Opportunity Zone Limitations & Ideas For Improvement, With Matthew Rappaport

The Opportunity Zones concept as a place-based economic development policy is a great idea with broad bipartisan support, but some the execution leaves much to be desired.

Matthew Rappaport, vice managing partner and co-chair of the tax group at Falcon Rappaport & Berkman, joins the show to discuss a wide range of Opportunity Zone issues, including its limitations, ideas for improvement, the IRS enforcement environment, and how politics are endangering the future of the policy.

Episode Highlights

  • A look back at how the IRS drafted regulations for Investing in Qualified Opportunity Funds, and a peek at Matthew Rappaport’s comment letters.
  • How the Opportunity Zone apparatus is very limiting, especially with regard to the 5% nonqualified financial property rule, sin businesses, and the working capital safe harbor provision.
  • Matthew’s best ideas to improve Opportunity Zones.
  • The non-conformity mistake made by California, New York, and others.
  • The current IRS enforcement environment, and a warning about nefarious tax strategies.

Guest: Matthew Rappaport, FRB Law

Also Featured On This Episode

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: Welcome to the “Opportunity Zones Podcast.” I’m Jimmy Atkinson. Today’s guest is a tax lawyer who advises family offices and private equity real estate funds. Matthew Rappaport is vice managing partner at Falcon, Rappaport, and Berkman, and he joins us today from Long Island, New York. Matt, great to see you. Thanks for coming on the show. Welcome.

Matthew: Any time, buddy.

Jimmy: Good. Well, before we dive in, Matt, I wanna get a bit of background on you. And actually, first, I’ll mention, Matt, that a couple years ago, I had the pleasure of interviewing one of your colleagues at FRB. I think it was before his time at FRB. But Andrew Gradman is now a partner at FRB, and he and I discussed seven common mistakes made by Opportunity Zone investors. I’m gonna make sure to link to that episode in the show notes for today’s show.

Matthew: Probably gonna be better than this one. I mean, first off, he’s smarter than me, and second off, I don’t have his professorial flair. So, if you’re expecting the master classes that that guy gives, I will disappoint you. Listen, there’s the reason he’s here, okay? And it’s not because I wanted to surround myself with people even dumber than I am.

Jimmy: Yeah, he does have that professorial flair. I think he probably has elbow patches on his suit coat…

Matthew: Doesn’t he? Doesn’t he? I mean, I say, it’s… I’m glad I don’t have to run around acting like I’m so smart anymore. I have him now, so…

Jimmy: Yeah, you got him to lean on. It’s always good problem to have, when you have people smarter than you working there. He’s smarter than I am. Anyway, so… Anyways…

Matthew: Yeah, that was a watershed moment. Somebody smarter than me wanted to work with me. That was a real watershed moment, man, so you can’t help but be happy about that. I mean, the guy has elevated the game here.

Jimmy: He really has.

Matthew: It’s…listen, this is not a podcast about Andrew Gradman. That being said, it is necessary to say, the way the man practices law, and the influence that he’s already had on me, I mean, he’s been working with us in some capacity for two years. But on January 1st of 2024, he folded in his practice, and he’s with us full-time now, and even in that short period of time, it’s been transformative. And it’s been great. So, I’m just like, I’m kind of, like, over the moon about it. In case you couldn’t tell, you know?

Jimmy: I can tell. I can definitely tell. Anyways, that’s a great introduction to that podcast episode I did with Andrew Gradman a couple years back. If you’re interested in listening to that episode, you can head to opportunitydb.com/podcast, and I’ll have a link to that episode in the show notes for today’s show. But let’s talk about you now, Matt. Let’s talk about you and your firm, FRB. Give us a little background on you and what FRB is all about.

Matthew: Yeah. So, me individually, I run a tax practice. When I began, I began in the trust and estates world, and was relatively heavy in it, but then, when I formed my own practice, in 2015, that practice was an exclusively tax practice, that occasionally ran into some trust and estates. And when I handled trust and estates, really, then and ever since, it’s been in connection with wealth transfer by high-net-worth individuals, and people who have businesses and real estate portfolios and different sorts of assets that may be subject to having the government take a piece out of it at the time they wanna transfer it to their heirs, and there are, as everybody tends to know, there’s various solutions out there that can tax-optimize the transfer from one generation to another, and that’s what trust and estate-related tax planning is about.

It’s not the only thing it might be about. There may be some income tax planning weaved into it, but primarily what people are going for is they’re going for tax-efficient wealth transfer, and that’s really where I focused for a long time. But then, in 2015, 2016 it started to shift, and it went from majority trust and estates to majority income tax. And where I’m at now is I wanna practice it as majority income tax now. But you know what the cool thing is? The cool thing about that is that the trust and estate-related background, and the way that I’ve had my hands in different matters, because as a sole practitioner, what I was doing was I was an outsourced tax department for law firms that didn’t have one. And I was being compensated as part of a deal team that may have included several law firms, but there’s nobody tax-wise who was in the deal. This would be a real estate deal. This would be mergers and acquisitions. This might be sorting out the tax consequences of a settlement in litigation, there were a number of things that might be going on, where you would have a corporate law firm, real estate law firm, a litigation outfit, a boutique that was doing something else, and they said to themselves, “Well, we don’t have a tax lawyer. Where can we find one?” And I would run around networking, and I would tell people, “Hey, listen, this is what I’m doing.” And the word got around, and then they would call me, and say, “Hey, we heard you’re a tax lawyer.” And what would happen is I’d come in on a consultation basis, I’d ally with some other law firms in my orbit, and I would do tax law for lots of different deals.

