The $100 Billion OZ Opportunity, With Jimmy Atkinson

Opportunity Zone legislation has provided investors, especially those interested in multifamily, with perhaps the most compelling tax incentive in history.

There is now a bill up for consideration that would extend the program. Jimmy Atkinson, founder of OpportunityDb and host of The Opportunity Zones podcast joins to discuss why he thinks this bill creates a $100 billion opportunity.

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Episode Highlights

  • What Opportunity Zones are, and why they are of interest to multifamily investors.
  • The single largest segment within the opportunity zones space.
  • Details on the new Opportunity Zone reform bill, which has been introduced in Congress.
  • Why The Opportunity Zones Transparency, Extension, and Improvement Act has a good chance of passing with bipartisan support.
  • When the bill might be passed.
  • Jimmy’s prediction on how the bill’s passage could transform the OZ industry, and be a once in a lifetime opportunity for multifamily investors.
  • Why residential real estate in Opportunity Zones is so popular with developers and passive investors.
  • The future of OZ legislation.

Featured On This Episode

Today’s Guest: Jimmy Atkinson, OpportunityDb

About The Multifamily Investor Podcast

The Multifamily Investor Podcast covers trends and opportunities in the multifamily real estate universe. Host Scott Hawksworth discusses passive investment offerings in the space, including direct investments, DSTs, opportunity zones, REITs, and more.

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Show Transcript

Scott: Hello, and welcome to The Multifamily Investor Podcast. Scott with you once again. And on today’s show, I am joined by Jimmy Atkinson, who is the founder of OpportunityDb and the host of The Opportunity Zones Podcast. And we’re going to be talking about some new legislation that is up for consideration to potentially extend the Opportunity Zones Act and reform it as well.

Jimmy, welcome to the show.

Jimmy: That’s right, Scott. Thanks for having me. Let’s go, man. What do you got for me today?

Scott: Yeah, well, I guess I always like to start off and make sure that we’re all on the same page. So, can you tell us just a bit about what are Opportunity Zones and why are they so impactful to consider for multifamily investors as well?

Jimmy: Yeah. So, Opportunity Zones, it’s an economic revitalization tool that was introduced about four years ago. And what it is, it’s a tax incentive policy that encourages private capital to flow into underserved and economically downtrodden communities all over the country.

There’s over 8,700 census tracts that about 4 years ago were designated as Opportunity Zones. And for investors who invest private capital into these zones, they stand to gain some amazing tax benefits. I don’t know how much detail you want me to go into Scott, but that’s very high-level what it is at least.

Scott: Sure. Well, could you just for those tax benefits, maybe just really give the quick hits, especially because you know, our audience has so many high-net-worth passive investors interested in multifamily? What’s really exciting about those benefits there?

Jimmy: Yeah. Happy to do that. So it’s kind of similar to a Section 1031 exchange type of benefit, where you eventually get to continually defer capital gains recognition. It’s at its core, a capital gains tax incentive. So the way it works is like this. You realize some sort of capital gain and it could be from real estate, but it could be from a different asset, maybe your stock portfolio or sale of private business or sale of cryptocurrency, even.

So you realize a capital gain. And if you roll over that capital gain amount into a qualified opportunity fund that invests into these Opportunity Zones within a 180-day period, you stand to gain from 2 benefits. Benefit number 1 is you get to defer recognition of that capital gain until the end of 2026.

So, essentially that’s an interest-free loan from the IRS. You don’t have to actually pay taxes on that gain until April of 2027. The second benefit is the big one, and it is elimination of all capital gains taxation on the subsequent Opportunity Zone investment.

So tax-free profits, essentially. If you two X or three X your capital gain, let’s say it’s a million-dollar capital gain, you turn it into $3 million, right? After a 10-year holding period. And you do have to achieve a 10-year holding period. Normally you’ve got a $2 million capital gain that you have to recognize and pay taxes on, but if you qualify under this program through a qualified opportunity fund, you get to escape all of that taxation completely free.

So the $2 million gain, you get to step up that cost basis to fair market value. And essentially it creates a $0 capital gain for you at the end of the day, but you do have to achieve a 10-year holding period.

