Opportunity Zones are an investment wrapper that provide exciting tax advantages… arguably one of the best tax advantages ever. There are many Qualified Opportunity Funds that contain multifamily real estate and are well worth any investor’s consideration.
Jimmy Atkinson, founder of the Opportunity Zones Database joins the show once again to offer his insights.
- What Opportunity Zones are, and why their tax advantages are so enticing for investors.
- The story behind The Opportunity Zone Database, and why Jimmy loves multifamily investments in OZs.
- Why starting an OZ fund is easier than you think.
- A few of the OZ funds with multifamily exposure Jimmy finds particularly interesting.
- Key dates you need to be aware of to get the most benefit from an investment in an Opportunity Zone.
- What the future holds for multifamily investments in Opportunity Zones.
Featured On This Episode
- Capital Square
- Grubb Properties
- Opportunity Zones Database
- Opportunity Zones – IRS.gov
- Opportunity Zones Resource Center – NOVOGRADAC
- Origin Investments
- Urban Catalyst
Industry Spotlight: Opportunity Zones Database
OpportunityDb (The Opportunity Zones Database) was conceived with the goal of providing world-class tools, education, analysis, and advice to help high net worth individuals, family offices, financial advisors, real estate developers, tax professionals, business owners, and many more navigate the ins and outs of the opportunity zones program’s tax benefits. And specifically, how they can create positive social impact in under-invested areas.
Learn More About The Opportunity Zones Database
About The Multifamily Investor Podcast
The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses attractive offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.
Scott: Hello, everyone. Scott Hawksworth here with you, and welcome to the second-ever episode of “The Multifamily Investor Podcast.” I’m super excited for this one because once again, Jimmy is with us. Jimmy Atkinson, founder of the Opportunity Zones Database, and he’s a podcast host himself. Jimmy, welcome to the show again. Episode two.
Jimmy: Thanks for having me, Scott. Great to be back with episode two. I think we did a reasonable job with episode one. Looking forward to exploring more about multifamily with you here today. And thanks for getting me back on. Appreciate it.
Scott: Right. And we kinda teased this episode. So hopefully people are really excited and eager to learn a bit about Opportunity Zones and multifamily investments in Opportunity Zones because really there’s a lot of excitement around this and you are the Opportunity Zones expert, really. So Jimmy, let’s just dive right in here. Just so we’re all on the same page, what is an Opportunity Zone?
Jimmy: So the Opportunity Zones’ tax incentive is possibly the greatest tax incentive ever created. And I’ll cut to the chase. Essentially, by making an Opportunity Zone investment you pay no new capital gains taxes ever. So if you’ve ever paid capital gains taxes from selling business or stocks or real estate, you know how much that eats into your returns. If you make an Opportunity Zone investment and you hold the Opportunity Zone investment for 10 years, when you exit that investment, you’ll have a gain, hopefully. That gain is 100% tax-free. So, the Opportunity Zones themselves is a place-based investment policy. The Opportunity Zones are designated at the census tract level and there’s over 8,700 of them all over the United States. And they are typically low-income census tracts that have these special tax advantages to them. So, I’ll stop there and turn it back to you, Scott, but I can go into much more detail on the entire program if you’d like me to.
Scott: Yeah, because I mean, I think there’s a time-sensitive nature to Opportunity Zones, right? In terms of…
Scott: …what was passed and what was the goal really of establishing these Opportunity Zones? You know, the effect is okay, you know, no capital gains, but what’s really the goal with them, and what’s the time-sensitive nature of it all?
Jimmy: Yeah. So two questions there. So I’ll take them one at a time. So first of all, I’ll tackle the policy goals of the Opportunity Zone tax initiative. First of all, this is a tax incentive that was created as part of the 2017 Tax Cuts and Jobs Act, which was President Trump’s signature tax initiative. It was a very small piece of that enormous legislation. It actually went unnoticed by most people for a long time. In fact, I didn’t really pick up on it until August of 2018, about 7-plus months after it was passed at the end of December of 2017. So, what it is intended to do, the context for it, the backdrop for it is that following the economic recession that we had, the downturn that we had, and the recession that we had in 2007, 2008, 2009-ish…
Scott: Of course, yeah.
