Opportunity Zone Tax Benefits and Investment Analysis with Guest Chris Loeffler

Foreign.

Welcome, everybody, to this week's episode of Main Street Business. Main Street Business podcast. My name is Mark Kohler. I'm here with my amazing co host, Matt Sorenson in the house.

Yeah, baby, yeah.

All right, sweet.

Yes, I'm present. I'm here.

We're also simulcasting on YouTube. We're iTunes, Spotify, and Stitcher, multiple venues. But we're here just talking about building wealth, saving taxes, living the American dream. Both Matt and I are tax attorneys specializing in different areas of business law, tax law. If you're a new listener, found this topic today on opportunity zones. Our topic today. Matt's going to introduce our guest here in a moment, but that's what we're trying to bring to you are ways that you can really just make it happen. And it's hard to get technical information that's not rah, rah, rah, but to get it in an interesting format that's accurate and somewhat palatable. So I'm going to give a disclaimer. Now, I will be making dumb jokes and movie references through the whole episode, but that's not a reflection of my co host or.

Yeah, I need like a T shirt that says that. Don't judge me by my co host disclaimer. No. Well, yes. If you are new to this show, you are listening to a podcast of tax lawyers, your choice. So hopefully we try to be entertaining and say something smart every once in a while. You be the judge of that by the time we get to the end here. But our goal is really to give you information that matters. Like, there's a lot of crap you can listen to. You can listen to sports and news and, you know, it's the same garbage over and over again. But we're trying to give you actionable information that matters. It can save you money.

Well, we just alienated every other podcast out there, but that's okay. Apparently you're all garbage and crap, but

yeah,

well, Matt, introduce our host. I mean, our guest here.

Okay. Yeah. Well, today we want to talk about opportunity zones. And despite Mark and I being tax lawyers and Mark also having the geeky credential of being a cpa, we're also authors, too. Heck of a good guys, too.

Just.

Just normal dudes. You know, I can hear you.

You know that I can hear you.

What's that? Oh, is this on the ginky guy part?

I heard that.

Okay, okay. Yeah, sorry. But we needed to bring an expert to the podcast today to talk about opportunity zones. So we have Chris Loeffler from Caliber who had Some accounting experience. He worked in public accounting before, you know, getting smarter and going into real estate.

Went into the es, came out.

Yeah, I'm still. I feel like I'm still in recovery, though. If you think about it, you know, it's probably going to take me years to get away from feeling like the only way I can solve my life's problems is with a pivot table and in an Excel file.

Yeah, yeah. There's Accounts Anonymous is the real AA out there. It's, it's, it's eclipsing. Alcoholics Anonymous is, you know, the number one recovery program in the world.

But.

Well, this is a huge topic and Chris, we wanted to get into it because there's some awesome stuff for 2019 and 2020. Those that have had a capital gain. And we're going to get into this strategy is one of these juicy nuggets, so to speak, from the Tax Cuts and Jobs Act. But because of all Covid going on in 19 and 20, there's some

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opportunity in the opportunity zone right now, which is why we wanted to hit this at year end. So that's the topic we're gonna get into with Chris.

Yeah. Glad you're here, Chris.

Thanks. Yeah, thanks for having me. And I've known Matt, I've known you for a while. Mark and I met years ago, and I just continue to be impressed by not only your good looks, but also your good jokes.

Wow. Oh, my gosh. For some referrals today or something.

Is this the part where I put up my PayPal account?

Yeah, we'll send that money right over. Well, let's start here. I think a lot of people. If I may, I want to pose the first question. A lot of people are like, okay, opportunity zone. Why does it matter? Capital gain? Tell us, if you don't mind, Kris. A lot of people can get around their head around a 1031 exchange. They're like, okay, I can sell a property and buy a new one of equal or greater value. I can sell multiple buy it. But there's timing. I've got to spend my money in a certain way. Maybe contrast the two if you could, right off the gate and maybe tell us what an opportunity zone strategy is compared to a 1031.

Sure, sure. So if I start off with, you know, just pure tax benefit, I'm going to use examples throughout our conversation, all based on one key concept, which is you make an investment for 10 years, you get an 8% growth rate per year over 10 years, which is, you know, kind of middle of the Road or actually slightly underperforming for what real estate tends to grow by over a decade's period of time. And you invest in an opportunity Zone fund versus a non fund. So if you invest in an opportunity zone fund, then you're basically investing in real estate or real estate related developments. You get this series of special tax breaks and the end all be all result over an 8% growth period over 10 years is you earn about double what you pay in taxes. So if you're going to have a million dollar gain and you're going to pay 300,000 bucks in taxes, you're going to earn an additional $600,000 in tax savings based on that scenario.

Okay, no, I love, I love. Chris likes to go right to the. Okay, let me just show you the number. That's the accountant.

That's the accountant.

All right, now let me, let me.

That was just, I was like, didn't. He didn't bury the lead. He just got to the point, you know, at the end of the day, you're going to have more money.

Yes.

And the IRS is going to have less.

