Why Invest In Opportunity Zones Now?

Opportunity Zone investing is down significantly over the past two years. Why might now still be a great time to invest in Qualified Opportunity Funds?

Recorded live at OZ Pitch Day on June 13, 2024, featuring OZ Insiders members Andrew Doup of SyndicationCounsel, Jill Homan of Javelin 19 Investments, and Coni Rathbone of VF Law. Moderated by Jimmy Atkinson of OpportunityDb and OZ Insiders.

Episode Highlights

  • Why Opportunity Zones may still be a compelling investment option for capital gains investors in 2024.
  • Why the marketplace for OZ investments may be primed for growth in 2024 and 2025.
  • How Opportunity Zones compare to other tax-mitigating investment programs.
  • How our panelists’ clients are continuing to invest in Opportunity Zones in 2024 and beyond.
  • Live Q&A from our OZ Pitch Day audience.

Panelists: Andrew Doup, Jill Homan, Coni Rathbone

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.” It’s a live OZ Pitch Day panel discussion, with three distinguished guests. I’m joined today by three members of OZ Insiders, Andrew Doup of SyndicationCounsel, Jill Homan of Javelin 19 Investments, and Coni Rathbone of Vial Fotheringham law firm. Today’s panel discussion, we’re gonna answer the question, “Why invest in Opportunity Zones now?” Opportunity Zones have been a little bit beat up the past couple years, I feel. The equity-raising is way down, but, to start us off, I’m just gonna ask a pretty simple question, a high-level question, I guess. Let’s just keep it at that. Why should investors still invest in Opportunity Zones now? And I’m just gonna go around the horn, in the order that you’re appearing on my screen, and you can also quickly introduce yourself as well, along with your question. We’ll start with Jill Homan. You’re on my screen first, so, Jill, let’s turn to you.

Jill: Great. So, good to be with you, Jimmy, and thrilled to be on the panel with Coni and Andrew, leaders in the OZ space. So, Jill Homan, with Javelin 19. Also, I’m a partner with Pinnacle’s Opportunity Zone Fund. So, really great group of people. So, to answer your question, “Why invest now?” I think the Opportunity Zone tax incentive, if it expires, will be a once-in-a-lifetime tax incentive for investors who would like to make a long-term investment, and have an opportunity to receive tax incentives that I think will be once-in-a-lifetime. So, that’s why I think, “Why invest now?” That’s my punchline, is, if Congress does nothing else, this will all expire, this will all go away, and I think you’ll be having situations where folks will be, you know, sitting around the table or out at the golf club, and one person will be talking about how, when they sell the asset, he’s not paying or she’s not paying any taxes on the sale, and then the other guy or girl will be saying, “Oh, I missed out on that.” So, again, I think this is a once-in-a-lifetime opportunity, which is why I’m so bullish on this.

Jimmy: Yeah, good point. It’s a perishable tax incentive and it is expiring, unfortunately, sooner than we’d like it to, unless we do get that extension, possibly next year. Andrew Doup, you are next on my screen here. What do you say? Why invest in Opportunity Zones now?

Andrew: Yeah. Thanks for having me on, Jimmy. Happy to join the panel with Jill and Coni. I run a law firm out of my office in Columbus, Ohio. We focus exclusively on QOF and QOZB syndications. So, working with developers and project sponsors on organizing their product or their business plan into a company, and then advising them on how to capitalize their company, in partnership with private investors looking for yield. You know, I agree with everything that Jill said. And, you know, I’d also echo the statements that you made to open up the event today, Jimmy. You know, it’s, could be one of the greatest income tax incentives in U.S. history, and it’s scheduled to expire, which I think is, you know, one of the, part of the brilliance behind the legislation at the outset. It’s not gonna be around forever. You know, to add to what Jill said, you know, it’s funny. Looking back, I think Jimmy and I, you and I crossed paths at what might have been the first national Opportunity Zones conference, out in LA. That was probably 2020, January time frame?