So, the cool thing is that I got a breadth of exposure. And in tax, that’s not the norm. And the cool thing about Andrew is Andrew’s got breadth too. So, for me, I enjoyed getting a cross-section of so many different types of things. And when OZs came into being, when the Tax Cuts and Jobs Act was passed, I saw my opportunity. Because I was taking a look at the statute, I was taking a look at the regulations, and the coolest thing about that, for a guy whose career began in 2011, okay. You have the OZ statute drop in 2017. It takes effect in ’18. And all these things I heard about from the OGs who had been in practice for such a long period of time, who are on the American Bar Association with me, things like that, talked about the ’86 Tax Act, Reagan and Tip O’Neill. They talked about the release of significant statutes, 409 Cap A, 1202. I mean, lots of different stuff that came out. And this was when I was, like, in diapers, in elementary school and stuff.

And now I got my chance. OZ comes out, and I’m like, “Hey, you know what? I got my chance now. Because now, I can be part of the process.” The IRS had a comment process, and you can look it up on the internet. I did two comment letters, both rounds of regulations. And I put forth in there, I was like, “Hey, guys, there’s a ton of issues going on here. How are you gonna deal with this?” And the cool thing was that was a culmination of me getting a vantage point on real estate tax, corporate tax, trust and estates tax. And am I, like, really heavily strong on all of it? I would say not necessarily. But I’ve got a good feel for a variety of different things, and what I feel makes my practice different, this department different, and the law firm as a whole different, is that we see a lot of angles. And there’s a few things, right. Like, your question prompts me to put my sales hat on, right? Oh, like, what makes FRB what it is? The answer that I would give you is that we are entrepreneurs serving entrepreneurs. We come at things from a practical standpoint, but we’re also artisans, the way that I see it. I see it as, we are people who come at legal issues from an artisanal angle, where we try to get very deep.

Like, you talk about Andrew Gradman’s episode with you. I haven’t heard it yet, but I would guarantee you that the man is, it’s a master class in all these different aspects of the OZ-related statute and regulations, and how to avoid these pitfalls and stuff. So, you get that level of technical expertise, combined with an entrepreneurial, practical bent, to try and get to the bottom of problems, and that is not the norm in the law. The norm in the law, as I experience it is, they’re gonna churn bills on you. They’re going to explore little nooks and crannies that are probably not gonna be practical, or may not even come up in the course of a deal. And you’re gonna have a lot of people, listen, everybody in this business is very smart, and everybody in this business works very hard. But what I feel sets us apart is we take a practical, business-like approach, and a wide-angle lens, in which everybody across our firm, which is a full-service firm, is practicing together. We’re not siloed. We’re not sitting there having internal politics interfere with whether someone else has to come in on an OZ matter and be like, “Oh, we need the real estate lawyers on this. We need the corporate lawyers on this. We need the tax lawyers. We need…” You know, if you’re coming in, you have intellectual property inside of your Opportunity Fund or your Opportunity Zone Business. We can address all of this stuff, and everyone’s gonna work together. Everyone is going to sort of be, like, a symphonic kind of a mass moving as one, rather than a bunch of different, disparate parts, like, coming together in a discombobulated, disjointed whole.

That’s not what we do. We have a team that comes together, we work in harmony with each other, and we give you a practical, workable solution, in plain English. That’s what we do here. So, we invite the most complex, the most, you know, hairy interdisciplinary stuff. And some other firms, like, won’t even touch it. “Too many practice areas. It’s too hard.” We don’t do that here. What we do is we tackle things, and OZ is a great example of that, we tackle things that require real technical expertise in a variety of areas to figure out, and we’re gonna put something together that’s practical for you. That’s who we are.

Jimmy: Yeah, your firm provides a synthesized, soup-to-nuts solution for different OZ practitioners. Hey, I wanted to, while you were talking, by the way, I found one of your comment letters, just to prove that, hey, this…

Matthew: There it is, man. That’s the first. That’s the first one.

Jimmy: This is the first one. There were a few others I found, but anyways, I will link to…

Matthew: Yeah, that’s the first one.

Jimmy: I will link to your comment letters on the show notes page for today’s episode. That was a wild time, back in late 2018.

Matthew: Makes for a great, great sleep aid, man.

Jimmy: That’s what I tell people about this podcast.

Matthew: Hey, listen, anybody who’s got an Ambien or a different type of prescription, you don’t need that. You need my comment letters. Put them on your bedside. You’ll be knocked out. You read to the second page, it’s a big accomplishment.