Yes. And drop pen, drop. Okay, let me take a stab at this and tell me if you're okay with this. A rudimentary example. I have a property I bought for 200 grand. I sell it for 500 grand. I've got a $300,000 gain. I don't want to pay tax. So I might go do a 1031 exchange, sell the property and buy another one. Well, opportunity zones came along in the Tax Cuts and Jobs act and they, and you gave us some legislative history before when we were talking. I'd love to hear you explain how they evolved here in a minute. But the point is, people said, you know what, it can't just be real estate if I have any sort of capital gain. I sell stock, I have any sort of capital gain, a farm, a ranch, and I want to not pay tax on that gain. A business, I'll say, okay, I don't have to go buy one of equal or greater value. I can just take the gain and go invest in one of these cool Opportunity zone areas through a fund that can say, okay, here's what we're going to do with this real estate. And if you invest your gain in this amount of money will defer the tax for a while. If the longer you hold it, we will maybe reduce the amount of tax burden. And in fact, even if you hold it longer, you can pay no tax on the future growth of that investment because we want you to help rehabilitate this zone we've deemed an opportunity. So how would you expand on that layman's term definition? Was that close?

Yeah, that's close. And that's why I started with the benefit. Because if you look at the math as a, okay, I'm going to invest in a piece of real estate. I'm going to earn my investment return, which is going to be whatever you're going to earn on that investment. But I'm also going to earn this tax savings, and that's effectively about two times what I paid eventually in taxes after my deferment period. It's, I think, the best starting point to compare it to a 1031 exchange. Because then you say in your scenario, mark, you've got a $500,000 ass sold, you had a $300,000 gain in your 1031. You've got to invest the full 500,000. You've got to buy another real estate asset. Most of the time, as an investor, practically speaking, you're going to invest in an even bigger asset. So as you age in life, you add more and more debt to avoid paying taxes, hopefully to get a healthier and healthier cash flow. As long as everything goes according to plan, right? And your money is kind of constantly tied up in this illiquid transaction. In the other scenario, you've sold your property for 500,000. You can take your $200,000 in basis and you can put it in your pocket, you can put it in the stock market, you can do with it as you please. You only have to invest the capital gain component, that 300,000 in this example. And the tax benefit you get from doing that is you stay invested in real estate. You get the deferment, you get a reduction in your tax liability that you eventually owe, and you get this benefit where you pay no tax on the upside of the investment. Once you sell it, that benefit drives those tax savings results that I first described. So the whole concept is, how can we get people to move their capital? How can we get them to sell their stocks, sell their businesses, sell their real estate and redeploy that capital? Not into, you know, an offshore fund or a conservation easement or something that's not going to produce very much value to the American economy in American communities, But something like a redevelopment of a psychiatric hospital in downtown Phoenix, which we just got done building, which is going to create significant benefit for the community. New jobs, new tax base, additional ability services, et cetera.

Yeah, we gotta make Phoenix great again.

Yeah, we gotta do It, Yeah, Arizona didn't go that way in the election. But let's not get into politics. Let me say, Let me talk like I'm an investor, okay? Let's say I'm. I'm investor, you know, investor, Matt, whatever. I sold something, all right, in 19 or in 2020 this year. And let's say it's the same thing. It's. Let's say it's even just stock. I just sold stock. Okay, let's get. It doesn't have to be real estate. That's what people remember. The 1031 has to be real estate for real estate opportunities, though. And this is a critical component. Could be. You could sell Amazon stock. You could have sold your xyz, you could have sold Vandalay Industries for a profit, you know, you know, Cramerica, whatever, whatever company you hit, you know, but you just redeploy the gain. Now, I'm excited about this right now because, Chris, like you say, all right, you can take back your basis, but that gain, if you reinvest it, when I go onto my 1040 on my tax return, I'm not picking that up.

Right?

It's just. It's not showing up. It's gonna help me today and next year, come April 15, I'm gonna be like, sweet, for how long?

When do I have to pick it up? Let's break. When do I. In Matt's example, let's just baby step it. That's benefit number one. And we're getting the investment side of this. But benefit number one, defer how long until I have to pick up that gain.

So your gain is actually calculated on 1231, 2026, and then your due date for that payment is April 2027. And so you're gonna say they're gonna look at the value of your investment at 1231, as long as it's higher than what you originally invested it into, you're gonna have to pay your original capital gain that you owed minus approximately a 10% reduction in that original gain. As long as you invest this year. If, God forbid, it's the end of the world in real estate and we're in another 2008 financial crisis, and we can justifiably devalue that position below what you've actually paid for it, you're actually going to pay less in taxes than you originally expected to pay in the original gain. And if we go the way of after 2008, five years down the road, and we actually sell that investment for a very big gain on its value, you Pay no taxes on the upside because you've already paid your associated taxes. And so kind of, Matt, and to your point, this is why I was sort of beating down your guys doors after our lunch was we got a really short period of time to think about this because of COVID Congress passed or not Congress actually. The IRS passed a variety of relief provisions for the Opportunity Zone rules around when you can invest. And those relief provisions allow people who had capital gains from 2019 and 2020 to extend all of their investment windows until 1231, 2020. So they have roughly 40 days left to find a fund, decide to do this and make that investment. You could have an investor who is a trader, day trader, and they have a million dollars worth of capital gains from earlier this year in trading back and forth all day and 900,000 in losses. They can take the million dollars in gain invested in real estate and Opportunity Zone fund, create a massive tax benefit for themselves and they can retain the losses for future use. So there's a lot of really interesting things and strategies around this. And conceptually, as an investor, you're just saying, okay, I can take a piece of my portfolio, put it into real estate development at a good time to invest in real estate development and get a tax benefit. It's as simple, I think, as that. Although as you dig in, you get into a lot of complicated rules and all that kind of stuff.

