The Ultimate Guide to Crushing Opportunity Zone Investing in 2024

David Moore: Hi, David Moore with Equity Advantage 1031exchange.com. And I’ve got Greg Genovese with USG Realty Capital. So, we’ve talked about a lot of different things, broad stroked it, but bottom line, OZ, QOZ, what do people need to know? As far as the process, if somebody’s interested in it. I was reading something about the process a couple days ago and somebody says, “Well, gee, I own property in this zone, so do I get this? Or what do I have to do to make it fit? Can I just go buy it and do what I want and have it qualify? Or if I’ve got a situation where… ” We’re going to talk about a couple different things, since I’m in the 1031 business, all about me, right? But, if somebody were to complete one of my transactions, how do they get in?

David Moore: We talk about a fallback, you said it’s B, but what does that mean? And how do we get into something, let’s say that Tacoma project when it’s done, how do I get involved with that? Does it have to be done for me to get involved with it?

Greg Genovese: Yeah, certainly. And actually, you brought up a few good points. Let me take them one at a time if I can. And it’s interesting that you said, and had you not said this, I probably would’ve forgotten to bring it up to your audience. You said, hey, I’ve got a client who called me and said, “I bought some opportunities on land.” So, let me make sure I’m looking right at the camera to your people here. The way the initiative reads from the Treasury Department, you really need to be careful.

Greg Genovese: You need to invest into an opportunity zone fund. They’re called QOFs, Qualified Opportunity Funds. It isn’t buying the land. And it’s unfortunate, I’ve dealt with a lot of investors who have done just what you said, “Hey, Greg, I bought this land.” And believe it or not, they… You talk in your business about a blown exchange.

David Moore: Yes.

Greg Genovese: That they blew their opportunities on benefits. because it has to be in a fund itself. Now, something that a lot of really smart, high-net-worth investors have done, which I completely promote, is they’ve gone to experts like yourself and or some of their attorneys and they’ve started their own opportunities zone fund. So, you could actually, if you’re a high-net-worth investor, you could actually take your gains, start up your own opportunities zone fund, put the money inside that fund.

Greg Genovese: Now it actually gives you a little bit more leeway about where you’re going to put the money. Because what I’ll explain in a minute is you have 180 days to invest the money from the day that you get your gains. You only have 180, just like on a 1031 exchange. By having it in your own fund, you can go past that so long as you have a business plan, etcetera. But just like anything, you got the good and the bad. The good is you’ve got more time. The negative is most of… You either have to find an investment to put it into, most funds don’t allow your own opportunities on fund to invest in them. It’s not because the fund doesn’t want to, but the initiative doesn’t allow for it. We expect it to change at some point.

Greg Genovese: So, what I would say to your investors that may want to start their own funds, either through you or if they want to come and visit us, we can advise them.

David Moore: Just a quick comment along those lines. You’ve been around the block; you know what you’re doing. You’ve been involved with institutional real estate for decades. Do not hire a lawyer that’s learning on your dime. If you’re going to do this, talk to people in the business. Hire somebody that’s done it before, because you don’t want to be paying somebody to learn on your behalf.

Greg Genovese: Very true. We’re very happy to help with that thing. That’s not what we do as our main business, but always happy to help. So, as far as how these programs work, let me just give you the basics. The way an opportunity zone fund actually works, or an opportunity zone investment works, there is a timeline. You actually have 180 days to invest your capital gains. So, I’m going to use a scenario. Okay. David Moore…

David Moore: So, I’m going to interrupt you, real quick.

Greg Genovese: Yes, sir.

David Moore: He just said something I want everybody to understand. You said they have to invest what?

Greg Genovese: Your gains.

David Moore: Just the gain?

Greg Genovese: Yes. Well, you can invest more. But only, you can invest more. It doesn’t have to be gains. Only capital gains are allowed for the benefits. So, if you were to just really like the project or the fund, the opportunity zone fund, and you just said, “Hey, I’m going to put a million dollars into it, or $100,000, whatever.

David Moore: It’s just like you want to make an investment, you’re free to do that.

Greg Genovese: You’re free to do that. You certainly will get a good return, but you’re going to owe capital gains tax on it.

David Moore: Yeah. But on the other hand, if you sold, let’s say a million dollar property and an exchange had a half million in gain, the benefits would pass after you spent the half million in gain as far as the initial big benefits.