Jimmy: …the nation as a whole recovered pretty nicely from that recession and pretty quickly 2010, 2011, and so on. And the markets have been going up and job recovery’s been up across large swaths of the nation. But if you look at the nation’s poorest zip codes, they actually did a very poor job, or I should say they had a very poor recovery from that economic recession. They got left even further behind and inequality in this country widened as a result. The nation’s wealthiest areas got richer after the recession and the nation’s poorest areas got even poor comparatively speaking. So, that’s the context for this.
And what the program is designed to do is it’s designed to tap into capital gains and incentivize private investors with capital gains to deploy their wealth and their gains into economically downtrodden communities all over the country. So, the mechanics by which this took place was this legislation was first conceived and drafted well before Trump was even in the White House when President Obama was still in the White House. I think like 2014, 2015-ish was when this concept was first conceived and it took a few years to get through.
And it was finally passed as part of Trump’s Tax Cuts and Jobs Act as I mentioned earlier. And mechanically, what happened is it allowed for the creation of these specially designated census tracts all over the nation that are called Qualified Opportunity Zones. So the statute provided a nomination process by which the governors of every state in the country and the mayor of Washington DC and the governors of all the overseas territories, Puerto Rico, Guam, U.S. Virgin Islands, etc., got to designate up to 25% of their low-income census tracts as Opportunity Zones. So that’s a process that took place in early 2018 and the list was finalized in July of 2018.
And as a result today, we have 8,764 census tracts that have been federally recognized as Qualified Opportunity Zones. So that’s what an Opportunity Zone is. It’s a federally designated area that is able to receive these tax advantages. So what are the tax advantages? Well, so first of all, it has to start with a capital gain. So you have a capital gain that you then roll over into an Opportunity Zone investment. Now, the gain can be from anything, basically be from the sale of stock, your Apple stock, or your Facebook stock, or you’ve got mutual funds or ETFs or bonds, anything in your brokerage account. They can be from the sale of Bitcoin. They can be from the sale of collectibles or art, comic books.
Scott: Right. Anything that would trigger a capital gain.
Jimmy: Yeah, it could be from the sale of real estate or a privately held business. Anything that would trigger any sort of capital gain. Normally, you would owe a lot of money to Uncle Sam. The following year, the rate on most capital gains is 23.8% at the federal level. And then the states oftentimes tack on an additional amount. If instead you take that gain and within 180 days, you invest it into an Opportunity Zone investment, you get three different tax benefits. Benefit number one is a deferral period. You get to defer the actual recognition of your gain until the end of 2026. Benefit number two is you get a reduction of up to 10% of the gain amount. And benefit number three is the one that I led with if the elimination of any capital gains tax liability within the Opportunity Zone investment after a 10-year holding period. So if you want me to, Scott, I usually like to walk you through an example with real numbers to illustrate how powerful this incentive is if you don’t mind. Unless you have questions.
Scott: No, let’s do it. And you also to kind of put a finer point on it, part of that other time-sensitive nature, that deferral’s till 2026, is that right?
Jimmy: That’s correct. And that date is written in the statute. So that date doesn’t change based on when you invest in, it’s written into the statute as December 31, 2026 is the date that you get to defer recognition of your gain too. Essentially, you delay payment on your initial tax liability, on your initial gain until December 31, 2026. I’ll go into more detail on that when I walk you through these examples…
Scott: Yeah, let’s do it.
Jimmy: …if that’s okay. So in my example, I like to consider a taxpayer that has a $10 million gain. And again, it can be from anything, right? So let’s assume a 23.8% federal capital gains tax rate because that’s the current rate. And those rates may go up, right? It looks like they’re gonna go up. And I’m gonna ignore state taxes just to keep it simple. But normally, that taxpayer would owe $2.3 million on that $10 million gain. And that would be due next April, leaving the taxpayer, and this is an important part, it leaves the taxpayer with only $7.62 million net to do something with, to invest in something else potentially, or to save or whatever that taxpayer wants to do. But instead, that taxpayer within 180 days of realizing the gain invests $10 million into a Qualified Opportunity Fund, which is the special investment vehicle that then deploys the capital into Opportunity Zone property. So benefit number one, a deferral period. So the taxpayer essentially gets to ignore that initial $10 million gain on his or her income tax return until 2026. So what you’re getting there is essentially a $2.38 million interest-free loan from the federal government. And that’s important, not just because it delays when you have to pay tax on the gain. And this is important. The tax on that initial gain does eventually come due.