Jimmy: If you can get there. Yeah, exactly. Well, let’s talk OZs. And, you know, one critique you have about Opportunity Zones when we were talking on the phone prior to this podcast interview, Matt, was just how limiting the Opportunity Zone apparatus is, both on the statutory side and on the regulatory side. What do you mean by that? What do you mean that it’s limited? How would you…

Matthew: I put this in the comment letter. I tried my best to nudge the IRS, and be like, “Guys, you gotta make this practical.” And they’re very polite. They’re good people at the IRS. There’s a lady that Andrew and I have become cordial with, I would say. This lady, Erica Regal, runs the OZ part of chief counsel. She’s real smart. She’s also practical too, as far as I’m concerned. She’s business-like, really knows what she’s doing. So, Erica was the addressee of both comment letters, to my recollection. She was the one who I think read through all of them. Right? And she very politely, in the preamble to both of, to the final regulations, she made some allusions to my comments, and she was like, “That’s a nice idea. We’re not doing it.” And it’s like, listen, all respect, you know? Like, this is somebody is way above my pay grade. But the suggestions I tried to make were in exactly that vein. And effectively, what I was saying was, listen, let’s take the example of QOZBs, okay? QOZBs have a rule that says, you know, you can’t have non-qualified financial property that amounts to more than 5% of the QOZB’s assets.

And I put a comment in, and I told them… You gotta realize, the way this is written, the QOZB can only have disregarded entities underneath it. That is to say, any entity that is treated, for income tax purposes, as not existing, and the assets are actually the assets of the owner. If you have any regarded subsidiary, that is to say, a partnership corporation, or the like, you’ve basically blown the rule. And I’m like, look, if you look at the statute, bird’s-eye view, okay? Even at the time of the first comment letter, December of 2018, it was patently obvious that the QOFs were going to be holding vehicles, and the QOZBs would be operating vehicles.

Jimmy: Right.

Matthew: And if you have an operating vehicle that can’t have subsidiaries in it, there are limits to what you can do. I mean, I’ll give you a great example. You’re gonna run a startup tech company that wants to own its real estate. Well, if you’re in the regular world, the non-OZ world, I wanna go opco/propco. Right? I want the real estate in entity one. I want the operating company in entity two. I want a lease between them, and we’re gonna keep these things separate, so that the real estate isn’t fair game if I’ve got a liability off my startup. Like, I got a medical device startup, and then catastrophically, the medical device, you know, changes everybody’s eye color. You know, you’re gonna get a class action lawsuit, you know, and it’s like, do you want your real estate to be fair game? I mean, nobody wants that. And you set up that same type of company, because you could do medical devices in the QOZB, if that’s what you wanted. You could have your operating real estate inside of an Opportunity Zone, and your manufacturing plants and all your other stuff, and you meet all the corresponding rules. But you can’t even go opco/propco unless it’s disregarded entities. And it’s like, “I don’t know. What if I want help financing the acquisition of my real estate from an outside passive investor?” And I can’t, you can’t really structure that.

I mean, maybe you could, right? But the thing is, you know, it starts becoming incredibly unwieldy. And for me, I look at it and I’m like, “I don’t know. Do you really want a regime in which your operating company has to be one tax entity, and you can’t have any regarded tax entities underneath it?” How you structure outside investors coming into one part of it and not another part of it? How do you structure, like, the fate of the ventures as they may evolve? I mean, I don’t know. What happens if, like, you stumble across some other idea inside of your OZ business? You wanted to make it into, like, three businesses. You know it’s, you got problems doing that too. You know, and the way you have to structure things is a problem. That’s, I would say, like, inflexibility number one. Then, just off the top of my head, inflexibility number two is around the idea that some of the businesses that you can and can’t have, both practically and explicitly in an Opportunity Zone, they don’t make a lot of sense, right? You start getting very dicey in the way of fact patterns, like, I wanna run a hotel out of an Opportunity Zone, but I also want that hotel to have a golf course and a spa. I mean, practically, you really kind of can’t do that, right? You have the sin business rules that say no, like, hot tub stuff, and no golf courses and so forth.

Jimmy: Right. Right.

Matthew: And it’s like, well, you know, and I got sports betting legalized across the United States, you know, and that sort of business, and, like, you know, there’s restrictions around gambling parlors, race tracks, this and that. And, you know, I don’t know. I mean, there’s no real guidance around how to toe the line of, you know… It’s safe to say, generally, I think, that most practitioners would agree with me that you can’t set up a hotel that’s got a golf course and a spa in it. But if you go anywhere across the warm weather jurisdictions in the United States, tons of hotels have golf courses. You know, Florida, Texas, Arizona, New Mexico, Southern California. It’s just tons of golf courses, you go to these hotels. And you’re just telling me that if it so happens I’m gonna be in an OZ, and I wanna bring economic activity by setting one of these things up, I’m gonna have to, detriments to doing it? Because, you know, what if my spa is standalone? I want the Elizabeth Arden Spa to go ahead and have a license, and pay me rent inside of my hotel. I can’t even do that. Because I got all these sort of rules that don’t make a lot of sense, and, like, you know, I think that that limit is broadly unnecessary.

And then, in terms of the capital deployment, working capital, I understand that this is all anti-abuse, that they don’t want money to go into Opportunity Zone tax-favored vehicles and then just kind of sit there. But at the same time, if you look at, even if you look at COVID, and you look at the extensions that COVID gave people for working capital deployment, and other compliance with the OZ deadlines, when the rubber hits the road, we’re in 2024 now, when the rubber hits the road, and you see how these projects have progressed and stalled, and had problems with the rising interest rates, and the supply chain issues, and all manner of other externalities that are outside of the OZ entity’s control, and its principals’ control, and these projects are getting stalled, they’re getting backed up, your timers are running out, and this is all being done in good faith, what are you gonna do? And there’s a lot of these. I mean, I don’t know how many people are appearing, Jimmy, on the program, and talking about the idea that, like, well, these projects are stalling out. First we got COVID, then we had inflation, we had supply shocks off of building materials and other things we may need for operating businesses. We got problems hiring people. There’s a tight labor market. Oh, and by the way, the interest rates, like, tripled. I mean, it’s, you know, and the limits around the program, and capital deployment, they make this stuff an issue, and, like, one of my beefs is, like, look, you know, I understand what Congress is trying to do. I don’t blame IRS for this at all. I think the IRS has done the best it could. Poorly-written statute. And it’s a good idea. I like the Opportunity Zone idea. I think it’s a good program. I think that there is justified excitement around it, that remains, even this far into it. But I think that Congress did not stick the landing here at all. At all. I think they had a great concept, and the execution was not good. And I think those effects reverberate today.