Okay, let's say that I'm listening to this fun though, in 2021.

Okay, you said fun. Listening to this podcast.

Listening to this podcast. It's a fun podcast. Yeah, I'm listening to this fun podcast. All right, and trust me, go through the podcast history, interview new listeners. I've said stuff way stupider than that.

Mark tops it.

Yeah, Mark will remind me. Okay, it's 2021. All right, I'm listening to the podcast and I want to do Opportunity Zone. How does it work now? What's my timing now when I sell an asset? What's the timing rule now on when I would have to invest in an Opportunity Zone deal?

Yeah, there are some exceptions to the rule that will extend your window. But in General, you have 180 days from the day you realize your capital gain to get it invested. And invested means you've actually wired funding into a qualified Opportunity Zone fund, which a lot of these funds are private real estate, private equity funds, and they require like kind of a week or two worth of lead time before you can make your investments. So you can't just buy a stock like you would in Five seconds on your Schwab account or something like that. You've got to really think about this and think about the fact that, gee, it's Thanksgiving week, then we have a couple weeks before we get into the holiday season, and what does that look like? And am I really going to have time to research a fund? And so the time is kind of now to figure it out. And so going forward, after the end of this year, you go back to the regular rules, which is, I got a gain within six months of realizing the gain I need to get it invested.

Okay, now I want to just summarize what we were trying to just do baby steps, and we expand our conversation. There's so many rabbit holes along this path. You know, we just want to dive down one every step we take. When you do that $300,000 investment, in our basic example, sold a property for 500, have a $300,000 gain. Let me be clear about this. You're not paying the tax on that 300,000 until spring of 2027 on that 2026 tax return. That's benefit number one. Chris Brief. I quickly stated it in his summary. But step two was I can actually reduce the amount of my gain by 10% at that time as well. So if I had a $300,000 gain, the gain on that 2026 tax return actually goes down to 270,000 in that example. So that's the next benefit. I get like this 10% bonus of not paying tax on 10% of the gain. Then the third one is I have to hold the investment at least 10 years. If I'm like, okay, I'm going to buy it in 2020 or 2021, I wait until 2030 or 2031. I really say that, but I wait 10 years. Whoa. I never pay tax ever on the gain I have in the investment itself that I just made. So I invest 300 grand. Cool. I gotta pay tax on that at some point. We talked about that. But that 300 gross to 600 or 900 over a 10 year period with appreciation, not to mention cash flow, that could be occurring along the way. And that gain does not have to be reinvested like a 1031. I can walk away and pay zero tax if I hold the investment 10 years. Okay, that was the baby step summary of the tax benefits.

Yeah, I think that's right. And it's. And because of that structure and because of the flexibility of the program, if you're in your, you know, 40s, 50s, and 60s, and you're saying, gee, I would like to actually use this cash at some point in time and not have it stuck in a real estate investment until I, you know, the whole 1031 till you die thing, this is a wind down for you. You make an opportunity on investment. Yes, you're eventually going to pay some of the taxes that you owe, but because you get all these benefits, you actually recover that and then some. It gets you to unwind that tax position and it could be very valuable to you. And then if you're kind of like, we're talking to a lot of folks at Zoom right now who had their stock go through the roof.

Right.

Well, you've got a 30 year old engineer with a huge capital gain and we invest in an Opportunity Zone fund. Your minimum requirement is 10 years. But if you wait and you say, you know, I don't need to sell this investment, I'm going to hold onto this investment for another 10 years. You could go 20 years and pay no tax on the upside over the whole 20 year period of time. So you can go up till 2048 with that. It's basically like a Roth IRA. Yeah.

Now, let's talk about the fund itself. Once you're. This is my last tax benefit question.

Well, who knows?

We shall see.

Disclaimer.

Famous last words. I can't tell how many clients people when I speak. One more question. One more question.

One more question.

Matt said, read my lips. No more tax.

No more tax questions.

That's right.

No more new tax questions for those millennials out there. That's a George Bush line, right? That's George H.W. george Sr. George Sr. Yeah, he was my favorite Bush, actually. Anyways, what was I talking about? Tax benefits.

Yeah.

Okay, let's say I'm in a fund. So I get into the deal, Kris, and I got the tax deferral. I got a little tax reduction. I'm paying some tax in 2027. Let's say the fund winds down in 2032. I don't know, whatever. Somewhere in the 2000 and 30s, which is weird, Mark, to say, What, what am I looking at there? I pay no tax on the gain. That fund kicks butt. And the development deal or whatever the project was takes off.

Yeah. You put in a million bucks and 10 years down the road, if it's worth two, you get $2 million.

Okay, no tax.

Now, now let's talk, let's talk investment. Now, a lot of clients of our said, okay, I want to set up my own little fund. I've got a real estate project. I want to do. And so I'm going to just go form my own llc. And we've helped clients form their own llc. That would qualify as a fund initially, but then it can be a little more complicated. What, what does that. Which let's say it is your own little LLC or it's a fund with a bunch of investors that's SEC regulated and you have some protection there. And we'll, and obviously we'll look at the pros and cons. But what's the con in this? What's some of the detail of what you've got to spend that money on?