Scott: So, they will have to pay that 2.3?
Jimmy: Yeah, you’re gonna have to pay. And it might not be 2.3. It’s gonna be taxed at the 2026 rate. So that’s a really key factor to consider. And tax rates may be going up. So there is some tax rate risk that you need to consider. But I actually think that if tax rates go up, it’s to your benefit, in the long run, to engage in this Opportunity Zone program anyway. But you can see if you have $10 million to play with instead of just the $7.62 million net…
Scott: That opens up more possibilities.
Jimmy: …that’s just that much more money that’s going to work for you for a longer period of time. It’s additional compounding essentially. So benefit number two is a reduction. The legislators of the program, of the Opportunity Zone Initiative, wanted to reward early adopters. So they put in a couple of kickers. If you’ve got your money in prior to the end of 2019, that benefit’s expired. That was a 15% kicker. Or now, to the end of 2021, that benefit’s expiring in a few short weeks here, Scott. And what this benefit is is it’s a 10% reduction in the amount of gain that you have to recognize when you do eventually recognize your gain at the end of 2026. So, in our example, the $10 million gain, the taxpayer gets to reduce that gain amount by 10%. So, on his or her tax return for the year 2026, he or she only recognizes that gain as a $9 million gain.
Scott: Oh, okay.
Jimmy: So tax rates may be going up, but the amount of gain that you’re recognizing is actually going down by 10%. So the way this is worded is the taxpayer has to achieve a holding period of at least 5 years prior to the end of that deferral deadline, which is December 31, 2026. So if you do the math on that, you can’t achieve a 5-year holding period if you invest past December 31, 2021. So that benefit’s expiring very shortly here. So that’s benefit number one and two. But if number three is the big one. This is why we’re here, right?
Scott: Yeah. That’s why we’re talking about this.
Jimmy: The first two are okay, but the third one’s really what we’re here to talk about. It’s elimination. You get to pay zero tax ever again on capital gains that are realized from that Opportunity Zone investment so long as you achieve a 10-year holding period. You need to hold the investment for at least 10 years before you’re eligible to take advantage of this last benefit. So it’s essentially tax-free growth within the Opportunity Zone investments. I like to liken it to a super Roth IRA. But there’s no limitations on the amount of money you can contribute. So, in our example, $40 million, let’s say it’s a 5X return after 10 years, pretty good investments.
Scott: Okay. So, you took the 10 million, invested in an Opportunity Zone.
Jimmy: And then you sell it 10, 12, 15 years later for $50 million. So that’s a $40 million gain. And normally, you know…
Scott: That’s nice.
Jimmy: …a tax bill of eight figures on that. In this situation, you owe $0. There’s zero capital gain tax liability on that OZ investment. And going back to my earlier point, if tax rates go up, that benefit actually becomes more and more valuable. The higher tax rates go on capital gains, the more valuable that type of incentive is. Those are the three main benefits. There’s also a hidden fourth benefit, which can be utilized quite a bit by real estate investors within this program, multifamily investors notwithstanding, right?
Jimmy: Multifamily investors in most types of real estate projects are able to take advantage of a tax write-off called depreciation. So essentially, every year you get to depreciate the value of the property and you can offset that against income. But the problem is when you go to sell the asset down the road, usually, you have to pay what’s referred to as depreciation recapture. It’s like a penalty for having taken that depreciation along the way. I don’t know if penalty is the right word, but it catches up with you eventually. With Opportunity Zones, there’s no depreciation recapture. Depreciation recapture is completely eliminated. So it could be a real lifesaver for capital-intensive businesses or for a real estate project that takes a lot of depreciation expenses. So I guess I’ll stop there.