Jimmy: Well, a lot of great points there. I love the golf course issue that you bring up. You’re absolutely right. It does seem silly, some of the sin businesses that are listed as ineligible to be a QOZB. I recently learned, by the way, Matt, I don’t know if you know this. I don’t know if a lot of our viewers know it. There are more golf courses in the United States than there are McDonald’s. I never would have guessed that, but I learned that…

Matthew: I had no idea.

Jimmy: I learned that recently. Yeah, there’s, like, over 10,000 of each. But the golf courses edge out McDonald’s, oddly enough.

Matthew: You know what, too? You know what, too? They call them “sin businesses,” but you know what’s crazy? What’s fair game, and listen, I didn’t have anybody take me up on this. When I was talking to my clients and turned around to me, and they told me, “What should I do in terms of capital deployment?” I said, “Well, they call them sin businesses, but there’s a ton of stuff that’s not on that list.” I’ll give you an example. Secretary Mnuchin, when he was still in office, under the Trump administration, came out and said, “We don’t want OZs getting used for marijuana,” and my response to that was, like, “Eh, Mr. Secretary, too bad.” Right? The advice that I gave my clients… Okay, standard disclaimer, right? I’m a lawyer, after all. Not legal advice on the podcast. But I gave individual people that were clients of mine, I gave them advice that cannabis was fair game in OZs. So, I said, you could go ahead and you could set up a dispensary. You could set up a grow house. You could set up whatever it is. As long as you meet all the rest of your compliance, you should be good.

Also, true sin businesses, gentlemen’s clubs. You could set up a gentlemen’s club in an OZ and qualify. It’s, gentlemen’s clubs are not excluded. Businesses that prey on the poor, check cashing, coin laundromats. I don’t know if coin laundromats prey on the poor. But coin laundromats make great money. Great money. And it’s primarily a low-income clientele. You can set up a coin laundromat in an OZ. So, weirdly, like, they had the liquor store thing, where they said, “Okay, you can set up a restaurant, but you can’t set up a liquor store.” That is to say, any facility for which alcohol is available for purchase off-premises…as long as consumption is off-premises, right? I.e., liquor stores. Fine. But, like, you can do check cashing? And you could do pawn shops.

Jimmy: Yep.

Matthew: Right, you could do precious metals. You can have people trade in their precious metals, and their old antiques, and they can pawn them off. I mean, you only find pawn shops in lower-income neighborhoods. You don’t find them in… And that’s something that the OZs were designed to benefit. But here’s a philosophical question. If I have a QOZ business, and I have disregarded entities underneath it, one of which is a gentlemen’s club, one of which is check cashing, one of which is a pawn shop, and one of which is a cannabis dispensary, have I accomplished what Congress really set out for us to do? I would say, politically, probably not. But legally, I will argue compliance to the death in that scenario. I’ll argue compliance to the death. I don’t think the government can win that, personally. I think the government loses. You go in, you have… I’ll turn around, I’ll say, “All right, here is all of your statutes and all of your regulations. I’m in compliance with every single one of them, so what are you gonna tell me?” And it’s a tough argument. I don’t think… I mean, listen. Like I said, this is above my pay grade. You got some really good people in chief counsel at the IRS, and the people that are in the litigation department and all the other business. Here’s my speculation. I don’t think litigation would take that. I don’t think they would. But that’s speculation. Like I said, these people, they’re way above my pay grade. They fulfill a very important societal function, and I don’t. So, they would decide. But if I’m speculating it, and I’m advising my client they’re not gonna take that case, they’re not litigating that, my client wins that case. That’s my estimation.

Jimmy: Yeah. I think so. I mean, just don’t put a golf course in there, and…

Matthew: Exactly. Don’t put a golf course behind the pawn shop.

Jimmy: Right. Or behind the gentlemen’s club.

Matthew: Behind the gentlemen’s club. Crazy.

Jimmy: So, you bring up several of these inflexibilities of Opportunity Zones, how, the limitations of structuring opco/propco, as you call it. Some businesses don’t make sense vis-à-vis the sin business definitions. We’ve talked about how golf courses would fail the test, but a gentlemen’s club would be perfectly acceptable. You mentioned it’s a poorly-written statute. What is your solution, potentially, to, if you had a magic wand that could rewrite the statute tomorrow, how would you change it? How would you fix it, make it more flexible?

Matthew: I would, first and foremost, run it somewhat similar… And by the way, this is Andrew’s area, not mine. The New Markets Tax Credit has a thing in it where you have to be…

Jimmy: And a lot of the definitions for Opportunity Zone statute are borrowed from New Markets.