Yeah. So the great thing about opportunity zones from the investor's chair is as long as you're not going to invest in your own fund, your actions are almost inconsequential compared to like a 1031, you know, in a 1031 you stick your money in exchange, you've got to manage the relationship with the exchange, then you've got to find out and identify at least three projects and then you've got to go through escrow period, closing period, acquiring the asset. And it's very active, right?

Yep.

In this, once you've surveyed the 900 funds or so that are in the country and decided which one you want to invest in, you fill out a subscription application and you wire your funds and you're done. You have to think about it. You're hiring a professional third party fund manager who is your co owner that is typically being paid based on the profitability of your investment to go out there and win the game for you. It is much more of an investment versus an active ownership or a second or third job, depending on who you're talking to.

And what's the fund manager doing for you? If you don't go one of these 900 funds of which yours is amazing, then you've got some work to do.

Do your own due diligence.

Yeah. So if you now have decided I'm going to create my own fund, you're putting the fund manager cap on and now you've created a new business and in that business you're accepting capital that you have to deploy within six months of accepting it into a qualified opportunity zone business, which could be a subsidiary company that you create to manage a real estate development. Once the money is deployed into the QoZB, you're now managing the accounting for the QOF and the qozb or multip qozbs. If you make multiple investments and at the QOZB business structure level, which could be owning A real estate project, you've got a bunch of requirements. You have to implement a 31 month development plan, follow that plan accordingly, manage your cash a certain way. You can't have too much cash either in the fund or in the business. There's different rules for cash in the fund and there's different rules for cash in the business. And you have to report to the IRS every six months to say that you're doing everything correctly. So all of this infrastructure was designed within the law in so that there would be a fund manager involved so that investors would be incentivized to say, you know what, it costs money to make sure I'm following these tests and I'm using good third party service providers and I'm making good decisions here. It may make more sense to me invest my million dollars in a fund that has $100 million invested instead of into a single million dollar fund where I have to bear the cost of all this on my own shoulders.

Let's, let's walk through an example, because let's. Because these opportunity zones, I mean, right, These are these areas that have these little maps. Right. When they created the law, each governor got to designate the areas in their states and they're these. What do they call them? What do they call? They're like tracks. There's these tracks and like you can look them up. I've looked them up in Arizona where you can see. And it's like you cross the street, you're out of the opportunity zone. You cross the street on the other side, you're in. And it could be like the same damn intersection. Right. But let's say I'm just like, all right, Kris, I just want to buy a single family home and rehab it. I'm going to throw some paint on the walls and some new countertops on it. I'm going to do a partnership tax return with me and my spouse because it's got, it can't do single member llc. Guys, if you're going to do this, you got to do a partnership or corporate return. So that going to count?

Yeah, you know, as long as you qualify, which is it's got to be located in the right census tract as you're mentioning, Matt. And just one little note on how those were identified, that was all pushed down to the states and then the states, depending on who the governor was and how well the state was run, either put together a really thoughtful process of how they identified census tracts that could be good quality opportunity zones, or they didn't.

And so I remember when this was going and the governors got a pick, I was like, man, this is where lobbyists are going to make their money because the governors are picking this and wow.

Well, and what it ended up doing, like in Arizona, our governor activated the thing called the aca, which is the Arizona Commerce Authority, which is like the economic development engine that rolls up all the other economic development parts of each city within, within Arizona. And so they actually did a great job of decentralizing the decision making and letting the cities and localities themselves say this little part, this census tract within our area, our city is growing already and has potential to take in more capital and have more growth. Because in order for the opportunity zone investor to win, the value of their investment has to grow over time. In order for their value of their investment to grow over time. We can't be necessarily investing in a place that's totally depressed and it's never going to change. We've got to be investing in a place that has some momentum of, you know, job growth, population growth, economic growth. So other states did not do such a good job depending on where you're located. And they just said, okay, let's just pick the most depressed areas we can find. Well, it's, it's all, you know, it's nice that they did that, but if those areas are not going to be a place where an investor feels safe putting their capital, then they're not going to do it. And so we, we, we, we, we've paid attention to what since specific census tracts, not just what specific states or cities, but what specific census tracts were well picked. And so to your point, once you, you know, once you've, okay, you've got your single, your husband and wife, limited partnership or whatever your structure is, you found an area that's an opportunity zone. Hopefully you do what we do, which is get a legal opinion that actually says that this actually is an opportunity zone. And specifically with that APN or that specific property, because sometimes the maps on Google aren't necessarily accurate. And then you invest in a single family property.

Now that's where the dollars come into play if I make Chris. Because let's say we're back to that same example, 500 grand. I have a $300,000 gain. I don't want to just go buy a place for 250,000 and put 20,000 of improvements in it. That's not a significant enough rehab because the theory was these investors are going to rush to these areas and get that, keep that momentum going and make these properties better. So what's the rat 300 grand. I'd have to buy a house of how much and put how much in rehab.