Scott: Wow. Yeah, there was a lot there, but I mean, it’s super powerful and I love your example there, Jimmy, because it really does kinda put those numbers to, hey, this is how significant Opportunity Zones can be, Opportunity Zone investments rather. We were talking about multifamily a little bit there and I’d love if we could kind of connect it a bit more to multifamily. When we’re talking about multifamily opportunity funds, can you sort of break down, I guess maybe some of…. what does a multifamily opportunity fund really mean? Where does that kind of fit into the grand scheme of these? And where does the rubber meet the road so to speak when we talk about multifamily investing and Opportunity Zones?
Jimmy: Yeah. Great question, Scott. And what’s interesting is multifamily is the number one asset class for Qualified Opportunity Funds or for Opportunity Zone investing. It seems to have much more traction than any of the other asset classes. And what I’d like to do is actually point to some hard data on multifamily. Well, specifically it’s residential, but there is a national accounting group called Novogradac that is one of the leaders in Opportunity Zone education. And they do a terrific job of actually tracking a lot of data for the industry. They don’t track every Opportunity Zone Fund, but they track a fairly large subset of Opportunity Zone investing. I estimated, or maybe I think it’s their estimate that they’re tracking roughly one-third to one-fourth of all of the investment activity. Their most recent update from October shows that just over $20 billion has been raised by the Opportunity Zone Funds that they’re tracking.
And they admit they’re off by probably a factor of three or four. So it’s probably if you take into account all of the funds they’re not tracking and extrapolate from there, they estimate that the total amount raised by this asset class so far is probably on the order of maybe like somewhere in the 60 to 80 billion with a B dollar range, just to caveat that. But anyways, let’s look at the $20 billion of the total amount that they are tracking. They’re collecting data on the type of investments that these Opportunity Zone Funds are investing in and what their data shows is that $15.5 billion of the $20 billion is going into funds that have at least some residential development component to it. So, that’s roughly 75% of all of the Opportunity Zones that they’re tracking has at least some residential component.
And it’s not broken down by multifamily versus single-family. But I would imagine that the vast majority of that 75% is multifamily. So suffice it to say multi-families wildly popular asset class and, in particular, it’s a wildly popular asset class for Qualified Opportunity Funds. So there’s a couple of different ways that an investor who has capital gains that he or she would like to defer into this type of investment vehicle can gain exposure to multifamily within a Qualified Opportunity Fund. I think that was your question, Scott.
Scott: Yeah, that’s the big question. It’s where do we connect all that?
Jimmy: So how can an investor with capital gains get started? So there’s two routes really by which to go. One is a more active hands-on approach. And this is great if you are a real estate developer or you are an experienced real estate investor, and you want to hold the properties directly, you can actually start your own Qualified Opportunity Fund. It’s a relatively straightforward process, unlike other government tax credit programs. And just to be clear, this is not a tax credit program. This is a tax incentive initiative. Many tech credit programs, you have to cut through a lot of bureaucratic red tape, you have to submit an application for approval, you have to be awarded a grant or something of the like, right?
In order to become a Qualified Opportunity Fund, you merely need to self elect to be taxed as a Qualified Opportunity Fund. So a Qualified Opportunity Fund can really just be any business entity, a C-Corp or an S-Corp or an LLC, or any type of partnership, basically. So the most common types I see are typically LLC partnerships. And when you go to file your taxes as an LLC partnership, assuming that’s the structure that you select for your Qualified Opportunity Fund, you just file one additional tax form every year. It’s form 8996, and you just say, yes, this is a Qualified Opportunity Fund. There’s a few other nuances to that that I won’t get into on today’s podcast. There’s some compliance hurdles, but…
Scott: But it’s not too, too complex is the point.
Jimmy: It’s not too complex, especially if you have the right advisory team and accounting team and the legal team in place. So that’s one way you can do it is you can start your own QOF, Qualified Opportunity Fund, and buy properties. You can have the QOF buy and hold the properties. Now, there’s some hoops you have to jump through with compliance. There’s…you can’t merely buy and hold properties. You actually have to substantially improve the properties or you have to… or it has to be new construction, ground-up construction. And there’s several other compliance hurdles you have to clear that, again, I don’t wanna really get into on this episode because it’s too complex and we’d be here all day.