Jimmy: That was January of 2020. Yeah, downtown Los Angeles. I remember it well. That was a good one.

Andrew: Yeah. Yeah, I don’t know… So, I remember, you know, there being hundreds, hundreds of people, you know, packed into these conference rooms. Everyone was trying to figure out what this legislation was, and how it could be used. And back then, we really didn’t have a lot of answers. You know, I’m an attorney, and all we had was, you know, the statute, which we could use to provide guidance to our clients based on our interpretation. But we didn’t have any regulations to guide that advice. We have that now. And we have a marketplace that has experienced, you know, five years of maturity since then. So, a lot of the risk of uncertainty that, you know, used to give investors and their advisors pause, that no longer, you know, is really as big of a concern as, you know, just, you know, routine deal risk, irrespective of whether it’s an OZ or a non-OZ project. So, you know, long, long way of saying a lot of the regulatory uncertainty associated with this program I think has been put to bed. Now is a great time. Perhaps better than ever.

Jimmy: Good points there, Andrew. Just one minor correction. That was actually January 2019, a little longer ago than we thought, that first OZ conference out in Los Angeles. Coni, let’s turn to you. We haven’t heard from you yet. A quick introduction, and why should we invest in Opportunity Zones now?

Coni: Hi, thanks. And you can just say “VF Law Firm,” because the name is so crazy. And I have basically the same background as Liam. I do all things real estate, and securities, and most things business, but in the real estate industry. And the question, “Why invest in Opportunity Zones now?” is because, as everyone said, it’s expiring. And whether or not… I think that it is fairly clear that most people in the Senate and the House think the Opportunity Zone program is worth renewing. But the crystal ball is whether there can be an overall tax package that can pass, because we can’t extend Opportunity Zones without a tax package passing. And one of the areas that I would like to focus on, that’s a little bit unusual, is to direct people in the area of rural. And I’m not sure you’re ready to go there yet, Jimmy, but that’s an area that I’ve been focusing on, and is pretty enticing, given the incentives that you can attract when you’re in a rural area.

Jimmy: I made a note to come back to that in a minute here, Coni.

Coni: Okay.

Jimmy: One thing I hear about Opportunity Zones, actually, one huge misconception I hear about Opportunity Zones, when I’m talking to people who are just learning about it, or maybe they’ve heard about it, but they’re not too familiar with it, sometimes I hear, “Wait, didn’t that go away already? Haven’t the benefits already expired? Is the deferral period still around?” And some of it has expired, to be fair, one very minor benefit of the program, the basis step-up on the original gain has since expired for new investors. And the deferral period, granted, is shorter now than it was if you had invested in 2019 or 2020. But I like to point to the, there’s an ancient Chinese proverb, “The best time to plant a tree was 20 years ago, but the second best time is now.” I think the same could be said about Opportunity Zones.

Probably the best time to invest into Opportunity Zones would have been in 2019, 2020, really take advantage of a really long deferral period, and get that basis step-up. But the second-best time is now. I’ll tell you what the worst time to invest in Opportunity Zones will be, after it expires, kind of to echo our other panelists’ thoughts. So, let’s talk about that right now. You know, I mentioned Opportunity Zones have been a little bit beat up, it seems, the past couple years. According to Novogradac’s survey fundraising in 2023 was down 64% from where it was in 2022. Why are fewer people investing in Opportunity Zones now? Are they missing out? Or any other thoughts that you wanna share. We’ll start…let’s start back with Coni again. We’ll snake back our way around. So, you can get first crack this time, Coni.

Coni: Yeah, I think that the interest rates have a huge impact on every real estate investment, and in particular…well, not in particular, but real estate investment. So, I think that the returns are not as attractive because of the interest rates. I think that, with respect to the timing, Jimmy, I think I’m gonna be doing a whole lot of husband-and-wife Opportunity Funds on December 30th, 2026 because when I teach about Opportunity Zones, I talk about the wow factor. And that’s the last benefit, which is, no tax on the appreciation during the hold period. So, even though you can’t defer on your capital gains going in, people will still be able to obtain the wow factor, which has always been the most attractive benefit in the program.