Scott: Right. I mean, regardless, that is definitely exciting. You know, we are the “Multifamily Investor Podcast,” so I’m curious why is residential real estate and particularly multifamily, the single largest segment within the Opportunity Zones space?

Jimmy: Yeah. Great question. And you’re right, you hit on the head. The program actually was kind of designed to help spur business investment in these economically downtrodden communities. What we’ve seen so far though, is that real estate by and large has been the largest asset class.

I think about 95% of all of the…give or take 95% or so of the equity that’s poured into these qualified opportunity funds has gone toward real estate. And within that real estate asset class by far and away the largest property type is multifamily. I think there’s a couple of reasons for that. One is just the nature of the qualified Opportunity Zone incentive program.

It requires what’s referred to as substantial improvement. And typically what that means is you need to have it be ground-up development. So you can’t just buy and hold an existing property like you would for a 1031 exchange or a DST. You have to actually improve the property or it has to be…and you have to improve it substantially. You have to double the basis in it, or you can have ground-up construction.

So what we’ve seen is mostly ground-up construction-type projects. And as you know, and as your listeners know, Scott, there’s a huge multifamily shortage in this country. And it seems like we can’t build enough multifamily. So, multifamily has been the largest property type so far for Opportunity Zone investing. Last I checked actually Novogradac, which is a big national professional services firm, they do a survey of qualified opportunity funds every so often, and the results from their past survey just from a couple of weeks ago, showed that approximately 80% of all of the capital that’s been invested in Opportunity Zone so far, 80% of all the qualified opportunity funds have at least some multifamily, or I should say some residential component to their fund.

They, unfortunately, don’t break it down single-family versus multifamily, but anecdotally, I know that the vast majority of that residential does go into multifamily. So, that kind of characterizes how much of the equity is pouring into multifamily, Scott.

Scott: Absolutely. And I think that it’s really important to also keep in mind the entire goal of the Opportunity Zones legislation is about encouraging economic development in distressed areas. And you’re talking about things like job creation. You’re talking about, you know, new businesses, but at the core of that people need homes and they need a place to live and, you know, go and work and have a convenient commute and all of that.

So it makes sense to me that residential component, particularly with multifamily, would have such a huge role to play in Opportunity Zones, right?

Jimmy: Yeah, that’s right, Scott. I mean, there’s target markets all over this country. You know, you think of the Bay Area, you think of some of the booming areas in the Southeast and the Southwest where we’ve added lots of new jobs over the past 5, 10, 20 years, but housing has not kept pace with that job creation. So, this is to help fill in that gap a little bit, anyway. I don’t know, we’ve got a long way to go before we completely cure the nation’s housing shortage, but this program does help get more multifamily developments built and takes it one step closer to achieving that goal.

Scott: Absolutely. So, okay. Let’s get to the meat of what we really want to talk about today because you were talking about this program and there is a timeline here, there is a sunset date. And there’s been a lot of discussion about possibly extending the program. And now there is specifically a bill which was recently introduced in Congress to do just that. And it is called The Opportunity Zones Transparency, Extension, and Improvement Act.

Jimmy, what can you tell us about this bill to extend the program?

Jimmy: Yeah. So, first of all, just at a high level, I think that this bill creates a $100 billion opportunity. And so let me explain that first of all, and then I’ll get into the nitty-gritty of what the bill does. So thus far, according to the Novogradac survey and data from the Government Accountability Office that came out not too long ago, a couple of different studies have shown that tens of billions of dollars has already poured into qualified opportunity funds for the purposes of investing capital into these economically underserved communities that are designated as qualified Opportunity Zones to the extent that now we don’t know the final actual number right now because the data is either delayed or it’s only partial data.

But based on how I extrapolate the data, I have estimated that $100 billion of private capital has already flowed into this program over less than the first four years of the program. And if you can consider that the program got off to a slow start for a few reasons. One, because it was a new program and it just takes the investing community time to learn about it and learn about what the different projects are that are out there, takes time for the marketplace to get established, takes time for funds to get up and run, that’s one delay.

