in as an LP, that’s a question I always have for the principals, is, “Hey, how much of your own money do you have in this?” And if the answer’s zero, or it doesn’t sound like it’s enough, I walk away. Because I want to know that our incentives are at least somewhat aligned, or very strongly, tightly aligned. I want my incentives tightly aligned with the incentives of the principal.

If you are being solicited by a sponsor who does not have any skin in the game, be very wary of that sponsor. Not because he’s a bad guy, necessarily, but just, his incentives are going to be different than yours. And if he’s the one driving the deal forward, his incentives are going to be very different from yours.

Just something to consider there. So, not only are principals allowed to invest in their own QOF, I would highly encourage them. Andy Bowman, “Is Joe Biden likely to sign legislation on the final regs?” Well, first of all, final regs. Regulations are handled by the Treasury Department and the IRS, and they don’t need his signature.

Legislation to extend Opportunity Zones is, I think, your question here. Is Joe Biden likely to sign it? Well, he is likely to sign a tax deal that… Andy Bowman got bingo.

Andy Bowman, congratulations. That’s awesome. Maybe it was Joe Biden that did it for you. I wasn’t planning on mentioning Joe Biden. That was kind of a decoy name that I put in there, but I guess we’re talking about him now. The OZ legislation will never hit Joe Biden’s desk as a standalone piece of legislation. Though we do have OZ legislation that’s been introduced to the House Ways and Means Committee, and, I don’t know, it’s, like, four, five, six pages long.

That four, five, or six pages is going to be packaged into a much larger, more comprehensive tax bill, if it ever does. And that tax bill, because, just the way that Congress works, they don’t pass tax legislation on little one-off matters like Opportunity Zones. So, Opportunity Zones, the only chance the Opportunity Zone legislation has of getting enacted is if it’s part of a much larger, broader tax bill.

And there is a tax bill that’s in play right now, that’s been passed by the House, last week, this $78 billion tax deal, that’s now going to the Senate, where it may hit a roadblock. That is the thing that’s going to hit Joe Biden’s desk. So, okay, Andy just clarified in the chat, “Yes, I meant the OZ extension in the legislation.” Yeah.

So, Joe Biden will never get a bill on his desk that is just the OZ legislation. It will be a huge tax bill, and the OZ legislation will be a very small part of it. And if Congress brings him some sort of tax deal that has OZs in it, he’s going to sign it. At least, this year, he’ll sign it, because he has control of the Senate.

So, that would mean that Democrat-controlled Senate has given its stamp of approval. It would be weird for him to veto a tax bill that had the support of the Senate Democrats. Beyond this year, you know, where we going to have a big election coming up in November, in case you haven’t noticed, I don’t know what might happen, but the balance of power might change.

It’s kind of a question of what might happen. It’s hard for me to predict, but any tax deal that hits his desk this year, at least, he’s going to sign. Whether OZs are in that deal or not, I don’t know, but OZs won’t hit his desks alone. We are at 1:00 p.m. Eastern Time. I want to be respectful of everyone’s time.

I’ll go a little overtime, but just wanted to clarify, once again, ozinsiders.com. I’d love for you to join. This is the type of discussion we have in our monthly master classes. This is the type of topic that we cover in those master classes. This is the type of stuff that we cover in our ongoing meetings. We’re going to talk about this stuff at our steak dinner, probably even.

And it’s the type of stuff that we discuss in our private chat group. I’d love for you to join. It’s $299 a month, 60-day, no-questions-asked, money-back guarantee. Hit the QR code, or type in ozinsiders.com. I’ll stay a few more minutes, though, and answer these last few questions. Anonymous attendee asks, “Can a OZ parking garage…” and, by the way, congrats to Andy Bowman on winning bingo.

Thank you for playing. “Can an OZ parking garage be viewed as an operating business, and would you need to make substantial improvement to the parking garage? Any variant of substantial improvement rules for different types of properties?” That is not really a bright-line test, and it is kind of a facts-and-circumstances test, as the lawyers call it.

I don’t think a parking garage would be sufficient, and there actually was an example, when they were discussing final regs a few years back, of a hot dog stand, buying a piece of vacant land, and just putting, like, a little, tiny hot dog stand on it. And the IRS attorney said that’s not going to work. That’s not substantial improvement enough. Like, technically, it meets the arithmetic needed for substantial improvement, but that doesn’t really count.

So, that one is a little bit above my pay grade as well, whoever asked that question. I would check with a trusted OZ attorney on that one. And let me know if you need any recommendations. Two more questions I’ll get to, and then we’re going to shut this thing down. Thanks, everybody, for attending today, by the way.

Kevin Bloom asks… Thanks, Kevin, for your participation today. “Is a general rule of thumb of amount of QOF raise as compared to total project cost…” Oh, “Is there a general rule of thumb?” This has changed, Kevin, as interest rates have creeped up. I’ve seen all different sorts of capital stacks for these different deals.

You know, it’s not atypical to have 60% or more leverage, though, I would say. So, you know, if you have $100 million total project cost, you know, it’s not out of the ordinary to be raising just $35 million, $40 million, $50 million, somewhere in that range, and then piecing in the rest of the total project cost with other pieces of the capital stack, a large part of which will be debt financing.

Or, maybe some other tax credit programs, like if you’re doing historical tax credits, or affordable housing tax credits, or anything else like that. Good question. Fernell. Fernell. Fernell Hogan asks, “If the QOF asset contains a business within it, do you need a separate QOBZ,” I think you meant to say, “for the business portion?”

There’s lots of different ways to skin that cat. I always recommend, and again, I’m not an attorney. Consult an expert. But you could put each of your assets into a different QOZB. So, if you have two, three, four, five, six different assets in your portfolio, you could hold each of them in a separate, distinct QOZB.

That can be quite helpful if you want to do sidecars, or side letter arrangements with different investors who are bringing in their own QOF. And then your main multi-asset portfolio QOF can hold all of those subsidiaries, that each hold just one QOZB.

That’s one way to do it. You don’t have to do it that way, but that is one way to do it. Last question here. Anonymous attendee, “Can you use ordinary income dollars, i.e., not capital gains, and still receive some benefit of investing in an OZ if you hold the investment for 10 years?” No. Short answer, no. And actually, that’s the long answer, too.

Unfortunately, no. You need to start with a capital gain to get any of the tax advantages associated with Opportunity Zone investing. And that does include even the 10-year step-up to fair market value. That only applies to capital gains dollars. That’s one thing that Shay Hawkins and I will be discussing at our master class meeting next week at OZ Insiders.

That’s part of the OZ 2.0 roadmap, so to speak. The industry would like for that incentive to apply to non-capital-gains dollars. It’s something that the industry is discussing, but at the moment, under the current legislation, no. No. And that’s it. That’s a wrap. I answered all the questions.

We did have at least one bingo. So, congratulations, again, to Andy Bowman for hitting the bingo. And thank you so much for attending today. Last chance, last call here, for OZ Insiders. I’ll send out a recap email to everybody later today, with the link to join OZ Insiders, and it’ll also include the link to this presentation deck, or at least some version of this presentation deck.

You can get started right now. So, get started now. Head to ozinsiders.com to learn more, and to join today. $299 per month, and that includes a 60-day, no-questions-asked, money-back guarantee. Thank you for everybody for participating. This has been a lot of fun, and I’ll see you next time.