Jimmy: Yeah, good point there. Andrew, any thoughts from you?

Andrew: Yeah. You know, I would say the worst time to invest into an Opportunity Fund is after your 180-day deferral period.

Jimmy: Yeah, good point.

Andrew: Because, I mean… Yeah, that situation happens, you know. And, you know, there’s a lot of flexibility with what you can do in the land of OZ, so long as you satisfy that 180-day deferral period requirement. So, that’s an important deadline to pay attention to. I, you know, I agree with Coni. You know, my expectation is that, you know, investors who have heard about Opportunity Zones, you know, they’re aware of some of the benefits sunsetting. But, you know, the response is investors are still in, for the benefit that everyone is mostly excited about, and that’s this prospect of a tax-free exit after the 10th anniversary of deferral. So, yeah, my expectation is that investors will rush to seed, to form their own self-directed QOFs, and feed them with whatever capital assets they happen to hold and can sell in short order, so that they can lock in the primary benefit, that 10-year tax-free exit. And then hold it. You know, why sell it after that 10th anniversary? Hold it for as long as you can. You know, maybe up until 2047.

Jimmy: Yeah, that’s another thing I hear oftentimes, that I like to kind of steer people in a different direction on, is, “Wait a second. Ten-year hold. That’s a long time. How fast can I get out of this thing?” And I tell them, “No, no, no, no, no. You’re thinking about this wrong. This is like a mega Roth IRA. You don’t wanna be asking how quickly can I get out. You wanna be asking how long can I hold this Opportunity Zone investment, and let it eat, and grow, tax-free?” Jill, any thoughts on, you know, why is OZ investing down the last couple of years? The investment volume’s down. And by the way, it’s not just restricted to OZ, is this downturn in investment volume. This is actually across all alternative asset classes and real estate sectors over the past couple years. But any thoughts there, and any other thoughts you wish to share on Opportunity Zone investing?

Jill: Yeah. So, it’s really two reasons. Number one, Coni touched on it, which is the profile of deals, trying to make the deals work when you’re in an inflationary environment, high-interest-rate environment. And so, deals that have been ready to go, a lot of those deals were underwritten with 4% interest rates, underwritten with anticipation of getting a certain hard cost budget, and then that deal now, when it’s being capitalized, the hard cost number’s higher, the construction loan interest is blown out, the refinance assumptions are not realistic. And so, when it’s all re-underwritten, the return on cost is way… Oh, and then also, the investors’ expectations on returns have gone up. And so, it’s like you’ve squeezed the deal, and then you say “Oh, and by the way, we need a higher return, because everybody’s cost of capital is higher.” So, whereas deals that were in the low fives return on cost, that investor now wants something, a higher return. And for a developer, for a lot of projects, there’s just no levers to pull. So, it’s really hard to find deals that work, it has been hard to find deals that work. So, that’s one piece of it.

The other piece is Opportunity Zones, the way it works is it starts with a capital gain. And so, if you’re looking at the equities market, and you’re seeing, you know, volatility, you’re concerned about the longest, like, the long-term hold of your portfolio, what it looks like, people aren’t harvesting capital gains. And so what I’d suggest is that people’s interest in investing in OZs tracks well with the stock mark. So, when, you know, stock markets are getting to an all-time high, when your Apple stock now, again, once jumped over NVIDIA, you’re thinking, “You know what? Maybe…maybe, like, I can’t make sense of this market. Maybe it makes sense for me to sell out of my Apple stock right now, and take my capital gain.” And so, we’re now in an environment where we’re seeing a lot of activity.