Scott: We’d be here all day. But to that though, I mean, so many multifamily investments, that’s kind of part of it is they want to improve the property, raise the value, all of these kinds of things. So that’s kind of built into a lot of them as well.
Jimmy: Right. Right. So again, you know, in this case, it needs to undergo either substantial improvement, which is defined as doubling the cost basis in the building, or new construction, ground construction. So the other way that a taxpayer with capital gains can invest in multifamily Opportunity Zone projects is to invest in a third-party Qualified Opportunity Fund. So there are hundreds of Qualified Opportunity Funds that I track on my website at opportunitydb.com. And the majority of them or at least a pretty sizable portion of them, I’d say certainly the plurality have an investing mandate for… Let me start over. And the majority of them or at least a plurality of them have exposure to multifamily in Opportunity Zone census tracts. So, did you want me to go into some examples of some of the ones that I’ve come across that are some of my favorites?
Scott: Absolutely. I think we wanna hear about some of your favorites.
Jimmy: Yeah. So just a disclosure here, all of these examples I’m going to give our advertising clients and sponsors of mine. And this is not meant to be investing advice, but for general information purposes only. But with that said, I’ve got four examples of funds that offer multifamily exposure. The first one is Urban Catalyst. They actually are on their second Opportunity Zone Fund. Their Fund I closed at the end of 2020 and was a multi-asset fund that invested in, I don’t know, I think a half dozen or more projects all located within the San Jose, California area. So, this is a developer that’s been developing in Silicon Valley and in the Greater Bay Area for, I think, close to 20 years, the team members there. But with their Opportunity Zone products, they are building solely in downtown San Jose, California. They’ve got a great case for San Jose as the next destination for a lot of tech companies that are migrating south from a little bit up north in Silicon Valley through to San Jose.
Google is a great example. They’re actually building their new mega campus in San Jose. They just acquired the land and got approved for construction on that earlier this year. And when that campus is completed in the next decade, it’s gonna be Google’s largest campus on earth. So, there’s a lot of activity happening in downtown San Jose. The fund of theirs that’s open right now, Urban Catalyst Opportunity Zone Fund II is a single city block that they’re going to transform. And it’s right across the street from City Hall. It’s a single city block that they’re gonna transform into a mixed-use project. It’s actually two separate buildings right next to each other. One is office space, but the other one is gonna be a mid-rise Class A luxury apartment buildings. So that’s a really interesting fund right there.
Scott: And to jump in for folks that listened to episode one, we talked a good bit about the housing shortage. And Jimmy, you actually shared a lot of insights on California itself as a state is sort of the poster boy for the housing shortage in this country. So when you think about the opportunities for investments in a place like California, and then kind of think back to those big numbers we were talking about in terms of the capital gains and all of that and that’s where you get that recipe where so many investors are really excited, right?
Jimmy: Yeah. And essentially the point that Erik Hayden, the Fund Manager of that fund likes to make is that it’s almost impossible to overbuild in San Jose and the Bay Area at large, just because there’s such a huge shortage of housing there.
Scott: Right, there’s such a need.
Jimmy: There’s such a need. Yeah. So let me move on to my second fund that I like is Origin Investments. So this is a slightly different flavor of a multifamily Opportunity Zone Fund. This is a multi-asset fund. So they are investing in several different institutional quality multifamily development projects and not just one location. But they have some pretty good geographic diversification, but primarily they like the Southern United States and fast-growing markets in the south and in the west. So that’s Origin Investments.
And the third fund that I like to talk about oftentimes is Grubb Properties. They’ve got, I think like a 50 or 60-year track record this company of developing apartments mostly concentrated in the Southeastern region of the United States. They’ve successfully closed a Qualified Opportunity Fund in 2019, and then they had another offering in 2020. And now, there are 2021 Grubb Qualified Opportunity Fund is closing at the end of this year. They essentially just issue a new fund every year. And what they do is they invest in moderately priced, I think they refer to it as a rental housing property is essentially focused in primary and secondary United States markets and growth areas. So as you can see, you kinda hear like it’s a lot of the same types of themes…
Scott: Right, same sort of flavor.