Greg Genovese: Correct. Let’s use your scenario first since you just brought it up. Let’s take two scenarios. One is selling, property. And you decide 1031 exchange for it, or you’re going to go into an opportunity zone. And then the second scenario, let’s just say you sold any asset, quite frankly, about half of our investors are people that are selling businesses, dentists, doctors getting out, attorneys, people that… We have one investor who just sold a coffee shop. It could be any gain, selling Amazon stock. But let’s take your scenario first. So, investor in Portland, Oregon sells an investment property. They sell it for $3 million. They have $1.5 million in gain, $1.5 million in cost basis left. So, they now have a choice. And what’s really neat about your services, the qualified intermediary services are… What I would always suggest people do, even if they’re looking at opportunity zones, is still engage the qualified intermediary, because you can take those gains as long as you don’t take constructive receipt. I know I’m telling you, your business.

David Moore: No, I love it. I get to sit here and listen.

Greg Genovese: But, to have that money, they don’t take constructive receipt. The money is at the qualified intermediary. The investor now has 45 days to really dig in, work with you, work with their advisor, maybe looking at different replacement properties for the full 1031 exchange. But they also could be vetting an opportunity zone fund. And during that time period, they can decide, “Listen, I think I decide… ” In this case, they decided not to do the 1031. And they said, “Okay, I really can’t get the returns I’m looking for right now.” Well, they, in our scenario that we used earlier, there’s $3 million that they sold it for, $1.5 million in gain. And so, that money is now sitting at the qualified intermediary. They can take that money so long as it’s within that 45-day period so far, and they can take that and put it into an opportunity zone investment. Now what’s going to happen in that scenario is during that period of time, if they hold the investment for seven years, at the end of the seventh year, they will owe taxes on the money, but they’ll get a 15% discount on the capital gains tax.

Greg Genovese: So, for seven years, you have to use a 100% of your money. And then you’ll owe the taxes and it’ll be 15% step-up in basis. If you hold it for five years, when you go to pay your taxes, you’ll get a 10% step-up in basis. And then as you hold for 10 years, 100% of those gains from the opportunity zone fund, 100% tax-free. So, I guess going…

David Moore: So, you’ve got limited deferral into the OZ, but what you make on the OZ, if held through the 10 year maturity, is tax free.

Greg Genovese: Yes. And I…

David Moore: So, that’s why I look at it as like a Roth IRA. You’re paying taxes… Roth money’s just tax money, growing tax-free. Traditional is pre-tax money growing, tax deferred. So, I look at, people come to me, they want to do Roth conversion, they’re going to pay the tax on that, but then whatever they buy with that money afterward, the fact is tax-free. And that’s what we’re looking at here.

Greg Genovese: I think that’s a good analogy. And I’ve never looked at… And this to me is a big point. It’s not 1031 versus opportunities on investing. I think it’s 1031 or and the nice thing is, during that 45 days, it really gives the investor complete, flexibility, what to do with that money. Now I want to make two quick points. One is I mentioned the seven years and the five years. One of the things that the government did was they actually put a hard line date of 2026. Well, we’re in a few days… Well, in a few days we’re going to go into 2023. So, if you invested into an opportunity zone in 2023, you’re not going to have seven years to get to 2026. So, right now, that seven year and that 15% step-up in basis isn’t in effect, because we don’t have enough time. But right now, the opportunity is 100% tax deferral during the next three years. However, there is what’s called the opportunity zone extension bill that is in Congress and the Senate.

David Moore: Finally, a bill we want to see passed. Yeah.

Greg Genovese: And it… Yeah. And it’s very true. And it’s being pushed on a bipartisan level. There’s been no opposition to it. So, the likelihood that it’s actually going to go through is very, very high. I can’t, in all honesty, be on tape saying, “Oh, it’s going to,” but it was… But it’s very high likelihood that it’s going to pass.

David Moore: But for the sake of the conversation, we are sitting here, this is, December 20th, 2022. So, we’re right here during the happy hour, neither one of us are wearing red, a little bit of green maybe. But I want to clarify one thing real quick. We’ve been talking about it. It’s not something where we’re typically going to blend 1031 in the OZ.

Greg Genovese: No.

David Moore: But I think that the OZ for people, there’s a lot of confusion out there, because the OZ’s got the same 180-day timeline 1031 has. I want to stress to anyone in a 1031 exchange today that there’s something called 1031-G6. 1031-G6 is the rule that dictates when we can release money through an exchange. And inside the 45 days, you can’t legally receive funds until you’ve purchased everything you have the right to buy.