I mentioned we’re a partner, and I’m a partner in Pinnacle Fund. It’s a fund of five deals, multifamily, in Denver, Nashville, Phoenix, Austin, and Charlotte. And interestingly, and the fund is closing at the end of the month, and interestingly, the level of activity that we’re seeing from investors, you know, we have a call to close, given where the stock market is, people have NVIDIA positions, NVIDIA split, it’s just makes a lot of sense for someone who now, now is overweighted in equities to say, “You know what. maybe I need to push more of my portfolio over to alternatives.” And so, to close the thought, it’s, you know, you think of it as the investor has a capital gain, and the reason it’s, people have been investing less up to this point, is it tracks closely with the market, and people’s perceptions of wealth, and whether they want to harvest gains. And then secondly, the ability for people to find good investment opportunities, and that’s been a challenge of late.

But I’m optimistic. I think the market is loosening up, in terms of investor appetite. I think that’s coming…that’s been very strong, really, just really recently, this, really recently. And I’m also optimistic, I think, you know, as the last panelist mentioned, and I think folks here can attest to, I’m optimistic that, you know, for markets that may have been overbuilt a bit, the construction starts have fallen off a cliff. And I think if you give markets which are a super high-growth market, and you take them for a loan, there’s 70,000 units under…like, that need house… They’re, I guess, under-supplied is the correct term. And so, these markets need supply, but it’s not, you know, always where you want the supply to be. But the point is, is construction starts have fallen off a cliff, and now, it’s, I think, I’m optimistic that you get some of these projects going, maybe six months from now or a year from now, that it will help smooth the market out, and be a good investment opportunity for folks.

Jimmy: Well, that’s a…but you’re talking about the stock market. It’s a perfect segue into a point I was about to make, which is if you look at the stock market, the Dow Jones Industrial Average hit 40,000 for the first time a few weeks ago. The S&P 500 is just off of its recent highs, but it’s up about 88% over the past five years.

Jill: Yeah.

Jimmy: If you’re a stock market investor… I’m sure the vast majority of people listening to us right now have some exposure to the stock market, either through individually-held stocks, maybe Apple, maybe NVIDIA, to your point, Jill, maybe through ETFs or mutual funds, certainly. If you’re a stock market investor, and you haven’t rebalanced your portfolio in a year or two, you probably have some pretty sizable unrealized gains there, and maybe it’s time to rebalance. You might be a little bit overweighted towards stocks. You’re one or two years older, and your stock market exposure is increased, you’re probably going in the wrong direction there. We oftentimes talk about year-end tax loss harvesting. But Jill, I love that concept of tax gain harvesting, specifically for the purpose of… Well, twofold. One, you know, get your stock weighting back in line with your target asset allocation, and two, take that gain, and reallocate it into this tax-mitigating investment, Opportunity Zones. So, any comments on that point from Andrew or Coni?

And then one more question that I’d like everyone to address is, you know, we’re talking about Opportunity Zones, and the fact that it’s a great tax-mitigating investment program. I declared it earlier the best tax incentive program ever created, tax investing incentive program ever created. But how do OZs compare to other tax-mitigating investment programs, and any pros and cons, any similarities you can draw with those. So, a lot I threw at you there, a lot to chew on for our panelists, but Andrew, you haven’t gotten to go first yet. I’ll start with you. Any comments, or follow-up there from you?

Andrew: Yeah, yeah. You know, all valid and great points. You know, a lot of the clients that I work with, they are, you know, they’re taxpayers who had a cap gain event. So, they’re coming to me after they’ve realized or recognized their gain, and for them, it’s a really easy decision. It’s, do I wanna pay my tax to Uncle Sam, or do I want to instead pay it later, by investing it into either my next venture, or into a private venture that’s professionally-managed by someone else, so that I can sip margaritas on the beach? So, from that perspective, you know, 9 out of 10 times, or maybe even higher, the answer’s gonna be I’d rather pay it, you know, later than sooner. And then, after that decision’s been made, you know, the next discussion is, well, you know, what’s your preference between an actively-managed OZ business, or a passive investment into a professionally-managed OZ Fund or OZ business.

