How To Diligence Opportunity Zone Funds & Deals, An OZ Pitch Day Panel

The most important issues that Opportunity Zone investors should scrutinize before making an OZ investment, whether its into a professionally managed multiasset fund, or a single deal.

Recorded live at OZ Pitch Day on March 7, 2024, featuring panelists Jill Homan of Javelin 19 Investments, Michael O’Mara of Ozone Capital, and Gerry Reihsen of Reihsen & Associates. Moderated by Jimmy Atkinson of OpportunityDb and OZ Insiders.

Episode Highlights

  • What attracted each panelist to Opportunity Zones.
  • The first determination that an Opportunity Zone investment must make: investing in a multiasset fund vs. single-asset deal vs. structuring your own deals.
  • The most important considerations when diligencing different types of Opportunity Zone investments.
  • Where Opportunity Zone investments fall on the risk-return spectrum, and when alternative investments are suitable for individual investors.
  • The four most important sections of an OZ investment’s offering documents that investors should review.

Panelists: Jill Homan, Michael O’Mara, Gerry Reihsen

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

Jimmy: Let’s now move into our panel discussion, “How to Diligence Opportunity Zone Investments.” In case you’re just joining us, welcome. You can always view the agenda for the day at Our three panelists, once again, they’re all members of OZ Insiders. Appreciate all of your support, from the three of you Jill Homan, of Javelin 19 Investments, Michael O’Mara, of Ozone Capital, and Gerry Reihsen, of Reihsen & Associates, quickly just introduce yourself, and a question. What attracted you initially to Opportunity Zones? And Jill, I’ll start with you.

Jill: Sure. Jill Homan. And as I mentioned, as Jimmy mentioned, with Javelin 19, and also in partner with Pinnacle Partners. So, excited to represent both firms. And just really excited to always see Michael and Gerry, who are also have been in it from the very beginning, so, and of course, Jimmy. So, appreciate your platform. So, for me, I, really, I would say, got into the Opportunity Zone industry because I have a career in real estate development, real estate investing, in areas that are in and near low-income communities. And I’ve been very interested in the intersection between impact and also impact and real estate. And so, when the legislation passed, I had some folks reach out and say, “You should really read this.” And I thought it was very biblical, because it was six pages, and every time I read it, I got a, like, a new understanding. I thought, “Well, maybe it means this, or maybe it means that.” But, in short, I help advise funds. I also advise investors, and have some projects that I participate in as well. And so that’s, really, see it from the vantage point of being a sponsor, as well as being an investor. So, just, will hand off to Gerry and Michael, to give a background.

Jimmy: Terrific. Michael, how about you go next? Quick intro, and what attracted you to Opportunity Zones initially?

Michael: Thanks, Jimmy. Yeah, it’s funny, is I sat on a couple BOMA panels way back in the day with Jill, when this legislation first came out, so it’s great to be here with her again. And some of you might have heard this story. I’m a commercial real estate broker by trade and practice, and a lot of my work was in the investment sales 1031 exchange arena. So, when the Opportunity Zone legislation came out, and the capital gain deferral mechanism, I was just very curious about it. So, I started to dive in, and, you know, really kind of became a student of the game, and still am. I’m learning something new every day. I got involved with a company, to run as consultant, called Ozone Capital. And what we saw here was, you know, obviously this is a tax incentive that, this is layered on, on top of real estate projects and private equity businesses, that we’ve heard, you know, those deals still have to stand on their own before you even get to the incentive. And obviously, there’s a lot of education that’s required in this space, so I look at myself as a service provider, and what we do is we try to consult with the marketplace, both QOFs, QOZBs, investors, you know, from soup-to-nuts analysis, structure, returns, and so forth like that. So, really excited to be here and participate.

Jimmy: Well, thank you. And, Gerry Reihsen. Gerry I’ve known for a really long time, and he’s actually a huge reason why OZ Pitch Day even exists. And he helped introduce me to a lot of people in the Opportunity Zone space when I first got started, so I’m incredibly grateful to Gerry for all of his help and support over the years, since the very get-go. Gerry, great to see you here. Welcome to the panel. Quick intro, and what attracted you to Opportunity Zones initially?