So say you've got 300,000 bucks. The ideal scenario if you were going to do it all cash and not borrow any debt, would be you would find a property that was 150,000 in general. And that probably means the land's worth 10 or 20,000, the house is worth the rest. And whatever the house is, whatever the existing improvements are on that property, you have to double in value. So if the land was worth 20,000 and the house was worth 130, you got to put another 130 in improvements in and then of course, maintain the right cash ratios and all that kind of stuff. And so they call it doubling the basis. So if you buy a single piece of land that doesn't have any improvements on at all, it's raw dirt. The general safe harbor that we believe exists is that you put in at least 60% of what you paid for. So if you bought a $10 million piece of land, you got to put at least a $6 million building on top of it. At least. If you bought a $10 million piece of land that has a $9 million building on it, you've got to put at least 9 million renovations into that building or an additional construction on that site. And so it's very complicated because you can't just, Matt, to your point, go in there and hey, yeah, paint, carpet, whatever, nice tax haven. I'm going to move on because A, that's not a compliant investment and therefore, if you get audited, you're going to get fined and your tax position is going to fall apart. But B, the benefit of opportunity zones is holding for 10 years and having to pay no tax on the gain. That's the biggest part of the tax benefit. Well, if you're just doing some basic cosmetic stuff and you're not doing something that's transformational within the investment, the likelihood that you sell in the future for some big number is probably pretty low.

Yeah. So I think the point here is if you are a real estate investor and maybe, you know, I own rental properties, right. Mark and I own rentals and different classes from residential to commercial. We got some land, you know, but like, we're more passive. Like, I'm not the guy that's going to go do a development project. And I think a lot of real estate investors out there, they might be the kind of the fixer upper, but they're not doubling, you know, the value here. Let's say, you know, that's a, that's a bigger type project. And so I think that's where this fund concept becomes circles back to a lot of those investors as being maybe I'm going to bite off more than I can chew and I'm going to get into something I don't really have business being in and I could lose my shirt in it. Maybe this is where I go the fun route with someone else that is in the real estate development business.

Yeah.

And there's a lot of husband wife partnerships that were put together or continue to be encouraged to be put together where it's like, okay, let's just put our $2 million gain in our own fund and we'll pick three or four projects to invest into and we'll let other people run them. That always makes a lot of sense to the investor first. But then it's like, okay, now you've got to report twice a year to the IRS and you've got to deal with all of that and you've got to find these three or four projects. Well, if there are qualified opportunities on projects, your 2 million bucks split into 4 or $500,000 chunks is not going to be enough money to build the project on its own. And so the developer is going to have other funds involved and just like caliber. I mean, yes. Will we take in somebody else's individual million dollar investment into one of our deals? If structured appropriately, we will, but they're last on the list. I mean, if we have the money sitting in our fund with our existing investors, we've got, you know, and we've got the cash to do it ourselves. The last thing we're going to do is take in what we call co investment capital. And so as an investor, it puts you in the worst possible position because you either got to do it yourself or you're like kind of the second or third choice in terms of where I'm going to get the capital from to do a good project if I'm a good developer and I'm involved in the space.

Well, okay. And I agree, I love the simplicity of the fund. And deploying those funds right away also becomes a problem because you've got six months to complete that process. And that's very, very difficult. So some of the naysayers may say. And so let's go there with a fund. How difficult is the exit? Let's just say that, you know, 10 years from now I want to sell out in my fund. Is that commonplace that people are going to be able to Find a replacement investor. Really, for lack of a better term.

Yeah, it's sort of a U curve. It's really easy on the exit on a really small fund on a single asset, because you just sell the property and you're done. Right? And it gets more difficult when you're sort of middle of the road. And then when you, the bigger you get, the easier it gets, even more so, and actually the more attractive the exit opportunities get. Because we saw this in after, you know, the big run up after, you know, the 2008 financial crisis in single family homes. Do you guys remember seeing the hundreds and thousands, hundreds of billion or tens of billions of dollars eventually into over a hundred billion dollars that was invested in single family rentals. And 2009 and 10 and 11 invitation homes came in. Blackstone, Colony Capital, et cetera. You know, the buzz on the street I remember in 2013 was, oh, geez, these guys are five year funds. When the five years hit, they're all going to try to run for the exits and they're going to deploy the single family rental market because they're all going to try to sell them at the same time. Well, none of them actually sold on the open market, but they sold because they took their portfolios public as a REIT. So they basically IPO'd the portfolio of rentals that they own and they sold in exchange for common stock. And selling into the public, they were able to exit their portfolio. And so a lot of the larger opportunities on funds, ours included, are saying, gee, what would be the best investor outcome if we get a couple hundred million dollars worth of real estate sitting in our fund and some of our friends have a couple hundred million dollars of real estate sitting in their fund. Perhaps rolling it into a REIT and taking it public would be the best exit. Because that is going to say, okay, my investor put in a million bucks, it's worth two. They get common stock and they can sell it in whatever period of time they want on the nasdaq. And if one investor wants to get out right at the 10 year mark because they have some use for that capital, they can, if they want to wait 13 years or 15 years or 20 years, they can make that decision. And that's what triggers their tax effect. So to answer your question, the bigger the portfolio, the more likely we can do a REIT exit or a portfolio sale or something a little bit more sophisticated. And if it's just one single property, you're saying, okay, I'm making a 110 year bet, I'm investing in one development. And I'm hoping 10 years from now it will be a good development that I can sell.

Right.

What if 10 years from now you invested in an office space and come to find out, you know, nobody uses offices anymore?