As far as comparisons to, you know, other income tax incentive programs and the tax code, you know, the general point of entry for discussion to new taxpayers considering Opportunity Zones is just comparing and contrasting to DSTs and 1031 exchanges. And, you know, Jimmy, that must be your experience as well, because you had an excellent slide that you put up to open up your keynote today. And it lays out really clearly why you might be inclined to opt for one and not the other. Ultimately, it’s gonna be dependent on, you know, the individual investor’s objectives. But, again, from my perspective, I love the flexibility that you can get with Opportunity Zones, and most of my clients do as well.

Jimmy: Yeah, there’s also QSBS is another program that it gets compared to, sometimes. A little bit less frequently. And then an offshoot of 1031 exchanges is Delaware Statutory Trust, or DST investing. Coni, let’s hear your response to what we’ve been talking about here. Chance for investors who are stock market investors to roll over into a tax-mitigating investment program like Opportunity Zones, and how does Opportunity Zones compare to different tax-mitigating programs like 1031s, like DSTs, like QSBS, and maybe some others that I’m not thinking of?

Coni: Right. Well, the… And the one that you left out was tenant in common.

Jimmy: Yeah. There go. TICs.

Coni: You know, that industry crashed, and I ended up representing about 150 groups. The Opportunity Zone investment, in general, is quite a bit more flexible than 1031s. One thing that I have advised my clients for my 36 years of practice is don’t invest in a 1031 exchange that you would not invest in with clean money, because it’s about the property. And that’s what people lose sight of. I will advise them the same thing with Opportunity Zones, is, the issue is the property. And so, for 35 or 36 years, my clients have ignored me on that advice, and gotten themselves in trouble. But, you know, one of the big things, the big bonuses with an Opportunity Zone versus a 1031 is that you don’t have to reinvest the debt, right? And so, that’s a big element of it.

Delaware Statutory Trust, you are… And I think it’s similar to Opportunity Zones. You are giving up total control of the property. And so, if you have investigated the sponsors, as well as the property, then those can be very similar, but unlike a DST, an Opportunity Zone can be refinanced, and the owners can benefit from the refinancing to pay the taxes when those come due, or at other times. And so, I’m not familiar with the other one that you talked about. I’ve worked mostly with tenant in common, DSTs, Opportunity Zones, 1031 exchanges. And, you know, you can get some additional depreciation benefits in Opportunity Zones over 1031 exchanges. And, for a lot of people, it’s nice to be able to stop the roll of the 1031s that they’ve been in for the last 25 years, and maybe finally get out, even though they have to pay their taxes on the gain that they invested, they might be able to get out that roll, and take advantage of the 100% step-up in basis without dying first, and passing that benefit on to their kids.

Jimmy: Yeah. So, the other one we were discussing was QSBS, Section 1202, I believe it is. Qualified small business stocks. Some similar benefits to Opportunity Zones that only requires a five-year holding period. There’s different hoops to jump through, different hurdles you have to clear. Jill, any response to what we’ve been talking about the last few minutes here, and how OZs compare to other tax-mitigating investment programs?

Jill: Yeah, I thought it was very well-covered. I just wanna underline Coni’s last point that she made. When I talk about, you know, a investor making a decision to invest in a 1031 versus Opportunity Zones, you know, what I say with OZs is you can actually exit the investment without dying, and you get the tax benefits. With 1031s, you pay the tax or you have to die. So, you know, with OZs, you can stick it to the man. You can get out without paying your taxes, and it’s … You have tax appreciation, plus no depreciation recapture, but… And then, just, so, I thought that was very well-covered. So, yeah. And with QSBS, I’ve seen generally that be used more for operating businesses, in terms of structuring.