Gerry: Thanks, Jimmy. And as far as your OpportunityDb goes, Jimmy is a hugely impressive entrepreneur, who has built, more than once, something from nothing, under the Peter Thiel concept of zero to one. I know Michael. I can’t remember where I know Michael from, but you might remember, Michael, I was a founder of Behringer Harvard, and you probably got involved in some of that stuff, in 1031 syndications, and unlisted REIT offerings. But I’m a securities attorney, and a corporate attorney, meaning that, for the last four decades, I’ve assisted everybody from American Airlines to doing deals and raising capital, to your, I had, actually, the smallest company I ever helped was a little plant nursery on the corner. But for half my 40 years, I was an entrepreneur, co-founded a tech company in the late ’90s, and then co-founded a real estate investment fund platform. Mostly real estate. We had some other funds as well, from 2000 through about 2015.

I discovered the Opportunity Zone arrangement… Much like Jill, I was doing a deck for a tech company, where I was including a section 1202 slide, and I said, “Well, Trump just passed this new act. I better see if there’s anything else in there to incent investors to invest in this new startup.” And I discovered the Opportunity… six-page Opportunity Zone statute, and it totally blew my mind that you could create any kind of business, with some limited exceptions, although those exceptions can be gotten around, any kind of business, just by geographically having a contact to a certain space, in a world where geographic locations are kind of agnostic to most businesses. So, as soon as I discovered it, I kind of started focusing on it. I can’t imagine we’ll ever have a chance to have unlimited tax-free upside in our investments again. And I created a conference, an event company. Jimmy attended the first… I reached out to him. I accidentally discovered him 35 miles away in Fort Worth. I’m in Dallas.

And Jill came, and Jill was a huge benefit to my first conference, and brought some great people, and had a great contribution. And I’ve been in it ever since the conference event, as counsel. I also, I represent all parties: investors, fund managers, fund sponsors, real estate developers. Anybody in the space, I’ve represented, and I’ve also assisted with capital raise, kind of incidentally to what I do. I mean, I was, at one point, a big capital-raiser and broker-dealer, and registered rep and whatever. But now I just kind of do it incidentally.

Jimmy: Well, it’s great to have all three of you here this morning. I have a similar story. The day I found out about Opportunity Zones was August 1st of 2018. It was a few weeks after the zones had been certified by Treasury, and I started the website literally that night. I was so excited about Opportunity Zones, and then a short while later, turned into a podcast, and now we’ve got this great event series, OZ Pitch Day, which has helped generate tens of millions of dollars of investment into Opportunity Zones over the past few years. This is our 11th those pitch day. So, a quick question. Well, I don’t know how quick it is, but I wanted to focus today’s panel for that investor who has a capital gain. Maybe it’s a few tens of thousands of dollars. Maybe it’s a few million dollars. And they’re looking at Opportunity Zones. Maybe they’re considering an Opportunity Zone Fund. Maybe they’re considering starting their own captive fund and funding their own actively-managed deals. Just at a high level, what are some of the most important considerations for diligencing an Opportunity Zone investment, whether it’s a fund or a deal? Kind of an open-ended question. Take it whichever direction you want to. I’m gonna snake back in the opposite direction. We’ll start with Gerry first. Gerry, what do you have to say? Give us some thoughts.

Gerry: Yeah. Well, I think the first step for a person with capital gains is to figure out, adjust how you’re looking at, as far as due diligence, as to what you’re looking at. If you’re investing in a broadly offered fund, like some of the funds that are presenting today, what kind of fund is that? What’s the track record? Where is it’s going? What’s its anticipated return? Or, if you’re all the way down to doing your own self-directed fund, you need to know a little more about the actual workings, work with a CPA or an attorney, of how the Opportunity Zone Fund works, and how you might execute on your own investments. Or if you just want a deferral, and you’re gonna defer, and then you can shut it down and pay your taxes later. But when it comes to due diligence, from third-party investments, frankly, the first step is something that almost nobody does. Read the offering documents, with special attention to the description of the business, to the financial results, and the risk factors, especially as to how the risk factors might pertain initially to you. I love reading prospectuses and offering memoranda, because I’ve been doing them for four decades, and I can immediately go to the spots that are interesting and important.