I don't know.

You know, those types of things are all things that we think about and consider in the real estate world. Nice.

I'd like if I could ask Matt. I was just going to. On this legislative history, what I thought was kind of interesting was there was traction for this concept, which makes sense 10 years ago. You know, we need to go to the governors. And it ended up being about 2,500 tracks. They said, let's give 50 governors a shot at 50 spots. Multiply that out, that's about 2,500 tracks. Let's go for that. And they were trying to get bipartisan support because everybody loves redevelopment and helping these areas, but they just couldn't get it passed. And then when Trump and the GOP showed up and said, hey, we're going to pass this trillion dollar tax Cuts and jobs act, that's when the Opportunity Zone said, sweet, we're in. And that's when it got passed in the Tax Cuts and Jobs Act. So some people said, well, is this going to extend? Are we going to see this live on into the future? And there's a lot of indications it probably will. What's your take, even with President elect Biden in the office on this?

Yeah, I mean, I'll read some tea leaves for a little bit, but of course, my opinion is just about as valuable as. Right. So where my information comes from primarily comes from actually talking to participants in the legislative process. And so this isn't just what I read in the news. In fact, if you read the news, you might see completely countervailing arguments to what I'm about to say, because the news cycle is different from what happens behind closed doors in the House and in the Senate. And so conceptually, the bill, Mark to your point, was written as a bipartisan bill with 50 sponsors from both sides of the aisle co sponsoring, 100 co sponsors in total. This bill to say how do we get capital to either re enter the economy because we're trying to incentivize people to actually sell something they wouldn't typically sell, that they would just sit on forever. And then how do we get that capital to then come into our own communities and into the neighborhoods like Phoenix, Arizona and St. Louis and San Antonio and Austin and places like that, instead of either into the major cities only or outside the country or in the market or something like that. And so it was, how do we get it to become a place based incentive to invest in your own backyard. So they created this whole thing. It was awesome. They passed it. Lots of bipartisan support. Insert President Trump and of course he's cheerleading it because he's a real estate guy and he likes real estate development and incentives. And so now it's become somewhat of a partisan thing to talk about in the news cycle. But with President elect Biden coming in, I think we go back to the fact that it was actually bipartisan in nature in the first place. And it was something that everybody can kind of get their arms around. If you're a Democrat and you've got a lot of, you're in a high a city that's highly impacted by multiple things and you need more, you want more money going into the government for services to help some of these people and populations. Well, guess what, this thing drives more local government funding, can drive more of those services and helps the people in those communities. If you're on the other side of the fence and you say I want lower taxes or whatever, then I think you can still get your arms around this. So what I think will happen is that there will be a reform bill that gets introduced in the early part of next year. They'll call it a reform bill and it will add in additional requirements for you to report more information to the government on what it exactly it is you're doing in an opportunity zone, investing. So the government can then say, ha, look, we're creating jobs, we're creating tax incentives and tax additional tax benefit where this program is paying for itself. It's look at all the community based benefits that are occurring. And in that reform bill, I think they'll actually extend out all the deadlines. If they don't, then we had a real brief window. You've got until 2026 to get invested. So even if you don't have gains today, but you're thinking about selling your business next year, then this is still something you can do. But if they do extend it once, I think it'll be one of those incentives that stays with us for the next hundred years because I think it's really effective. Hopefully we see that happen. You either have a relatively brief window over the next plus or minus six years or you have a program that will stay with us for a very long time.

You know, I think a lot of the tax incentives, that was my air quotes there, they came about under these like one time programs. And then they just kept getting extended and extended. Let's keep doing this. It works. And you know, communities love it, local government loves it, federal government sees a role for it. And so it's interesting you said that. I never thought about it, but we could see this. You're right. Going for many years to come.

This just.

Everybody just got a little taste, you know.

Yeah, we don't know what the reporting will look like, but I think what it will show, because being on the ground actually doing these deals, I can see it is, okay, these investors over here saved a couple million dollars in federal taxes, but now they're producing $800,000 a year in property taxes and employment taxes and a bunch of other things. And within a very short period of time, the additional taxes that are being paid quickly offset the loss in federal taxes at that moment in time. And then over a 10 and 20 year period, you see, this incentive has a huge payback period because otherwise everyone kind of makes the mistake of, well, gee, if we didn't give this incentive, then people would. They'd still have the same activities, they'd still sell their real estate and their businesses, and they'd still invest in these same places. That's not true. You know, we're seeing investment come into places that haven't seen investment for a long time because of the program.

Now let's. That's maybe one of the last topics possibly here. We don't want to keep you all day. And this has been so informative, the rate of return. Let's get back to that. Because when all the dust settles, most real estate investors are like, yeah, sure, I don't mind helping out this dilapidated area, but I want a great freaking rate of return. And, and so I have clients and see if you can articulate this from a fund perspective. Most real estate investors that are doing their own gigs and would generally shy away from a fund, help give them the reasons why they need to consider this. If you may. First, a real estate investor looks on their cash on cash return. If I'm going to invest 300 grand in cash, I want to see some sort of return.

3,000 or 300.

Did I say 300?

I think you said 3,000.