Jimmy: Right? But growth markets, secondary cities, a lot of the time, similar regions of the country for these that I’m recommending. And then there’s a, you know, the fourth one I’d like to point to is Capital Square. Capital Square is really interesting because many of these others they’ve been doing real estate development for a long time. And in fact, Capital Square is probably better known in the 1031 exchange world. I think they’re one of the top three or four largest Delaware statutory trust sponsors in the country. But they have kind of hooked into the Opportunity Zone program because they’ve had a lot of investors in their network, ask them, “Hey, what about some opportunities on stuff?”
Scott: And yeah, makes sense.
Jimmy: Yeah. And they noticed, “Oh, well, a lot of these properties that we’re developing happen to fall into Opportunity Zones so we could offer them as a Qualified Opportunity Fund.” And that’s similar to what Grubb is doing also. But unlike Grubb and Origin Investments, what Capital Square does is they issue a new fund for every single project they do. So it’s very project-specific. So two of the offerings they have open right now, or at least last time I checked in with them a few weeks ago is there’s a ground-up multifamily development in Raleigh, North Carolina. That’s gonna be the 297 unit multifamily development. And it’s got a retail component to it as well. So, I guess technically mixed-use, but mostly multi-family.
And then they also have a fund that invests in a mixed-use product in Charleston, South Carolina. It’s a 50 unit hotel/luxury apartment and plus retail space in Charleston there. So that one’s also a little bit of a mixed-use development with a hotel component and a rental space component. I was talking with them about this one a couple of weeks ago on one of my events. And what one of the fund managers was telling me was the city of Charleston is cracking down on Airbnb listings. So this was kind of their way around that. If they build some hotel component into it, they can still kinda utilize Airbnb, I think. So that was kind of interesting how they’re capitalizing on that trend there in Charleston. So those are four examples of what I think are pretty high-quality operators in the Opportunity Zone space. You know, all those operators have a good track record that dates back prior to the Opportunity Zone Incentive, and they have quite a bit of experience with developing multifamily.
Scott: Yeah. And I mean, thank you for sharing all that, Jimmy, and I kinda wanna underline too the multiple kind of mixed-use examples that kinda keep coming up. We talked a bit about it last episode and just the power of mixed-use and why that’s attractive to investors as well. So really interesting wrinkles there. Jimmy, I feel like we really kind of threw a lot at folks today and I think we covered quite a bit of ground when we’re talking about multifamily Opportunity Zones. Right?
Jimmy: I think so, man, I think so.
Scott: I think we got it. So, Jimmy, thank you again for joining me on the show today, sharing all of this insight. If folks wanna find out a bit more about Opportunity Zones, maybe dive into some other things non-multifamily, where can they do that? Where should they go to find out some more?
Jimmy: Yeah, great question. So I do have a free download available on my website for anybody who’s new to Opportunity Zones. And if you head over to opportunitydb.com/download, you can download my free “Beginner’s Guide to Opportunity Zones.” It’s a great primer on how the investment incentive works and how you can get started with Opportunity Zone investing. If you’re interested in learning more about how to actually start your own Qualified Opportunity Fund, I also have an advisory business that can help set up that legal structure for you and advise on compliance. And that business that I’m involved with is called OZ Pros. And if you head over to ozpros.com, you can learn more about some of the services that we offer there for anybody who’s interested in starting their own Opportunity Zone Fund.
Scott: And as we said, it’s not that hard. So, that’s good stuff.
Jimmy: It’s not that hard. It’s not that hard. Really, the devil’s in the detail though, and you need to have the right team of advisors.
Jimmy: And OZ Pros has a pretty deep network of powerful operators and professionals within the industry. And we also have a lot of expertise to help guide you along your… whatever your goals may be, we can help you get there.
Scott: Fantastic. Thanks again, Jimmy.
Jimmy: Thank you, Scott. It’s been a pleasure.