Jimmy: Well, I wanna follow up with you on that in a minute, but I wanna hear from Mike. Mike, what are your high-level thoughts on how you would advise an investor, or a taxpayer with capital gains who’s considering becoming an investor in Opportunity Zones, what are some of the most important considerations when diligencing either a project at the deal level, or maybe they’re considering becoming an LP in a fund? Open-ended question. Take it where you want, Mike. What do you say?

Michael: Well, I would agree with Gerry, and I think, right now, you know, across the universe, there’s a lot of friction in the marketplace, for obvious reasons. And I see a lot of conversation about LPs not fully understanding the deals. And, you know, there’s situations out there. There’s a lot of capital calls. So, you know, we see both sponsors… We usually are dealing with, you know, single sponsors coming in to help structure the deal, and make sure it’s packaged correctly, so it can be presented in a manner that’s efficient. But then, you know, we have a lot of investors and funds coming to us, looking for deals that, you know, they’re looking for the home or the right opportunity. We’re a service provider. We don’t raise capital. We’re not a broker-dealer. So, we really kind of emphasize, and that’s where my, kind of, broker hat comes on, is, you know, you gotta get dirty. You gotta get the on-the-ground of the project, whether it’s real estate or business. And when we first got into this space, we thought it was, for us, we thought it was all gonna be real estate, but we ended up on a couple large businesses, and that really kind of opened up my eye because it’s higher risk, higher return, you know, a private equity play. But we diligence the company. You know, we get into the team, the timelines, the risk, returns, location details, you know, both on the real estate and the, on the QOF and, you know, down to the QOZB is where we really, you know, kind of try to get to.

Jimmy: Higher risk, higher return. Definitely good to point out. Opportunity Zone investing is not a riskless, or, you know, low-risk type of asset. It’s not the same as investing in a blue chip stock or treasuries, right? It’s more toward that opposite end of the spectrum, when you’re taking on construction risk, or significant improvement risk, or venture capital risk. Because you’re looking for a big capital gain, and that’s what the program is designed to try to spur. Jill, we haven’t heard from…

Gerry: Well, from the overall perspective, it’s usually considered an alternative investment…

Jimmy: Correct.

Gerry: …which has got non-correlated return dynamics against your public investment portfolio. So, it’s, the advice of most advisors is that you have 5% to 10% of your portfolio in alternative investments.

Jimmy: Good to point out. I also think it depends on what your net worth is. If your net worth is in the hundreds of millions or billions of dollars, maybe that 5% to 10% mark inches up to 50% or 90% or more, who knows. But for a more typical main street investor, I think that’s spot on, Gerry. Jill, we haven’t heard from you in a while. It looks like you’re situated there in the stolen conference venue at the Marriott.

Jill: Yeah.

Jimmy: Why don’t you give us your high-level overview? Some thoughts on diligencing Opportunity Zone investments.

Jill: Yeah. And so, I’m also a registered investment advisor representative. And so I’ve worked with individual investors and family offices to provide investment advice on Opportunity Zone investing. And what I, how I kind of describe this is it’s really choose your own adventure. So, if you think about that, where it’s, you know, okay. Do I go to page 56 or page 37? And so, the first question is, you know, really, do you want to invest in a multi-asset fund? Do you want to invest in an individual deal that’s being developed by a developer? Or thirdly, do you want to invest in and execute the business plan yourself? And so, that’s, like, the first decision, is which adventure, if you will, do you go on? And with each one, it has a different level of risk. We’ve been talking about risk. And it also has different levels of fees. And so, more broadly, if you think about, so, a multi-asset fund, you would be investing in, and that kind of diligence, you would be investing in a fund manager, and the fund manager’s role is to select best-in-class real estate developers to execute the business plan, and the best-in-class, you know, those developers have best-in-class deals.

