David Moore with Equity Advantage asks the expert attorney Connie Rathbone with Dunn Carney about investing in Opportunity Zones. They look at securities and qualified opportunity funds and talk about how to get started. They also discuss the value of seeking out quality advice and information. Know what you need to know!


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How Do I Get Started with an Opportunity Zone?

Connie Rathbone: I teach classes all the time on Opportunity Zones, and I always remind people that number one, the Opportunity Zone is just an overlay on existing law. All of the LLC provisions that we’ve done for real estate developments are all applicable. All of the securities provisions that relate to the sale of securities are all applicable, and the Opportunity Zones just overlay it.

The other thing is that it can be very, very simple and it can be very, very complicated. My first Opportunity Zone project was for Sturgeon Development Partners.

David Moore: They started small, right?

Connie Rathbone: Yes, we started small with the $330 million opportunity fund. And we put that out last November and that is big and complicated. It’s got a lot of structuring, it is absolutely a security. But this applies equally if you and I or you and Sheila form a two-member limited liability company. You make an election in the LLC.

David Moore: Yes.

Connie Rathbone: To be an opportunity fund, you go and buy, you take some capital gains from the sale of a stock. You go buy a piece of property in Bend, in an Opportunity Zone, and you build a duplex. You build one side pretty nice because your ultimate goal is to retire in Bend, so you build one unit really nice because you’re going to live there.

David Moore: I don’t know if I want to live next to my tenant.

Connie Rathbone: Okay, you’re going build one unit nice and then you’re going to build another unit. So I really like for people to see this is not for wealthy developers. It is for people all over the United States who have capital gains. The key is creating the fund.

David Moore: Yes.

Connie Rathbone: The qualified opportunity fund can be a simple, two-member limited liability. Don’t think of it like a big real estate fund.

I created one for someone who will have hundreds of investors, millions and millions of dollars that she’ll raise, and it can be complicated like that or it can be very simple. It can be a security or not a security.

David Moore: Can you explain that a bit please?

Opportunity Zones – How Do I Get Started?

Connie Rathbone: Whether something is or is not a security doesn’t depend on what the product is; it depends on the manner in which it is sold. So the easy way to think of a security is to think of the Howey Test, you don’t have to remember Howey Test, but it’s an investment of money into a common enterprise—with the expectation of profit. We always have an expectation that we’re going to make profit, but here’s the key: based solely or primarily on the efforts of others.

David Moore: Yes.

Connie Rathbone: If you and I form a manager-managed LLC and our friend puts in a bunch of money into this qualified Opportunity Zone, you and I are going to have sweat equity. We’re just doing the activities, and they’re going to bring a million dollars in capital gain money.

But they’re going to rely on us for this development project to make their return. That is a security, even though it’s just three people.

So it’s not the number of people, or the product, it’s how it’s sold and whether somebody is going to make money based on the efforts of someone else. If the same three people are forming a member-managed LLC and we’re all participating in the work that it’s going to take to make us money, I think of it as pulling the oar. We’re all pulling the oar on the work. Then that’s not a security because we’re making money based on our own efforts. That’s the difference.

David Moore: I think that’s something very important for people to understand because I see that happen all the time. You see people get groups of people together. One person’s taking care of everything and I think a lot of times people rely on the good deal exemption, right?

Connie Rathbone: Yes, too often.

David Moore: Everything is great until it’s not. If you’re putting these groups together, I really encourage you to pay to talk to somebody that has the knowledge. I say that about lawyers and CPAs all the time. You want to pay somebody that’s been doing this stuff. And don’t look at it and say gee I wish I would have done this or that, later. Really ask the questions when you get into it, because everybody goes into these things happy and things don’t always turn out that way.

Connie Rathbone: And I want to explain that you joked about the good deal exemption. That is a joke, there is not good deal exemption. If it’s a good deal, nobody is looking to sue anyone on the back end.

David Moore: Yes.

Connie Rathbone: But there are many exemptions from registrations, some Oregon only, some federal. And the fact that it’s a security is nothing to be afraid of unless you don’t jump through the hoops required as a result of it being a security. Then it can come and bite you badly. But if you jump through the hoops and you provide the appropriate disclosure, whatever that is in the circumstances, then you’re in pretty good shape whether the deal fails or succeeds.

Navigating 1031 exchange options takes a professional, and you can count on the whole team at Equity Advantage to help. Your investments are just too important not to have an expert on you team. Give the folks at Equity Advantage a call at 503-635-1031 to get started!