Matthew: Yeah, they did. But what they didn’t borrow was they didn’t borrow the community embrace of the project. So, the New Markets Tax Credit, to my understanding, and I’m speaking out of school a little bit, because Andrew does it and I don’t. To my understanding, the New Markets Tax Credit has a mechanism in it where it says, if the community loves what you’re doing, get the credit. And if they don’t want it, you just don’t get it. And I think OZs would have greatly benefited from community collaboration, because I think it would have been more politically agreeable to the leftward fringe.

Jimmy: Mm-hmm.

Matthew: And I think it would have spurred more certainty, that did not exist until the regs were finalized. And then by the time the regs came out, there were a bunch of people that looked at it and said, “Well, this is unwieldy anyway.” I mean, which brings me to the next thing on the proverbial wish list, which is, I would clarify the rules around refinances where they borrowed from disguised sales and said it’s a presumption that if you refinance within two years of a contribution to a QOF, it’s considered to be a taxable transaction, you know, and an inclusion event and this and that. I would have modified those rules, and I would have said you gotta, when the money’s in, you know, you have to go ahead and find out whatever you’re gonna do to be able to make the project work economically. The substantial/slash original use rules don’t make sense. I would have measured it by community embrace. I would have measured it by some level of, just investment.

And the other problem that they had was it’s only capital gains that get you eligible for the tax benefits. There’s no penalty for contributing non-capital gain assets, or money. But there’s also no benefit to doing that. I can understand the philosophy that they wanted to spur the economic activity of both selling capital assets and reinvesting into these zones. That was misguided. I think they should have allowed the benefit based on wherever investment came from, and if they wanted to supercharge it for people who deferred capital gains, all the better. But the problem with OZs, for real estate sellers, is that when you stack them up next to Opportunity Zones, they only make… I’m sorry, when you stack up OZs next. To 1031, the OZs only makes sense for people in the business of development, and people who have really difficult disentanglements they have to get out of with their business partners, like S corporations, or large partnerships, or CMBS-encumbered property or something like that. Other than that, 1031, the reason why people like it is because you’re kicking the can down the road. In OZ, you do not kick the can down the road. I understood that based on the Byrd Rule, they needed the money that was deferred to be due in ’26, right? Otherwise you would have failed your Byrd Rule testing, and you would have… You know, the Tax Cuts and Jobs Act was passed through reconciliation. It was less than 60 votes. If they allowed the OZ money to be deferred past 2026, they would have needed 60 votes. They didn’t have it in the Senate at the time. So, I understand why they did it. But practically, when the rubber hit the road, it was bad. Because you got a bunch of people shrugging their shoulders.

Jimmy: I think the ’26 deferral was a function of the CBO Congressional scoring. The Byrd Rule stripped out the reporting requirement.

Matthew: But they’re related, right?

Jimmy: They’re related. Yes. Absolutely.

Matthew: Like, in other words, the two are related. CBO scoring and the Byrd Rule are, what’s the word, hand-in-glove, right? If you…you need a certain amount of CBO scoring to avoid the Byrd Rule. So, it’s like, it’s all one and the same. They needed it in there. Except, right, we’re in 2024. So, what do I get? I get two years’ worth of deferral now? And it’s like, well, listen, the deferral was, like, super cool in ’19 and ’20. And the reason why it was cool was not only the length of time, but if you go hindsight 20/20, which is not that hard to predict at the time that you were deferring, the other thing about recognition in ’26 is that if I know I’m gonna have it, now I can plan for it. Cost segregation, losses from other investments, because you’re deferring capital gain, after all, so your losses from the markets, like, if your stock took a bath or something, right, then you get to go deduct those losses against your ’26 gain event.

So, now you get to plan. So it’s like, okay, you know, ’19, ’20 and ’21 was cool, not only because I got to defer for a comparatively long time, but I also got to plan. And I get to line myself up and say, “Yeah, that’s cool. I got something in my back pocket. If I wanna take a riskier investment, or I wanna do something that I was on the fence about earlier, I got the comfort of understanding that if I take a loss on that in the next five years, I got this gain coming up, where I just wipe it.” And that’s cool, because there’s no rule against, in ’26, taking the recognition from the deferred capital gain and then offsetting it with something else. There’s no rule against that. So, there were cool aspects to this, that were additional selling points to anyone interested in the OZ program, comparing it to what else might be out there. But you’re selling real estate nowadays, and unless you’ve got a real interesting situation, or you love developing, OZ is not as good of a sell anymore. And when I present the menu to clients, where I say, “Listen, these two are available,” although it’s among a series of other things that might be available, when they’re weighing OZ and 1031 as against each other, the sellers of real estate are 1031 all the way.

The sellers of other assets, they can’t do that, so OZ is still pretty damn cool. Because you get to go in, you got to either defer into a QOF that’s got real estate in it, or defer into an operating business. You get to mix and match. I can sell a business. I can sell stocks and bonds. I can sell artwork. I can sell lots of other stuff. But when you’re selling real estate, OZ/1031’s a tough comparison now, due in part to the length of deferral, but due in other parts to the structure of the program. And so, that’s a small list of stuff that is, among other things, as a matter of technicality, there’s a lot of things in there, that I would take the OZ theme, getting a tax advantage for investing in an underserved area, with no limits, I would have executed it very differently.