And so, part of, like, the big component of the diligence there is looking at the fund manager’s track record and what they’re able to do. And what’s unique with Opportunity Zones is, because of the timing, developers and fund managers have a short amount of time to place the capital. And so, you, what’s unique is you can actually look at a lot of these underlying assets that these funds already have, which is unique to a lot of real estate private equity funds. So, you can diligence the fund manager, but then you can also look at a lot of the deals, and when you’re looking at the fund manager, you’re looking at track record. When you’re looking at the deals, you’re looking at, you know, returns and fees. And then, if you don’t want to invest… And, but you’re also paying two levels of fees. So, you’re paying the fund manager fees, and then the fund manager’s paying the real estate developer fees. And I’m really speaking about from the real estate side.

So, that’s one adventure. The second is if you’re investing in real estate developer’s deal. So, investing in a single deal. And there, I would just say, high-level, you’re diligencing the track record of the developer, the sponsor, the location, and then also the asset. You know, is this an asset that you wanna be invested in for 10 years, and are these people you wanna be invested in for 10 years? And within each, like, each level of that, you have, you know, what to do for diligencing investors, the location, and also diligencing the asset.

And then thirdly, if a investor wants to do their own deals, then that’s all about, you know, the 101 of real property diligencing, and, you know, getting, you’re boring through geotech reports, and all that good stuff. And that goes off on a whole ‘nother level. And so, I think, for a lot of our conversation will be about the first two. So, that’s really how, you know, my first conversations, when I talk with investors, is, which way do they wanna go. And the last one, you know, sure, they have, the developer has a chance to keep 100% of the profits, but they’re taking 100% of the risk. And so they need to figure out, you know, which path that they want to go down, and then, you know, go in clear-eyed on what the risk is, not just, you know, focus on keeping 100% of the profits.

Jimmy: A great breakdown there, Jill. Really appreciate that. We did get a question from Jay a moment ago in the chat, that I wanted to address. Jay asks, “So, based on Jimmy’s comment, OZ investments are categorized as high-risk?” I would certainly say they fall toward the riskier end of the spectrum, and I’m comparing them to the entire universe of possible…

Gerry: Well, Jimmy, if I can interject.

Jimmy: Go ahead, Gerry. Go ahead.

Gerry: One of the elements of risk in the Opportunity Zone space is the illiquidity. There’s the illiquidity risk, which is, which means it avoids the volatility of traded securities, is, in itself, a risk-based dynamic that most investors would consider to be, “high risk,” because you do not have the control as an investor to get in and get out. And you have to rely, permanently, until the resolution of the fund, on the skill and success of the fund sponsor. So, even though you might look at a certain real estate investment, or, I mean, you can invest in businesses, and there are some, a few venture capital funds in the Opportunity Zone space, even though you might look at an underlying investment or investments as low-risk, the illiquidity factor is a high-risk dynamic.

Jimmy: That’s great to point out, Gerry. And just to touch on that just for another minute, you know, looking at the broad spectrum, the entire universe of all possible investments that you can make with your dollars, there’s, you know, “risk-free investments.” I mean, all investments carry risk. I would say the most risk-free are just holding in cash. But then, of course, your cash is eroding due to inflation, right?

Gerry: Actually, U.S. Treasuries are better than cash … risk-free.

Jimmy: You can do U.S. Treasuries. U.S. Treasuries are risk-free…

Gerry: Especially when they’re paying 5% or 6%, like they are today.