Jimmy: Right. We had a question about QSBS. I wanna get to that in a minute, but wanted to make sure we covered this next topic first. We do have about 10-ish minutes left in this panel discussion today. I wanna get to a few questions. Looks like we got three or four questions queued up, but did wanna touch on how you or your clients are investing in Opportunity Zones this year, in 2024, if you have any examples of maybe specific deals, or just high-level concepts, and Coni, I’d love for you to talk about rural at this point as well. And Coni, we’ll start with you, actually.

Coni: Great.

Jimmy: Let’s get to your rural talking points.

Coni: Great. Well, it’s my experience… I practice primarily in Idaho and Oregon, and really kind of all over the U.S., because I’m only a transactional lawyer. But what I have found are that rural areas are just very, very favorable towards assisting developers, if they’ll bring a development to the area. I’m working on a 1200-acre parcel, to build a city within a city. And, you know, this concept that we have used, which is stacking incentives on top of the Opportunity Zone incentives, has been really beneficial. We have $6 million in grant funding that’s been committed to build the infrastructure, and it will complete all of the infrastructure for our first phase, of 160 homes. This is in a small town in eastern Oregon. Each home receives a 7% cash rebate upon completion. All SDCs are fully paid by a local urban renewal agency that we helped get created, and the net result of these three incentives is an average profit increase of $30,000 per unit. And so, every state and every county has a different basket of incentives that you can target, but… And I’m also going to talk to the, not Liam, but the presenter before that, about this element of eliminating property tax, where we maybe we…

Jimmy: Yeah, that was Barrett Linburg in Texas.

Coni: Barrett, yeah. Maybe we better be talking to Harney County about this great program that Texas has, if they want affordable housing.

Jimmy: Yeah.

Coni: And so, people are fleeing the metropolitan areas, and the increased crime, etc., and working remotely, and wanting to go to rural areas. And I know from experience that it’s been hard to persuade sponsors to go there, and hard to persuade, you know, sometimes bankers to go there. Luckily, I work with the owner of all 1200 acres, and so we’ve been able to go forward with that, and this community had been receiving one business request a week, for the ability to move to their community, but there was no housing and nothing to do. So, we’re solving for those. And it’s kind of an unusual expertise. We’ve helped some businesses on the Oregon coast, you know, little coastal towns, etc., but it’s not just the big cities that benefit by these.

Jimmy: Good explanation there, Coni, and I’m looking forward to hearing more about that deal, and hopefully we can get you to present it at an upcoming OZ Pitch Day, maybe in November, or certainly in 2025.

Coni: Yeah, we’re working on that.

Jimmy: We’re ready to go. Good.

Coni: High on the list.

Jimmy: Excellent. And Andrew, let’s turn to you now. We haven’t heard you in a while. Sorry.

Andrew: No, all good.

Jimmy: How are you and your clients investing in OZs? Any particular deals or concepts, strategies that you’re thinking about for your clients?

Andrew: Yeah. Yeah. So, my practice is, it’s not limited to just real estate projects. So, circling back to the QSBS commentary, you can couple two incentives, the QSBS and QOZB, in the same capital structure. And, you know, I advise clients who can qualify for that exemption on how to do that. You know, what I see is the primary reason why it’s not being done very widely is just because, if you’re coupling the two, then you’re narrowing your investor class to a very specific type of investor, because VCs aren’t really accustomed to limiting the type of cash that they can put into a start-up with pre-tax cash. That’s just, it’s a new concept to them, and a lot of them aren’t even paying cap gain to begin with, because of this QSBS exemption. So, the educational curve can be higher, in a lot of cases, even if after you cross that threshold, you know, it’s like, well, you know, why limit ourselves any more than what’s worked with us in the past? Which is, you know, relying on the QSBS exemption.

Jimmy: So, it’s not redundant to stack QSBS and QOF incentives, then. That was one of the questions.

Andrew: No. No, it’s not redundant. It’s just an extra hurdle, an extra compliance hurdle, that the QSBS, or the QSB operator, would need to satisfy in order to ensure that it receives tax treatment as a qualified small business. Similar, you know, similar to the hurdles you would need to satisfy as a QS…or, alphabet soup, QOZB operator.