Jimmy: Yeah, it’d be interesting if we could remove that CBO requirement, or that Byrd Rule requirement, and actually push something through that was permanent, or maybe there were certain five-year cliffs that rolled every year, something to that effect. But yeah, the 2026 end date that’s written in stone, no matter when you invest, that is a tough one. The other idea you had is, you know, have it based on community embrace, versus original use or substantial improvement. I kind of view that as a double-edged sword. You know, part of what I like about Opportunity Zone investing, and I think part of what a lot of my listeners like about Opportunity Zone investing is that you don’t need approval from anyone to just start doing something, right. You can just, you can set up the fund, and you can just make it happen. There’s no red tape. I guess the community embrace would introduce a little bit of red tape, have some sort of mechanism to quantify that, versus mere mathematic of either putting more improvement into the project than you paid for it, or developing something brand new. But those are just my two cents there.

Let’s move on to talking about some conformity issues, because I love Opportunity Zones. It has its challenges. At the federal level, though, it’s an incredible tax incentive. It was particularly more incredible back in 2019-2020, the early days, when you had that longer deferral period, but it still has some punch, especially with non-real estate gains. At the state level, a lot of states either don’t have a capital gains tax rate to begin with, or they fully conform with the Opportunity Zone state, but there are a handful of states, perhaps most notably New York and California, that have some pretty serious conformity issues. How do you advise clients on that, and what are your thoughts on non-conformity issues in some of these states?

Matthew: I think, politically, the coastal states made a mistake. I think New York made a mistake. That’s my home state. I live here. We have an office in California, in Newport Beach, so we have a presence there as well. Andrew is physically located in California. He’s in Pasadena. He commutes to Newport Beach when he needs to. And we have a familiarity with the SoCal market, the Bay Area market, and the New York City metro market. Each of those faces a common problem that OZ can go a long way towards solving, warts and all. It faces a critical, crippling, terrible housing affordability crisis. Terrible. I’m in it. I mean, listen, thank goodness I just completed my own home search. But you gotta realize, I own equity in a law firm that does a good amount into the eight figures of annual revenue. And, you know, I was creditworthy. And I took a look at the market around me, and I said, “I can’t even with this.” And I managed to find the right thing, after a very extensive, years-long search. Years. Years and years. I finally found the right thing for me and my family. I’m one of the lucky ones. I have the type of income that can justify the price I paid. Which is too much for the house I bought, but that’s the nature of the market.

You look at others that are in these areas, and they’re experiencing the same thing. Housing stock is non-existent. The inventory’s non-existent. You have a lock-in effect now. You have mortgages that were taken out between as low as 2.5% and as high as maybe 4%, 4.5% by the time that the, you know, the ZIRP, the zero interest rate policy ended up expiring. Your mortgage rates now are, on a really good day, 6.5%, on an average day, 7.7%. No one’s selling right now. No one. If you have a low mortgage, you’d have to be a fool to sell out of that and relocate. And the only thing that’s gonna force people to sell is hardship, and we have an economy that is rip-roaring itself. New York and California contributed politically to their current problems in this arena by decoupling from OZs. Because like it or not, a very robust proportion of OZ investment went into multifamily. Like it or not. And all of the units, and that is at minimum a four-digit number of units, probably a five-digit number of units, that are not built in New York and California, because they decided they would not conform to OZs, and they are paying the price, really badly. Because they’re finding out that office-to-residential conversions are cripplingly expensive. Prohibitively expensive. They can’t be done, in many cases. They are finding out that the tax outcomes of a successful investment that an OZ could juice would have encouraged investment that might not have otherwise happened, and it’s very difficult, with the costs of labor, the cost of supplies and materials, the costs of legal and other soft cost, architecture and engineering, to be able to clear the red tape to build in these metro areas, are staggering, and the fact that you turn capital away, in so many words, by not giving them the state incentive to make that type of investment, was foolish. It was foolish.

And I’ll tell you something, okay? Politically, I’m a disinterested, non-affiliated centrist. I don’t have any party registration. I think both parties are terrible. I could rant about this forever. The left made a mistake, because that’s really where it came from. It’s, for the sake of sticking it to the investors who, I will admit, would have made a lot of money, and would have gotten real outsized tax benefits not available to middle and lower-income people. I understand that. They spited those people to prove a point, on pure principle, for nobody’s actual benefit. It was all to the detriment of their own constituents. There’s problems with that on both sides of the political aisle. There just are. And I think, largely, which, when you look at the fate of OZ in Congress, there’s a lot of people that ask me, “What do you think about the OZ extension bills that have been floated by various Senators and congresspeople to extend the timing on the deferrals to change around some of the particulars of the program?” And I say to them, “Wake me up when it’s not performative.” The problem that you have in American politics, local, national, it doesn’t matter where it is, there’s a lot of it right now is performative. And when you look at the passage and the implementation of the OZ program, like I said, you have a great concept, that is being put into place and enforced on the political side, not on the technical side. Technical side, like I said, you got good people at the IRS, who are apolitical. I’m dead serious about that. There’s a serious misconception problem with the minds that are at the IRS who do this stuff. They’re very, very good, and they’re very apolitical, and they’re interested strictly in enforcing the law as it is, not in playing stupid political games.