Jimmy: Yeah. Exactly. That’s a good type of investment. Those are very low-risk or “risk-free” types of investments. There’s stocks and bonds and mutual funds, your more traditional investments, which, within that category, has varying levels of risks. Then we’re talking about alternative investments, which are illiquid, as Gerry points out. Real estate deals, or private equity, venture capital deals. And then there’s more speculative stuff, like crypto, or precious metals, commodities, and the like. So, Opportunity Zones, because it involves, speaking of real estate now, ground-up construction, or substantial improvement, there is that level of risk that you’re taking on. Might still be a great investment. Just, there is an illiquidity premium, so to speak, and some additional level of risk. So, but as Rob points out in the chat…

Gerry: Well, and I see someone commenting, “High risk, high reward.” The reality is that, no. And yes. It depends upon what you’re investing in. If you want an alternative investment structured as a pyramid scheme, that’s high-risk, ultimately, probably no reward. So, you can have illiquid investments that are ridiculously stupid, or you can have illiquid investments that seem to have a very good opportunity for upside. So, high risk, high reward can be a dynamic, but you still have to look at the underlying investment.

Jimmy: Absolutely.

Jill: And I would, add that, you know, the purpose of the Opportunity Zone tax incentive was really to bring new investment to these designated low-income communities, and new investment in the form of tangible property. And so, that, out of that, I talk a lot, there’s, like, two business plans, in my mind, that can be done. One business plan involves substantial improvement, and how that translates to real estate is, you know, major, major rehabs. But the second business plan is original use. So, bringing new tangible property to an Opportunity Zone. And that can be either through real estate development, or it can be buying newly-constructed real estate, or, you know, just-about-finished, so, prior to certificate of occupancy, where the risk there is in the lease-up.

And so, having underwritten a lot of these lease-up, you know, whether it’s multifamily, office, but generally, institutional capital looks for a return. So, if you’re solving for, call it 150 to 200 basis-point spread over current cap rates, on an untrended return on cost basis, so, if that’s what you’re solving for, generally, institutional capital is willing to accept about half of that for these lease-up… You know, and I’m just talking generally within real estate private equity. So, they want between 75 to 100 basis points spread over current cap rates, where the development risk is taken out, and all we’re really talking about is lease-up risk. And so, again, there’s correlation between risk and return. There is this other strategy that involves, you know, okay, buying new buildings and leasing up. But ultimately, the whole point of this is to bring new capital and new investment to these areas, and that’s why there’s, that’s why the government decided, policymakers, to try to, this is what they thought would really, really entice capital, you know, tax-free appreciation, in order to achieve the policy goal.

Jimmy: We are very quickly running out of time, believe it or not. We only have a few minutes left now before I need to move on to our next presenter, who will be Meg Epstein from CA South. We also have Driftwood Capital coming up a little bit later this afternoon, and then a few more pitches throughout the course of the day. We got a few more minutes left. I did wanna touch on one thing that Gerry said toward the beginning, was, read the offering documents if you’re looking to invest in a Qualified Opportunity Fund. Gerry, what in the offering documents do you like to pull out, assuming I’m not actually gonna sit down and read the 100 to 200 pages of legal disclosures and the PPM, and, or the prospectus, or the subscription agreement? What are some key sections that you like to take a peek at? And then let’s move on to Mike and Jill for their thoughts on that too.

Gerry: So, I always look first at the description of the opportunity, whether it’s a blind pool fund, where it might invest in assets that haven’t been identified yet, you know, how that strategy goes. Whether they say anything about their track record in that area, the sponsors of the fund, their track record. If they don’t say anything, then I would ask a supplemental question to the founders about what their track record is. Then I would look at the financial suggestions. They might be projections, they might be estimates of return, and see if those are reasonable. And finally, I like to look at the risk factors, not for the general risk factors that are in everything, but anything that’s specific to this deal, or this Opp Fund, and to you.

So, for instance, if you’re a…wouldn’t apply here, but if you’re investing through a IRA, investing in real estate could be problematic because you can produce unrelated business taxable income, so you’d want, you would look at that. The other thing I wanna mention, having done $12 billion in real estate funds myself, from 2000, 2015, there is a whole industry of independent due diligence experts out there, that will create a report on the funds, and they will do the work for you. Often those reports are free to any investor, once created. So, you should ask a fund person, a fund sponsor, “Have you got an independent due diligence report? And if you do, I’d like to see it. And if you don’t, why haven’t you gotten one?” And I know all the people in this space. If anybody wants to know, say, hey, if they wanna ask that question, and then suggest they go to FactRight or Mick & Associates or whomever. Catherine Bowman, there’s all kinds of them out there. You know, well, why don’t you go to Catherine Bowman and get a due diligence report then?