Two, the regulatory process was very lengthy. It took two full years before the final regulations came out from IRS and gave investors certainty into what they were actually doing with their capital. How they could qualify how funds could do this and that. And three, we had the COVID-19 pandemic, which kind of upended markets for a while.

And in spite of all that, in just a little less than 4 years, I think we have seen a $100 billion of capital come into the program. Now, what this reform bill will do, it actually does five things. But one thing that it does is it extends the program by an additional two years. Currently, the Opportunity Zone tax policy is set to sunset beginning at the end of 2026.

And if you do the math, you know, you have until about Q2 or Q3, kind of depending on a few ins and outs that I won’t get into, to make your final qualified opportunity fund investment. What this bill will do, is it actually pushes out that 2026 date to the end of 2028, gives the bill…or gives the policy, I should say, two more years of runway.

And I think that’s going to lead to an additional $100 billion of private capital flowing into these economically underserved communities that we call Opportunities Zones. So that’s point one, that’s the first thing that the bill’s going to do. Do you want me to keep going with two, three, four, and five?

Scott: Yeah. Break it all down.

Jimmy: Did you have any questions for me about the two years first?

Scott: No. I mean, I think that’s pretty self-explanatory and then I can see too how that’s exciting, especially as funds are going and thinking about just the opportunities there when you add more time, give folks more time to realize those benefits.

Jimmy: That’s right. Yeah. So, yeah, and I’ll just say this one more thing before we move on to points two, three, four, and five. This is a perishable tax incentive policy, and there are some benefits that have already expired. One of the benefits actually is a 10% and 15% basis step up on that initial gain that you have, that you roll over into a qualified opportunity fund.

So you remember at the beginning of the show here a few minutes ago, I mentioned that you’ve got a $1 million capital gain, you don’t have to recognize it until the end of 2026. Initially, if you had invested prior to the end of 2019 or the end of last year, you actually got to reduce the amount of gain that you recognized that $1 million gain in 2026 becomes $900,000 or $850,000, depending on the holding period that you’ve achieved within the Opportunity Zone Fund before the end of 2026.

This legislation would possibly reopen those windows again for investors which could be quite powerful as well.

Scott: Yeah. That would be exciting.

Jimmy: Yeah. So the interesting thing about the policy being perishable is that it does create some urgency with investors, right? And there was a big deadline that occurred on December 31 of last year, December 31, 2021. And we did see a rush of equity to get into the door before that deadline expired at the end of 2021. That deadline, by the way, was that 10% basis step-up.

So, you know, I used the word deadline rather loosely. It was one very small benefit among the whole suite of benefits that this program offers. The biggest one, of course, being that elimination of capital gains on the back end, after holding the OZ investment for 10 years and that’s still around for many years to come. But I think it’s interesting that they’re considering or Congress is considering pushing out all those deadlines by an additional two years.

Because I think it would reintroduce those urgent deadlines at different points in time in the future, but still give the policy an additional two years of runway to raise what I think would be an additional $100 billion of capital. So…

Scott: Absolutely. So, okay. What are some of the other points of the bill then? Because I think the extension, yeah, that’s one of the main things but what else is there?

Jimmy: The extension is main… Yeah. I think for investors, the extension is the main thing, that’s why I spent so long dwelling on it. Just to zoom out a little bit, and then I’ll get into benefits two, three, four, and five really quickly. This is a bipartisan bill and it was introduced bicamerally. It was introduced into the House and the Senate at the same time at the beginning of April of this year, just a little less than a month ago.

It has Senate co-sponsors on both sides of the aisle. It has House co-sponsors on both sides of the aisle. This policy really is truly one of the very few…

Scott: Few.

Jimmy: …bipartisan policies that we see. I mean, there’s not a lot that Republicans and Democrats agree on ever, especially in this day and age. And this is one of those things that they actually do happen to agree on.

Scott: So that bodes well for it? There is a potential chance to pass it, right?

Jimmy: I think it does. I think it does. I think there’s a very good chance that this policy does get passed at some point in time. And maybe you can ask me a question on that a little bit later. But anyways, to kind of rattle off the other four things that this bill will do is, you know, number one was the two-year extension, right? Number two is it would introduce, or I should say reintroduce reporting and transparency requirements that were included in the initial policy but were eventually stripped out before it got passed at the end of 2017.

