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OZ Investing Tips, From The Experts

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This episode is the audio recording of a live panel from the ADISA 2022 Spring Conference. Erik Hayden (Urban Catalyst), James Brunger (Capital Square), Jamie Nahon (Eagle OZ), Matt Iak (U.S. Energy Development Corporation), and Rob Johnson (Realized) were the expert panelists. The panel was moderated by Jimmy Atkinson (OpportunityDb).

ADISA’s Spring Conference is designed for all industry professionals who sponsor, analyze, market, distribute or sell alternative investments with several educational sessions offered, many of which qualify for Continuing Education credit.

Click the play button above to listen to the panel.

Episode Highlights

  • Types of asset classes for Opportunity Zone investing and what’s catching investors’ attention.
  • How the Opportunity Zone program offers tax benefits to investors making qualified investment in a Qualified Opportunity Funds (QOF). 
  • Current trends in OZ investing, specifically multifamily and mixed-use assets.
  • The future of opportunity zones and what’s in the store for this space in the coming years.
  • Top considerations that Opportunity Zone investors should consider before placing their capital gain into any QOF.
  • Advice on how to find an advisor in the OZ space and other types of alternative assets.

Featured On This Episode

Industry Spotlight: ADISA

ADISA leads active advocacy work for those in the alternative investment space, keeping members abreast of legislative issues and reaching out to regulators and legislators to provide important information about this “alternative” side (that is, not the traded stock and bond side) of the investment world.

ADISA’s Spring Conference showcase new industry offerings and opportunities, as well as offer ample networking time to meet face-to-face with leading industry professionals. Designed for all industry professionals who sponsor, analyze, market, distribute or sell alternative investments with several educational sessions offered, many of which qualify for Continuing Education credit.

Learn More About ADISA

About The Opportunity Zones Podcast

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

Show Transcript

Jimmy: Welcome to The Opportunity Zones Podcast. I’m your host, Jimmy Atkinson, coming to you live from the ADISA Spring 2022 Conference in sunny Orlando, Florida. I’m going to walk the floor of the conference exhibit hall here for a few minutes and talk with some different Opportunity Zone stakeholders and get their thoughts on all things Opportunity Zones for the next few minutes.

So enjoy today’s episode. And so, first of all, let’s just start with name, title, company.

Erik: Erik Hayden, CEO and founder of Urban Catalyst, an Opportunity Zone fund based in San Jose, California.

Jimmy: Terrific, Erik. Thanks for joining me today. Let’s talk about the future of Opportunity Zones. What do you see as being the future of Opportunity Zones? A rather open-ended question, give me any thoughts you have.

Erik: Well, unfortunately, the legislation for Opportunity Zone funds if you don’t invest before the end of 2026, you don’t get any tax advantages. And while the program goes through 2047 so that everybody that has invested should be able to reap the benefits of their investment from a tax perspective, unless the federal government and the legislature passes new laws to extend the program, the program goes away.

But for now, the program is, you know, finalized. Folks are starting to understand it and become interested in it. We’re seeing more investment into it. So the success of the program, I guess it’s really stabilized. And I expect to continue to see that, you know, onward and upward trajectory until the cutoff.

Jimmy: What about trends unfolding right now? What are some trends that you see in the Opportunity Zone space that investors should keep their eye on?

Erik: You know, the trend I’m seeing is that a lot of Opportunity Zone funds are raising so much money that they don’t know what to do with it. And that can be a real problem because if a fund, you know, say goes out and raises a $1 billion and then tries to place that money, there just might not be enough projects for them to be able to place it in a way that is beneficial to the investors.

And, you know, as I always say, Jimmy, Opportunity Zone funds, you know, the tax benefits, they’re great. It’s really the underlying real estate that matters because the biggest tax benefit is you get tax-free profits after 10 years, you know, there better be profits after 10 years, or what’s the point of the entire program?

Jimmy: That’s exactly right. Last question for you. What is the number one thing that Opportunity Zone investors should consider before investing a capital gain into a qualified opportunity fund?

Erik: They definitely should check out OpportunityZoneDb because they do a great job of talking about all the different types of funds and presenting different sponsors so that investors can figure out which type of Opportunity Zone fund works best for them.

Jimmy: Thanks for the kind words, Erik.

Erik: You’re welcome.

Jimmy: I didn’t even pay you to say that. Appreciate your time today, Erik. Thank you.

Erik: You got it, Jimmy.

James: James Brunger, Capital Square, chief sales officer, new title for me.

Jimmy: James, tell us about what you think the future of Opportunity Zones might bring. What are your thoughts on the future of OZs?

James: Oh, sure. You know, obviously, it’s been a great program, well-received, but frankly, Jimmy, I think just getting its due and the attention here in 2022. So great attributes associated with the tax benefits, but I also see it evolving into the realization of what some of the social benefits of the Opportunity Zone program.

Now that like our multifamilies are coming online, being, you know, not only finished construction, but being leased, since we focus on multifamily, I think the realization is that the Opportunity Zone is working. It is getting for our purposes housing in core markets that were under-capitalized. Now, all of a sudden, we’re seeing this great wave of investment opportunity where people are finally paying attention that Opportunity Zones are something they should look at in their portfolio.