Jill: And to be clear, the reason you do that is so that you create optionality between your hold period year 5 and year 10, right?

Andrew: That’s right. Yep. That’s right. I would love to see more… I would love to see more incubators in Opportunity Zones. You know, I do think that that is, you know, it’s just an idea that hasn’t really been well-developed, or developed enough, but it’d be awesome to see OZ incubators for startups.

Jimmy: I thought we were gonna see more of those, and I talked with some groups early on, in 2018 and 2019 and 2020. You know, you buy a plot of dirt, you put a co-working space in it, and then you also own pieces of all the QOZBs that are being incubated inside that building. I thought that’s a brilliant concept, but I haven’t really seen it done at scale very successfully. I don’t know. Jill, any thoughts on how are your clients investing in Opportunity Zones currently? Any specific strategies, or particular deals?

Jill: Yeah, I mentioned the multifamily fund, the residential fund, and then what we’re working on now, with Pinnacle and Trilogy, Trilogy Residences, they’re a build-to-rent developer, very large. And so, it’s a co-GP build-to-rent Opportunity Zone Fund. And so, built-to-rent is, has really become a very, very attractive asset class for investors. And I think a lot of it has to do with, you look at, again, the interest rate environment. So, for an individual who are, and these would be buyers by necessity, so, or, I’m sorry, renters by necessity. So, you look at the interest rate environment. It’s, you know, it’s 7%. It’s hard to get all the money that they need to buy a house. And a lot of these houses were built under earlier times, and so the housing affordability in a lot of markets is just very, very challenging. And so, you have an increasing number of people who need to rent. And then you also have an increasing number of people who want to rent, because they see the 7%, and they also don’t want to be, you know, permanent in a location. I think a lot of people during the pandemic realized that they want some flexibility.

And so, there’s a significantly growing number of people who want to be renters. And so, these are purpose-built homes, these are single-family homes, they’re build-to-rent homes, build-to-rent community townhomes, and, that are rental. And so, that’s been a very, very attractive asset class. It’s become institutional, and so there’s a fund that we’re working on with three projects in the Southeast, in Atlanta, Decatur area, Augusta, and Huntsville. So, that’s one of the strategies that we’re working on. And so, I’d say we’re keenly focused, you know, my lens is keenly focused on real estate. Primarily been working with investors who really like multifamily, or like residential, like build-to-rent. And some of that has to do with the liquidity at refinance. And so, as, you know, over the last two years, particularly, you know, post-COVID, and when the market started to slow down, it became very difficult to refinance. Again, you know, needing to refinance, meet a debt service coverage ratio at higher interest rates means the loan proceeds were down. But people levered at, you know, 65% or 70%. And so, for a lot of folks, it was hard to refinance out.

And so, having, on the residential side, having the agencies, and also pension funds and others, want to finance more, to provide more loans, that’s provided more liquidity on the capital markets side. And so, that makes it, you know, as you kind of rewind that, it makes it an attractive asset class for investors. So, that’s kind of my lane. But, kind of circling back to your comment, Jimmy, about incubators, and I thought that might have as well been a strategy that folks would pursue, but I think some of the challenges I think with the Opportunity Zone compliance, and I’m sure Andrew and Coni can speak to that, with what I described as, on the real estate side, you know, if there’s, say, 10 requirements to comply with OZs, the real estate maybe starts off at, you know, with 6 of those in, you know, easy, because we don’t move, we can’t move, you know, the business is right there, the employees aren’t moving. And so, it’s just, there’s a thicket of requirements that, on the operating business side, that they need to do, I think, which makes it more difficult, more costly. So, I think that might be some of the challenges, but my hope is, if we get an extension, as Coni alluded to, that some of these might be a little bit easier to deal with.