I won’t get into the details there. But essentially it’s going to require that funds collect and report to the IRS a little bit more information. And I think the bill does a nice job of hitting the sweet spot. The sweet spot being right now there’s not quite enough data being collected, but you want to make sure you require some data collection but not too much. You don’t want it to be too burdensome, too onerous on the funds.

And I think this bill hits the sweet spot there. So, that’s important because then as, you know, a community of Opportunity Zone stakeholders, we’ll be able to show to the American public how this program is succeeding a little bit more effectively than we have in the past due to the limited amount of data that we have.

Numbers three, the third thing that the bill will do is it will disqualify a very small amount of high-income census tracks that were designated as qualified Opportunity Zones, essentially kind of using updated census data to say, well, hang on a second. This Opportunity Zone policy was really only meant to designate like truly distressed communities.

And as it turns out, there are, you know, probably a few dozen or so where you kind of have to squint when you look at them, and you kind of scratch your head and you think, “Why the heck is that an Opportunity Zone? It probably shouldn’t be.” So, if the median household income is greater than, I think it is 130% of the nation’s average or median household income, essentially, if the track is very high income, it’s going to be early sunset or disqualified from being an Opportunity Zone going forward.

Now, for those funds that have already invested in those zones that get disqualified, they’ll be grandfathered in. So it won’t unwind anybody’s investment that’s already been made. That’s an important note.

Scott: That’s a key point.

Jimmy: That’s an important point that I like to point out because some people get really nervous about that.

Scott: Yeah.

Jimmy: And then four and five are a little bit less important. But four is, it would allow for a fund of fund investment. So, currently, qualified Opportunity Funds are not allowed to invest in other qualified opportunity funds. This would open the door to that. There’s a feeder fund…

Scott: I know there has been an interest in that so makes sense.

Jimmy: Yeah, there has been an interest in that. And some people refer to this as a feeder fund concept, essentially it would just, you know, catalyze more investment in the marketplace. I’ll leave it at that. And then the fifth thing it would do is it would create a state and community dynamism fund, which would create some flexible grants and some technical assistance not just for Opportunity Zones, but for all sorts of low-income communities across the country.

So that’s a basic breakdown of what the bill would do and how it would help Opportunity Zones and the investors in Opportunity Zones for the next several years here.

Scott: So, if it were to pass, what do you see the impact being really on the Opportunity Zones industry?

Jimmy: Yeah, well, I think it allows the Opportunity Zones industry…if it gets passed, I mean, it essentially just gives the industry another two years of runway. So it allows for the industry to mature a little bit more. It allows for more real estate projects to get developed in these low-income census tracks all over the country. It allows for more businesses to get developed in these low-income census tracks all over the country. And I think there’s a lot of good that this policy has done already to date, and this would just extend it by an additional two years.

Scott: So, okay. We were kind of touching on it, but what do you think the chances are that this does pass and that, you know, folks on both sides of the aisle continue to come together over it?

Jimmy: Yeah. Well, I think the good news is I think there’s a very high chance it gets passed for some of the reasons I’ve already cited. One, it is supported in a truly bipartisan effort. It was introduced in both the House and the Senate already. So bipartisan and bicameral. Another reason why I think there’s a likelihood that this gets passed is that the Biden administration signaled at least during their campaign.

They haven’t come out with anything publicly since he’s been elected. But when Joe Biden was running for president, I believe it was after he had already won the primary, but before the general election. So, you know, in spring and summer and early fall of 2020, his campaign website made mention of Opportunity Zones in a handful of places.

He and his administration want to leverage Opportunity Zones. They want to reform Opportunity Zones to further advance their “Build Back Better” agenda. Now Build Back Better has stalled in Congress. Maybe it gets passed as part of a reconciliation bill at some point here, but you know, we’re a year and a half in, and no sign of that passing so far. But I do think that there is at least some support from the presidential administration and the administrative branch to the government that something happened with Opportunity Zones at some point in time that it gets some sort of reform.