Jimmy: What about Opportunity Zone trends to keep an eye on, or Opportunity Zone trends that you like?

James: Yeah. I’ll give you ones that I like and then one that I’m a little bit kind of cautious on just on timing-wise. One that I really like is there’s still great benefit on the yield on cost, so that risk premium. Let’s be very clear.

For us in real estate development, real estate development generally has higher return projections, potential returns. And the reason why is because there’s more risk. However, the spread of that risk premium measured as yield on cost, so what it cost you to construct, get it fully stabilized as compared to, you know, what your cap rate would be when it’s stabilized is still strong, very strong, if not close to where it was in 2018 and ’19 when we first…within 40 basis points.

So there’s still a lot of value associated with that risk premium. You have good cushion there, if you will. And meanwhile, the stabilized market is, you know, down into threes, high threes in most of the core markets. So I like the trend line that there’s still a lot of value to build and potential value to build.

You get paid well for that risk. That’s a good way to put it. Or you have the potential to get paid well for that risk. One that I’m a little cautious on Opportunity Zones is the timing of refinance or cash flow because now we’ve got that 2026 taxes due timeframe and without legislative extensions, that’s getting shorter and shorter.

So some of our project focus is going to have to be tied, can we get it built? Can we get it stabilized? And can we get refinance proceeds so that most investors feel comfortable to have money to pay their tax bill? I would hate to say the tax tail’s going to wag the dog on that 2026, but it is going to influence the opportunities we see unless there’s some kind of legislative action to extend. That’s the only trend line I’m worried about, all the other positive ones, though, there’s still a lot of value.

And, in particular, you know, a lot of realization that both the social and economic benefits are true and the program’s working as it should.

Jimmy: What’s the number one thing that Opportunity Zone investors should consider before placing their capital gain into any QOF?

James: So we deal with so many cash flow-focused investors. On the risk side, are they comfortable with the fact that in our deals especially, it’s going to be a while before they get cash flow? You know, it’s development real estate. Are they comfortable with the risk? So I know that’s not number one, but, you know, the other thing is, is the quality of the project matching their risk focus and their return ideals, right?

Does the market fit? I don’t know if a lot of people…I feel like they lump a lot of Opportunity Zones into the same kind of, “Oh, it’s an Opportunity Zone,” look at the project. So number one thing I wish everybody would do is say, “Hey, this is something that I actually think has a great propensity to succeed,” with whatever measure means most to them.

So yeah, that’s probably my number one thing. The flip side of it is obviously on the risk, make sure you understand the cash flow and kind of where your returns are going to fit into what you need out of it.

Jimmy: Awesome. James, thank you.

James: Good to see you, Jimmy. Enjoy the conference.

Jamie: Jamie Nahon, president of Eagle OZ.

Jimmy: And Jamie, tell me when you think about the future of OZs, what do you think is coming for the Opportunity Zone industry in the future?

Jamie: I think that the Opportunity Zone industry is going to explode as people learn more about what the Opportunity Zone is and how they can use it to shelter paying tax.

Jimmy: And what about trends, Opportunity Zone trends that you’re keeping an eye on that you think are in play here right now that investors should consider?

Jamie: Opportunity Zone trends, you know, I think that there is a mass movement towards safe multifamily investment. And I think the more that Opportunity Zone developers reveal locations within the Opportunity Zone to create stable multifamily property, that’s what we’re going to see.

Jimmy: And last question for you, what is the number one thing that you think investors should consider before investing their capital gain into a qualified opportunity fund?

Jamie: Ten years, you’re going to have to keep your money in there for 10 years if you want to get those tax incentives. And so, as you’re looking at the real estate that you’re investing in, you should make sure that you are very comfortable with the sponsor and that you’re very comfortable with the real estate that you are investing in.

Jimmy: Fantastic. Thanks, Jamie. Appreciate it.

Jamie: Yeah, sure. Anytime.

Matthew: Matthew Iak, U.S. Energy general partner.

Jimmy: So, Matt, thanks for joining me today. We’re here at ADISA at the spring conference in Orlando, Florida. First question for you is the future of Opportunity Zones. What do you think that looks like, what do you have your eye on?

Matthew: I believe that the future is actually brighter than the past. I think that with the clarity where the ultimate investors recognize the largest benefit is the 10-year hold versus a lot of the white noise around the deferral, I think that we’ve come to a place where until 2030s, there’s an amazing investment cycle to take advantage of.

Jimmy: What about trends? Are there any ongoing trends in Opportunity Zones that you’re aware of that you think investors should be aware of?

Matthew: Yes. So we’re kind of unique in that we’re in the energy space. So our trend, I think, is very different than the norm. So from my paradigm, it’s interesting that it hasn’t taken a hold as large as you would think it would from the investment opportunity. So for us, it’s kind of an unlimited investment opportunity that repeats itself every single year because I’m not competing against anyone, whereas real estate’s getting smaller and smaller because most real estate has looked for the best opportunities that were in the census tracts that were defined in 2010.