The politicians, however, it’s not the same with them. And when you talk about the, when they stand on ceremony, and things like decoupling, and you look at the way the far left is, at the federal level, treating the OZ program, they’re missing out on an opportunity. You need to understand that in the history of this country, there have been ugly, ugly compromises from day one. And I feel what you need to do on OZ is you need to make an ugly compromise. You need to say, “The fat cats will make money.” It’s a fact of life. It’s been happening in this country for the longest time. It’s not gonna stop anytime soon. In exchange for the fat cats making money, you’re gonna benefit your community quite a bit. You’re gonna open up housing stock, you’re gonna put downward price pressure on the markets. And not only on purchases, but also on rents. And you’re going to have private, skilled operators of places for people to live, workforce housing, affordable housing.

And if you wanna go back to the question of what would you do to change the program, I’d make the synthesis between the Affordable Housing Tax Credit, New Markets Tax Credit, the Low Income Housing Tax Credit, all this other stuff, right? I would make the synthesis between those things and OZ a lot easier, because, double-whammy it. Right? Make it like, this is a bonanza. This is great. You wanna know why? There’s people who live in these places, there’s a mini-bonanza for them. There’s the idea, I got a place to live in. It’s a brand-new place to live in. And if you’re not living in the brand-new place, the older place they had their eyes on is gonna come down in rent, because there’s more housing stock. And in the decoupling, they really missed out. They really missed out. And they made a mistake. And they’re reckoning with it right now. Because they have problems. It’s costing them politically, and they know it. They have constituencies that they can’t reconcile. They have NIMBYs who just don’t want development, because it’s gonna affect the prices of their own homes and other commercial properties. And then they have the people that are clamoring for housing, any housing. Yeah. Where you gonna put it? You know, what are you gonna do? And then you have constituencies that don’t want the wealthy people to make money. And you have constituencies that are okay with it, and they’d rather have the tax breaks. And they got real problems, the coastal states. These problems are occurring everywhere. They’re occurring on the federal level. But when you talk about the OZ, and the fate of OZ and decoupling in the coastal states, they shot themselves in the foot. And it’s bad. And it’s gonna make their political problems worse.

Jimmy: I wonder sometimes. You know, Opportunity Zones were embraced in bipartisan fashion. That initial Investing in Opportunity Act…

Matthew: They were.

Jimmy: And then, they were passed as part of Trump’s Tax Cuts and Jobs Act at the end of 2017…

Matthew: Yup.

Jimmy: …and that act was passed purely along party lines. I sometimes wonder, if Opportunity Zones had been packaged into a tax bill under the Obama administration, or maybe under this current Biden administration a few years later, would it have received the same vitriol from that left side of the aisle? Would we have these issues in New York, California, these other coastal states that have decoupled…

Matthew: It’s a great hypothetical.

Jimmy: Would they have wanted to stick it to the investors in quite the same way?

Matthew: Great hypothetical. The gentleman who really wrote this was an Obama administration attorney named Steve Glickman, who now runs a consultancy called Develop LLC.

Jimmy: Yep.

Matthew: First off, he’s a mensch. He is an amazing dude. I’ve met him, at this point, a few times. And he’s just awesome. Anybody who’s thankful for the OZ program, as I am, as you are, and as many listeners are, you have Steve Glickman to thank for that. This is his brainchild. Sean Parker, of Napster and Facebook fame, was a big driver behind it, and did a lot to get it passed. And, you know, eventually, right, Sean’s consultancy, of which Steve was a part when this whole thing passed… You know, Steve left the White House when Trump took office. But the idea continued. And it was shaped, and it was formed, and even during the Trump administration, Senator Booker from New Jersey, he’s a high, at this point, a high-ranking Democrat. He got OZs into the bill, even though he didn’t vote for the overall bill. But he got them into the bill. He’s played a part in getting them into the bill. And these, like I said, these are people with real good ideas, but by the time that Congress had to make the sausage, they screwed up. And here we all are. And it’s like, look, we’ll navigate our way through this. There’s advantages to be had, there’s good investments to be made, and there’s communities that can really still be helped by this. I’m a believer, even after everything I’ve mentioned on this podcast. Has problems. OZ has political problems, has legal problems, has interpretive problems, it’s got enforcement problems. It has problems.

Jimmy: Well, let’s talk about those enforcement problems. How would you categorize the current enforcement environment? What private letter rulings have caught your eye, or, you know to…

Matthew: Well, Andrew and I got one, for a client, that the service… Here’s how I… Very sensible. Very sensible. Erica Regal’s at the top of it, right? A chief counsel. I don’t know who else is in the group with her. But, very sensible. You talk about what have we seen out of the enforcement environment in terms of the approach that they’ve taken? First off, it began with the regulate…the regulations are fantastic. They make chicken salad out of chicken droppings, the regulations. I mean, you have a statue…the statute’s terrible. And you have regulations that are great. The regulations for all, the hand that they were dealt, are fabulous. The enforcement, the award of PLRs, the consideration of the issues, the things that the service has their eye on, we also decertified our first fund. We called Erica directly, and we asked her, “We’re decertifying a fund. What should we do?” And she gave us great guidance. She said, “Listen, we’re not out with it yet,” the formal guidance around decertifying a fund, “but here’s what I’d like you to do.” And it was extremely helpful. I mean, so, you’ve got you a woman at the head of the ship who is a great lawyer, very sensible, very practical, understands the mission here, and is not being heavy-handed in this at all. And reasonable cause extensions, right? The reasonable cause waivers for penalties, we’ve had three clients obtain those. Very sensible. Wide latitude. The type of thing that I feel is a good example of good government.