Jimmy: That’s a great tip, Gerry. Mike, or Jill?

Michael: Gerry, well, thanks for mentioning that because that’s one of the big things we see in the marketplace. And so, we are providing those services right now…

Gerry: Excellent.

Michael: …and would love to talk to you further about that. You know, I love the different perspectives here. And again, I’m kind of more of the boots on the ground, and so, when we get into the Opportunity Zones, where they’re over 8700, and obviously, not all zones are created equal, right? So when you get into evaluating these zones on the feasibility analysis, of, you know, what is the demographic trends? What are the comps in the market? What are the rent growths? Because a lot of the projects are multifamily, to date. You know, we get into the private equity and the businesses, what Gerry’s talking about, the alts, a lot more risk. And so, I think, listen, I’m bullish on the space, Jimmy. You know that. Obviously, we’re all rooting for the proposed legislation, whatever it might look like, but we know that 2026 is coming up quick. I think, you know, when everyone first heard about these, they were more interested in the capital deferral mechanism, and didn’t really think the long-term strategy of, you know, the 10-year hold, the appreciation, no depreciation recapture, and no taxes on the exit. So, there’s still a lot of education that needs to be done in the marketplace, and so that’s what we, we’re trying to be part of that solution.

Jimmy: Jill, final words?

Jill: Sure. You know, I hope it’s not tacky, but the first thing that I look at is fees. And I don’t fault anybody for, you know, wanting to make money, and having fees, having a fee load. It is a business. But, for me, it’s how, I just need to understand exactly how the fund is making money, and I know, like, I know what market is, and I like to understand how they stack up to market. Because, to me, it’s also a gating question, if, you know, if the fees aren’t market, then it saves me a lot of reading, because, you know, I just think the fees need to be in-line. And I’ve seen a number of deals where it’s shocking. And then I’ve, you know, but more often, it’s, you know, a lot of deals are in-line. So, I start out with the fees, and, you know, finding all the fees, and what the waterfall is, and that helps me also understand, you know, how they’re motivated. You know, whether it’s, you know, more of it’s being charged on invested equity versus waterfall. If someone’s really motivated by promote, and getting a return on and return of before they get paid, then that’s a different sort of fund than if they’re making a ton of money based on equity under management. And so, that’s really where I start, and then, before I, you know, dig into the deals and everything.

Jimmy: Great tips from all three of you. We are really low on time. If you liked today’s presentation, I did wanna tell you a bit about OZ Insiders for just a minute. All three of these panelists today are members of our new Opportunity Zones mastermind group, OZ Insiders. You can learn more at Best part, we did just scratch the surface here today. We didn’t really have time to dive in fully with the limited amount of time, but each of these three panelists is also going to be presenting a master class to our OZ Insiders community, coming up later this year. Jill Homan has our April master class on diligencing opportunity zone funds and deals. It’s gonna be pretty much this, but much more detailed, and more extensive. We have a full hour blocked off for her.

Mike is gonna be presenting a class in May on financial modeling for opportunity zone deals. And then Gerry, we’ve got you slotted in in July. Gerry’s gonna be discussing Opportunity Zone development joint ventures. So, that’s just a little sampling of what is to come at OZ Insiders, our new mastermind group. Again, you can learn more about joining us. There’s over 40 members now. We’ve got three of them here today with us on this panel. Head to Jill, Michael, Gerry, thank you so much for your time and support today. I know we could probably go on for another hour, but I do need to move on to the next segment. But sit tight, stay tuned, and keep on rocking with us here at OZ Pitch Day today.

Gerry: Thanks, Jimmy. Great job.

Jill: Thank you, Jimmy.

Michael: Thanks, Jimmy. Appreciate it.

Jimmy: Thank you.


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