And the fact that this was co-sponsored by Senator Cory Booker Democrat in the Senate. I think he’s a very strong, powerful voice for the Democrat Party. You know, I think that improves the chances of this bill being seriously considered. So maybe your next question would be, “Well, when is it going to pass?” Would that be your next question, Scott, because I got thoughts on that?

Scott: Yeah, yeah. You stole my thunder. When is it going to pass?

Jimmy: Well, so it’s a bipartisan bill, right? So it’s not just some Democrat agenda that they can just ram through if they wanted to. It’s actually broadly supported by both Democrats and Republicans, as I’ve mentioned throughout the course of this podcast. We’re coming up on a general election here in just a few short months. And I think the closer and closer we get to that general election, the less and less likely it becomes that we have some sort of bipartisan efforts on anything really.

So, I kind of feel like this might get passed toward the end of the year in a lame-duck session of Congress. That’s my prediction. If I’m gazing into my crystal ball. And, by the way, I have no insight or special knowledge of this. I wish I did. I’m just kind of making an educated guess.

I think that this gets passed as some sort of tax extenders bill or appropriations bill maybe toward the very end of this year, right before the holiday break, before the new year, and probably in a lame-duck session, that would be my guess.

Scott: I buy that. I buy that. So, okay. Let’s say it does pass, what might the impact be on multifamily in OZ’s? What could we potentially see there when we talk about multifamily development and real estate in general?

Jimmy: Yeah. So, for multifamily, I think it’s great. And like I mentioned before, multifamily is by far and away the largest asset class or largest property type within real estate that’s being developed as a result of this program. Or I should say through this program.

A lot of equity has been raised for a lot of different multifamily ground-up construction all over the country. And I think that’s just going to continue as this bill hopefully gets enacted at some point. It’s just going to give an additional two years of runway for more capital to be raised for these multi-family projects.

Then hopefully what happens is, I didn’t mention this before, but one of the things that the bill would do under the reporting and transparency requirements that I think was my point number two, is that it’s going to require that treasury report on the progress of Opportunity Zones to Congress every 5 years, specifically on year 6 and on year 11 of the program.

And I’m hopeful that when treasury makes those reports and that as all the data comes in from all of the different qualified Opportunity Funds around the country, as we get more reporting and transparency requirements, that we’re going to see all of the capital that has been raised for these multi-family projects, these housing developments all over the country, and how not only has a lot of money been raised for the sake of investors but a lot of money has been raised for the sake of building housing, much-needed housing in distressed communities all over the country that need it the most.

That’s what I am hopeful the additional reporting and transparency requirements will help to show down the road here.

Scott: illuminate that.

Jimmy: And I think that’s great news. That’s great news for multi-family because then the nation buys in even more, Congress buys in even more the fact that capital is being raised and it’s being deployed successfully to actually address that problem, specifically that we need more multifamily in this country.

Scott: We absolutely do. The housing shortage is not going away anytime soon. And so anything that can encourage more investment in housing development seems like a no-brainer to me.

Jimmy: Absolutely. And like I said, I really do think this is a $100 billion opportunity. So think of what $100 billion dollars can do in terms of lifting more of these census tracks, these qualified Opportunity Zones out of poverty, building more housing in those communities that need it most.

Scott: Absolutely. And it’s going to be exciting to see how it all shakes out and hopefully this bill, the people can come together and pass it and extend that program. Jimmy, thank you so much for joining me on the show today. Really breaking all of this down, offering your insights there. And if folks want to find out more about Opportunity Zones, check out your podcast, hear a bit more from you, where can they do that?

Where should they go?

Jimmy: Yeah, well, if they want to download the Beginner’s Guide to Opportunity Zones, I’ve got a guide up on my website. They can find that guide on the Opportunity Zones Database website at opportunitydb.com/download. And then if they want to learn more about Opportunity Zones by listening to my podcast, get your headphones on, subscribe to me on your favorite podcast app. You can find the podcast at opportunitydb.com/podcast, or just do a search on your favorite podcast platform, whether it’s Spotify or iTunes, or what have you, for “Opportunity Zones Podcast,” and you’ll find me there.

Scott: Fantastic. Thanks again, Jimmy.

Jimmy: All right. Thanks, Scott.