Oh, my God. $300,000. I was thinking of $30,000. Yeah, all right, 10% cap rate. So 10% would be 30,000. But let's just say if I've got a $300,000 investment as a real estate investor, I want to see some cash flow on that quarterly or annually. Then secondly, I want to see appreciation. There could be 5% or more over the long haul per year. And usually there's some debt reduction. Because whatever I'm investing in is I'm going to use leverage to really build this property or acquire it. And that leverage is going to get paid down over time. So I have these three benefits that can really add up to double digit returns before I even get to taxes. Taxes separate. I've got cash flow, I've got appreciation and mortgage reduction in the fund. How are they accounting for that? And I guess there's a prospectus everybody gets to see when they invest. Tell us how that's working at Caliber.

Yeah. So in the institutional real estate world, which is somewhat different from what you guys are describing in the kind of the typical like buying rental properties and building up cash flow over time and that kind of world, we have four categories of return profile. One is opportunistic and that's real estate development. That's like building from scratch or adaptive reuse where you're taking like an old assisted living facility like we did and turning it into a psychiatric hospital. Very heavy turnaround, renovation or ground up construction that has a certain return profile and return expectation. Then you have. Next down the list is value add, which is slightly less risky because you've got an existing building and maybe you're doing renovations to apartment units and you're increasing the rents over time or something like that. You maybe may not be building a whole new wing to the apartment complex, but you're improving the units that already exist. Value add. The third component is called Core plus. And Core plus is like, you know, you've got an existing building, it's 85% occupied, it has a good cash flow. You can kind of improve the occupancy and the rents on the margins over time. And it's very stable and very safe. And the last category is called core. And it's that exact same thing I just described to you. But it's like 95% occupied, it's totally stabilized. Everything is going exactly how you would expect it to go. And it's in a great location and it's a beautiful glass tower. You know, it's a beautiful building, right? It's all the things, all the things and things, right? So in institutional real estate there's an expectation of return that is the highest for opportunistic. And then you have value add and then you have core and core plus. And if you have your expectations set appropriately, then you know that opportunistic real estate generally on average Over, I don't know, hundred years has produced at least an 11% annualized internal rate of return net to the investor. So 11% IRR is close to a 2x equity multiple, meaning if you put in a million dollars five years down the road, it's worth 2 million. Okay, with that type of IRR,

and

that's because of the fact that it is a riskier type of investing and it does require so much effort to win the entitlements and design right and do everything right that you get the biggest reward. Opportunity Zone funds are required to invest opportunistically. It is in the requirement in the fund, in the law that we have to invest in the way that makes the most money in real estate typically. Which means as an investor, your expectations should be, if you have picked a fund that they know how to do that, they know how to double the value of your equity every five years if they know what they're doing. And it's going to come to you in kind of the reverse order mark of what you Described. The first 2 to 3 years, you're not going to see any cash flow at all because they're out buying a piece of land, getting through entitlements, designing, developing, bringing it ground up. And then the next couple years you probably will start to see rents come through because they're actually occupying the building and pushing their rents out. And if you're in a fund format, like a multi asset fund, like calibers, we have the ability, because the law allows it, to sell a property five years into the fund or however long in the fund we want. Frankly, as long as we redeploy that within 12 months, we maintain all the tax benefits so we can compound your gain. So if I can take a million to two in five years, I can sell it and then take two to four in the next five years. Now your 10 year experience is going one to four. If you're doing it on your own and you're just buying a deal after that five year period, you might go from one to two and then maybe two to two and a half for the next five years because you get a little bit of appreciation along the way. But you don't get the same pop in value that you do when you get through the first transformational piece of the development. So fund formats allow you, if you have a fund manager who's aligned to this, to get that pop twice in a 10 year cycle instead of once. And if you're an individual investor, yeah, you've got more stability once You've built it out and you've got rents coming through, but you're missing out on that next wave. And so we tried to set our investors expectations that by the time they hit year four, year five in the fund, they should be seeing regular cash flow at a certain minimum target that we have, which is 6% in our world. And then it will grow over time as more and more projects come online, and then as we groom the portfolio, sell off deals that make sense to sell off and then redeploy into new deals. By the time they exit, they'll have a really good exit. And we're hoping for. We wrote two and a half times in our prospectus, but we're certainly hoping to do better than that. So that's conceptually what you should expect. And if you aren't working with a fund manager or a real estate investor that knows how to do that competently and has a demonstrated track record of it, you might, you might want to reconsider.

Yeah, let me. This is lawyer Matt. Now, you know, of course, we brought Chris here as the expert on opportunity zones without doing any due diligence on the fund. That's not our shtick. You know, you go do your due diligence on it. Get your advisor.

You said the returns were guaranteed, Matt?

Yeah, yeah. I'm like, yeah, good. I'm just kidding. It's a disclosure. I read all the cases on this stuff, you know, from Directed IRA and our company there, and it's like. So we're like, we don't recommend investments at all. And then people sue inevitably, not us. We haven't had that. But just in the industry. But it's like, well, what happens if they made a good investment? Do you go back to that company and say, hey, thanks so much. Here's the share of the profits I made on that deal. That went great. But no, I want you to, you know, cover me on the loss. Anyways, I'm just trying to say do your own due diligence on this. But one thing I would note when you're looking at an Opportunity Zone fund is like Chris said, There's 900 plus of them out there, and you want to look for people that have the right background, just like any investment. Like, did they just get on the tax strategy, you know, or do they actually have an experience doing development deals? Because again, this isn't just a fund manager that can do a, that can buy a apartment building. You know, this is, you're talking a little more construction development type skillset, which is Different. I know that many of you listening that are real estate investors, you know, that don't get into a fund of someone that's never done that and is trying it out because there's a cool way to raise money under opportunity zones. So that's an important thing to look at.