So a lot of things changed from 2010 to 2020 and thus real estate really took advantage, I think of those areas that were “Opportunity Zones,” but were already going to be great investments. So those are dwindling. I think where the trend is now going is, at least from my anecdotal experience, a whole lot of CEOs, business owners are realizing that they can put their companies in Opportunity Zones and take advantage in a very different way, which is to potentially grow their own business and take advantage of the law well beyond investment fund in real estate.

And so if I were to predict a trend, it’s that the super-wealthy and intelligent are going to use Opportunity Zones in a much broader fashion than how it was initially presented as a real estate investment.

Jimmy: Very good. I like that. I like that optimism there. What about, last question here also, the number one thing that Opportunity Zone investors should consider before they invest their capital gains into a qualified opportunity fund?

Matthew: So the number one thing would obviously be the underlying investment, and ultimately, if they believe that that investment is somewhere they want to put their capital. Because the tax law is so powerful, I think it might obfuscate the underlying investment. So from a thesis standpoint, I think it fits phenomenally well in financial planning and portfolio management, and I think a lot of investors might jump towards something and let the tax tail wag the investment dog.

And as long as that’s not the case, and you can find the underlying investment you want, it is the greatest tax law ever written, but don’t let that cloud the investment decision because you have to find that underlying investment that you believe is going to make money. Otherwise, the point of tax-free return only makes sense if you actually make a return.

Jimmy: Very good. Thank you, Matt. Appreciate your time.

Matthew: All right. Perfect. Thanks, man.

Rob: Rob Johnson, head of wealth management at Realized.

Jimmy: Rob, thanks for being with us here today at ADISA. What do you see for the future of Opportunity Zones? What do you think will unfold over the next few years?

Rob: Yeah. I think that it is going to result in a tremendous opportunity for the individuals who are early investors. They’re going to see returns from these projects and they’re going to be happy that they took advantage of that legislation when they did. It’s going to support their longer term investment plans. In some cases, it’s going to be very supportive of retirement income plans and creation of wealth for a lot of investors, you know, in retirement or allowing them to take those proceeds and move to other investments at a much greater value in the future.

Jimmy: And what about trends, Opportunity Zone trends that you believe Opportunity Zone stakeholders of all types should keep their eye on over the coming months and years? What do you think?

Rob: Yeah. That’s a great question. You know, as far as the multifamily sector is concerned specifically for Opportunity Zone projects, I think that’s going to be a sector that continues to outperform, it continues to be needed. At the end of the day, when we look back to, you know, why qualified Opportunity Zone legislation came about in the first place, it had a lot to do, all to do quite honestly, with helping areas and regions that needed the help, quite honestly, from a socioeconomic standpoint.

So the Tax and Jobs Act of 2017 was really centered in and around going into areas that were challenged and could potentially grow, lay a solid foundation for communities over time, and multifamily as a sector lends itself very well to doing that, right?

At the end of the day, people need roofs over their heads, people of all walks of life. When you take a look at the cost or the value of a single-family residence, those valuations have outpaced what most people have seen in terms of real wage income growth over time. So it puts a lot of the population in the United States at odds with being able to afford their own single-family residence.

So a multifamily project, a residence that allows them to gain access to a great region, a great area that, you know, supports them in their early stages of life or growing their family, or later stages of life where they’re empty nesters, or they’re at the point where they just want that flexibility of not having to be tied to a single-family residence, multifamily as a sector supports all of that.

So I believe that qualified Opportunity Zone projects in that space will continue to thrive and grow in the years to come.

Jimmy: Great. Now, last question. Put yourself in the shoes of an investor. What is the number one thing that Opportunity Zone investors should consider before placing a capital gain into a qualified opportunity fund?

Rob: That’s a great question. So we focus on the basics, who is the sponsor, what’s their track record, what’s their experience? If they’re working with one or multiple developers on that project. Same sort of assessment, who are those developers, how have they established themselves in that region or that sector, prior projects, the success of those projects, the viability of them being able to execute.

These are ground-up development projects. So you don’t want to see a lot of delays, cost overruns. You want to make sure that you’re aligning yourselves with the right sponsor and the right development team to get that project done in the time frame that they’re planning on getting it done, and then also understanding what the longer-term exit is.

So when we think about a 10-year investment time horizon, it’s long term and a lot of things can change over 10 years. So having a project that makes sense now and on a go-forward basis, not just today or, you know, in five years, but over the long term is very important.

It’s essential. So conducting research, doing due diligence on the sponsor, the partners, and the region. Ultimately, you want to make sure that that region can stand the test of time. And it’s on the, you know, uptrend, so to speak, and it’s not going to potentially be at risk as a region, you know, 10 years from now.

Jimmy: Fantastic. Rob, thanks so much.

Rob: Yeah. Thank you.

Jimmy: That’s it for our show today. A huge thank you to you, our listener. If you liked this episode, please rate and review us on iTunes. The Opportunity Zones Podcast is produced by the Opportunity Database. Visit opportunitydb.com to learn more about Opportunity Zones and Opportunity Zone fund investing. You can learn how to subscribe to this podcast and read more about today’s guest in the show notes by visiting opportunitydb.com/podcast.

And we’ll be back soon with another episode.

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