Jimmy: Well, hopefully so. Fingers crossed there. We’re a couple minutes over time, but I did wanna get to one or two more questions. I’m the next presenter, so we’re eating into my time now, so that’s fine. Should we consider… Yeah. So, here’s some live questions from the audience. One question is, “Should we consider diversifying by investing in multiple Opportunity Zones? The storage guy,” he refers to Russ Colvin as “the storage guy,” couldn’t remember the name. But yeah, it’s Russ Colvin, with Your Space America, “he had a $25,000 minimum, and it got me thinking.” And I’ll quickly answer. I would say, if you’re a stock market investor, you probably don’t have all of your money in NVIDIA, although, boy, it would be nice to have done that a few years ago, right? But usually, you wanna have a diversified portfolio. So, me, personally, I am invested in multiple different Qualified Opportunity Funds, across a variety of different asset classes. So, I always think it’s smart. If you have one big capital gain event, you don’t have to pour that entire gain into one QOF. You can split it up into multiple… I don’t know if anybody else had any additional thoughts there.

Andrew: Yeah, or you can form your own QOF…

Jimmy: You can form your own.

Andrew: …and diversify across a portfolio of QOZBs, and, you know, being a 10-year partnership with, you know, your spouse or another family member, and not have to worry about, you know, what an operator is doing, you know, when it comes time to exit.

Jimmy: We had a question here from John Berlet, for Jill. Real quick, I think you can answer, is, he wants to know, “Jill, does Trilogy do business in Texas for build-to-rent?”

Jill: Yes.

Jimmy: Yes. Good answer there. And then, we’ll wrap up with this final question here, and then I’m sorry, I gotta cut you loose, to move on with the program, but, “What return do you look for, given local market conditions, i.e. plus or minus X percent versus non-OZ? What kind of returns do you like to see in a QOF, or deal level?” I don’t know. You can say fund level or deal level. Specify the type of return you wanna see. Shout it out.

Coni: Eight percent to 15%.

Jimmy: Eight percent to 15% from Coni. Jill, how about you?

Jill: Just, in the simplest form, let’s talk about return on cost.

Jimmy: Sure.

Jill: An untrended return on cost, that’s about 150 to 200 basis point spread over current cap rates. And, you know, that becomes a challenge if there’s not a lot of trades. And then you have IRRs that are really driven, you know, that that’s at, you know, maybe about 15%, but those can be, IRRs can be financially engineered, and that’s why we always start with the untrended return on cost.

Jimmy: All right. And Andrew, I’m gonna give you the final word here, and then we’re gonna wind down.

Andrew: Yeah, mine’s unfortunately gonna be a little more nuanced, because I have this conversation with clients a lot. You know, it’s, well, you know, if I’m organizing a QOZB or a QOF, what should I offer, you know, to investors? And my answer is always the same. It’s every investor is gonna have different investment objectives. So, you need to figure out what your business plan is, and be consistent with your narrative. And I’ll just give you an example. If you’re a single-asset real estate project, you need to be competitive with other single-asset projects in your asset class, though, you know, 8% to 12%, probably gonna hit the market that you’re looking at. But I’ve also seen multi-asset, you know, minimum 10-year partnerships that are, you know, compounding exits, you know, and delivering, you know, crazy multiples over a 10-year time horizon, and they’re positioning themselves as not a cash distribution machine, but, you know, instead more like a 10-year self-directed IRA, where, you know, the pitches don’t anticipate any cash flow during that time. Instead, we’re gonna reinvest that cash over that 10-year period, and maximize the value your tax-free exit. So, depending on what kind of investor you’re speaking to, you know, you might imagine how one could resonate more with the other.

Jimmy: Awesome.

Coni: That’s completely true.

Jimmy: Excellent. Well, thank you, all three of my panelists today, all OZ Insiders members. Thanks for your insights. Andrew Doup, Jill Homan, Coni Rathbone, thank you so much.

Coni: Thank you, Jimmy.

Andrew: Thanks, Jimmy.