Yeah, there's three core things I'd leave your listeners with that they should be looking for when they're looking at the investment strategy. Once they've said, okay, I understand the tax benefits. And the tax benefits are driven by having a good investment in the first place. There's three things they should look for. One is the infrastructure of the sponsor, the fund manager, that's taking care of their capital over that 10 plus year of time. That's a long marriage that you're marrying somebody else that's actually making decisions on your behalf. So they need internal infrastructure to make good decisions on the tax position, to manage the reporting, manage the. There's a lot of difficult things that will happen during a development where maybe this, the city council rejects the development or things like that. How do they pivot? How do they, how are they still able to make that a successful investment even when they lose every once in a while? There's, it's kind of step one. Step two is, in my opinion, is a demonstrated track record having built from scratch or having turned around massive projects because you can conceptually understand what it takes to build a hotel, but until you've built one, you have no idea. And so you want to have that. And then the third one, which is super, super critical, is that they're transactional already in the market. And what I mean by that is that they have been buying and selling especially for the last couple years already. Maybe not in their Opportunity Zone fund, that might be a new fund, but maybe in other areas of their business. Because that is what gives you the heartbeat of what's going on in the market. That's what helps you understand deal flow so you get the best deals that are off market and that kind of stuff. And that's what makes sure that when you get a big slug of capital coming into your Opportunity Zone fund, you're not rushing around trying to build relationships and get it deployed in six months. And maybe you make a bad decision because you don't have any deal flow, you've got to have deal flow. So those three things are the things that I would, if I was an investor, say, okay, I like the idea of investing in real estate. I like this tax incentive. I'm going to go Pick one or more funds. You could take a $5 million gain and then separate it into five funds and, you know, million dollars each or whatever. I'd say am I investing with groups that have those three key components?

I love it. Well, Chris, let us give us a little contact info. How can people do their due diligence on your organization? What's the best place to go?

Yeah, so caliberco.com is the website. We have about 50 people in the company. They can email me chriscaliberco.com that actually comes direct to me. Our view is bring the information, the principals, and get to that decision point as fast as possible. That's how we run our business. That's just how we view the world. And if they want to do due diligence on Caliber, there's a couple things that they can do. One is they can look at who are the service providers that help us. So Deloitte is our auditor for the fund and we've got Snellen, Wilmer, Mark Schultz, who does the tax legal on that, and he's a nationally recognized expert in opportunity zones. So we've got some great people that are helping us in that space, but they can also talk to our clients. And so we do. Every month I do a live CEO call where they can actually see, you know, 30, 40, 50 plus, sometimes 100 plus caliber clients asking questions, live Q and A, no scripts, no, no, no plants in the audience or whatever. In the past, pre Covid, we would do live events on a regular basis.

Yeah.

You know, so I would encourage them not only to get to know the company, but also get to know our clients. And our clients will help them understand, hey, these are good guys. They don't make every decision perfectly. There's some times that we'll invest in the deal and something doesn't work out or whatever, but when it happens, we do everything in our power to fix it, which is real estate investment 101, 201 and 301. You know something's going to go wrong. But if you have a group of people that really care about you and your investment outcome and that project, they will figure out a path forward, which is where the creativity of my business comes in. So that's what I would recommend. And hopefully this has been helpful to you. And hopefully that, you know, as you look out across the landscape of funds and such, you'll look at Caliber as an option, especially if you want to invest in what we call the greater Southwest, which is Arizona, Colorado, Texas, Nevada, Utah. That's where we live.

Cool.

All right, Chris. Well, it's a pleasure to have you on again. That's caliber. C A L I B E R Coco Calm.

I got.

I spelled that right, Right?

Yep.

Okay.

All right. I was gonna make a spelling bee

joke, but one didn't come to me. And thanks, everyone, of course, for listening, if you're still listening. You kind of like this show, guys. Give us a five star review. It does help other people find the show. We really appreciate it gives Mark and I a warm fuzzy. At least it does for me. Does it. Does it do anything for you, Mark?

I feel great. And, you know, this is the time of Thanksgiving and, you know, cheer. So feel free to thank us. We.

Feel free to thank us. It's okay.

On that note, I have to say my thank you. So I don't. I don't lose my opportunity here. Thank you, guys for your leadership.

That was your opportunity zone right there.

You'd be shocked at how many people in your profession don't understand this topic and don't want to take the time to figure it out. So thank you for your leadership. Thank you for the leadership you guys provide our country and making sure you're spreading the word. And I appreciate everything you do, man.

High fives for everybody. So.

Yeah.

Well, thanks, everybody. Be safe. Thanksgiving. This is a great time not to invite family over because we know it's just going to be a debacle anyway. People drunk and screaming at each other. So you can blame the governor of your state and say, you know what? We're just going to be safe this year. Stay home. We don't want you. So that's what we recommend, everybody. Have a great holiday season. Thanks, Chris. Thanks, Matt. And see everybody after Thanksgiving.