I think that the people that, the service has a chief counsel who are in charge of this, the folks that we interacted with, including Kyle Griffin, was a part of the team that was on the PLR with Andrew and I. Kyle’s part of this enforcement apparatus. Erica’s part of this enforcement apparatus. You’re talking about, the IRS has its best people on this. There’s a lot of good people. They have their best people in this particular sector. And I think one of the big saving graces that you have, in going forward, is that…this is what I think. This is, I’m not speaking for the IRS. I have no authority to do that. I, you know, they’re gonna say what they’re gonna say, and they’re gonna do what they’re gonna do. My hypothesis is that if you are going into this program in good faith, you will get a reasonable enforcement outcome, even if circumstances outside of your control screw things up, and it starts leading to technical foot faults and problems, right? I think… emphasis on I think. I think that when the rubber hits the road on the 10 years, and I think that when the IRS is evaluating how these projects have gone, and what it’s all like, I think they’re gonna reach the right outcome the overwhelming majority of the time. Overwhelming. And that’s what I would say. I think we’re in a sensible, reasonable enforcement environment, with the right people at the wheel. That’s what I think.

Jimmy: Well, that’s great to hear. And glad to get those thoughts from you that there are some really sharp people, apolitical people at the IRS, who are dealing with these tactical matters on a day-to-day basis. Matt, it’s been a pleasure speaking with you today. We’re running low on time here.

Matthew: Likewise, buddy.

Jimmy: Great, great insights here. I just wanted to ask you one big zoom-out question before we hop off today’s conversation. What are some trends in overall tax strategy that you’re keeping an eye on? We’ve got some things coming down the pike here, the, a lot of the TCJA is set to expire in 2025. OZs might expire at the end of 2026, without any extension. Anything legislatively speaking, or any other, just big tax strategy trends that you’re keeping an eye on.

Matthew: There’s a general trend, and there’s a general… What’s the word I’m gonna use here? Do you know what the word “anomie” means?

Jimmy: No. Define it for me.

Matthew: It’s like almost like an environment of immorality. It’s almost like, where norms, and the threads that hold society together start to fall apart. You know what I mean? In the general tax planning community, I get a sense that nefarious strategies are continuing to proliferate. And the IRS needs its funding to help stamp all of them out. There are really wicked, abusive, promoted tax shelters, the names of which I will not mention here, that… One of the reasons I like OZs is that it does not fall into that category. However, if you follow litigation, if you follow tax litigation, tax enforcement, the Criminal Investigation Division, which, if you wanna talk about fabulous, look no further than CID, which is excellent at its job. You have a big problem, where there are abusive tax shelters that we try our best as practitioners to tell clients, “Do not do this. You will get in trouble. Your promoter will get in trouble.” And the IRS is presently under-resourced. I’ve called in public many, many times. “Tax Notes Today,” journal articles, podcasts, many times I’ve called for the IRS to be properly funded.

One of the reasons why it needs to be funded is for the overall fairness of the tax system, and these illegal tax shelters are a stain on the fairness of the American tax system, and they proliferate despite the IRS bringing criminal prosecutions against their promoters, despite the IRS levying heavy penalties on their users, despite the IRS putting its best efforts into education against them. You have a lot of people that should know better, who are lawyers, accountants, learned people with CFA designations, with the credentials to be able to evaluate this properly. They don’t care. They’re out there, doing this dirty work anyway. And it sickens me. And I think the most important trend that OZ investors should understand is that if you are looking at OZs, you are in the demographic that is also looking at other mitigation-related strategies. And the warning I give to you in parting is that some of those strategies are going to destroy you. And if you’re going to look at something, and it seems really, really good, you’d better vet it really, really carefully. Because the way that the promoters are implementing these, the statute of limitations is not running, the IRS has forever, and you’re gonna have a bad time. And I would importune everyone listening, somebody comes to you with a real good tax play, better get it checked out by the right people.

Jimmy: If it seems too good to be true, it probably is, and stay on the right side of the law. I think those are good bits of advice to end on, Matt. Hey, thanks so much again for sharing your insights today. Where can our audience of Opportunity Zone investors and advisors go to learn more about you and your firm, FRB?

Matthew: frblaw.com is the place to go. We… I’m not a phone guy. I’m an email guy. If you folks are listening and you wanna get in touch with me, my initials are my email address. It’s [email protected]. That is the best place to reach me. Phone is a bad place to reach me. I schedule all my client phone calls. I don’t even take, unless it’s an emergency, I tend to tell clients, “We’re gonna schedule something, and you gotta talk to me.” It’s just the way I operate. My schedule’s too insane. So, the best way to reach me is by email. It’s [email protected]. Mention Jimmy and the podcast. Drop a line. I’ll be happy to chat with you. And I hope to meet some folks listening in person someday.

Jimmy: Perfect. I’ll make sure…

Matthew: And if you want, if you’d like me to come back, happy to come back.

Jimmy: You bet, Matt. Well, thanks again for joining today. I’ll make sure to link to your website and your email address in our show notes page for today’s episode, which will be available at opportunitydb.com/podcast. I’ll have links to all the resources that Matt and I discuss on today’s show. And please be sure to subscribe to us on YouTube, or your favorite podcast listening platform, to always get the latest episodes. Matt, it’s been a pleasure. Thanks again so much for joining me today.

Matthew: Cheers, buddy.