David Moore: Which means there is no way that we can release funds for any reason other than to buy property inside the 45 days. So, if you’ve got a 1031 started, the money’s sitting here with us, or anybody in the exchange world that treats this business seriously, because the government’s position on this is that if somebody’s not following 1031-G5, it doesn’t jeopardize just the person, that wanted that money, it’s the policies and procedures of the company. So, there’s nobody in the exchange world that’s going to give you money outside 1031-G6 if they know what they’re doing. So, what’s critical is if you want to take this path, you got to understand you’re not going to get your money till after the 45th day to do it. But it’s really critical that come midnight, that 45th day, you’re totally committed to completing the exchange, or as you said earlier, get out of it.

David Moore: Okay. Kill it on the 45th day. Don’t ID things, our ID forms by the way, give you the ability to identify multiple properties. But there’s a little blank underneath that primary identification. And that blank is there stating that you are IDing these properties, but you have the right to buy only blank of them. The reason that’s there is when 1031-G6 was really put in place and made hard that rule, and the government’s going to start enforcing it, we said, “Look, we got to somehow give our people the ability to ID things, maybe if they’re IDing three properties and they intend to buy one, as soon as they buy the one that the second and third or fallbacks, as soon as they purchase the one, any residual funds, they are then entitled to receive outside the 45 days.”

David Moore: So, that’s what’s going to give you access to money to get into this stuff. The other thing I’m going to say is that, and we talked about earlier with FIRPTA, Foreign Investment Real Property Tax Act, a lot of times the money will come into us, except for what’s impounded for FIRPTA, and our wonderful government works so quickly that the money’s not released until after the guy’s outside of the 1031. So, a lot of times when we have FIRPTA funds impounded, we have our client come out of pocket that corresponding offsetting amount to complete the exchange, I would say going into Greg’s product, that is what I’d recommend doing also. So, if you’re in an exchange, the exchange company won’t give you your money. You’re thinking, “Well, now I’m stuck because not only can I get my money, I can’t get into the OZ.”

David Moore: Just think of it from the context of like, okay, you got $200K sitting with the accommodator, come out of pocket to $200,000 throw it into Greg’s fund and you’re going to be fine, because you do only have that 180 to get it done.

Greg Genovese: And that’s a wonderful point. So, I was going to get to that where to your list or to your listeners, excuse me, to your viewers.

David Moore: To our watch viewers.

Greg Genovese: Yeah. I was thinking back in the seventies on the up… But really the 45 days really gives the investors the complete flexibility between a 1031 and an opportunity zone. So, that’s why I highly recommend don’t take constructive receipt of your money, make sure it goes to the qualified intermediary. Now, when you get past the 45 days, you are not kicked out of any opportunity to get into an opportunity zone, however, you have to have some money. So, like you’re saying, if you can replace it. So, in our example, I think we said it’s $1.5 million, maybe I should use lower numbers. But in our example, there’s $1.5 million. Oh, yeah. , there’s $1.5 million at Equity Advantage.

Greg Genovese: And if they were decide, let’s say in day 100 that they’re going to do an opportunity zone, what they could do is, let’s say, they weren’t going to put a $1.5 million into an opportunity zone, but what they did want to do is, let’s say, $500,000. You can now take, if you have $500,000 in your bank account, put it into the opportunity zone at the end of the 180th day, you are going to send them their $1.5 million, but five, only five, they would owe taxes on the million. But the $500,000 that was put into opportunity zone, that would be a 100% deferred. So, there really is a way… There are workable solutions past the 45th day. I’m just saying there’s more flexibility.

David Moore: Well, and the other thing that you’ve hit a few times, you’re talking about the OZs just are going to require for the benefit to invest the gain. So, if I’ve got $1.5 net equity sitting in the exchange account the entire $1.5 is probably not gain. A portion of it is. So, you got to talk with your tax people and figure out what piece actually needs to… You want to get in or need to get into the OZ to take care of what you want to happen.

Greg Genovese: And really, David, that’s why I’m saying it’s not a case of one versus the other. I just think that it’s just another solution. Now, pre-inflationary period that we had about a year ago, it almost felt like there was only one choice and it was 1031, because things were just so good, low inflation, low interest rates it made… But now that we’re seeing increases in interest rate, it’s tougher to get loans and financing, the opportunity zone side because they’re for the most part development deals. And if they’re in the right places with the right returns and you’re mitigating risk the right way, the return potential in opportunity zones is now beginning at least for the time period either at or moving by some of the 1031 exchange solutions. So, I think if ever there were a time in the five years of opportunity zones where the choice between an opportunity zone or a 1031 has ever been equal enough to be on, let’s say, on the menu at the same time, it’s probably right now.

David Moore: Yeah. No, I think you’re right. So, it’s interesting in that the OZ… So, when we, years ago, probably 20, 25 years ago, I had a guy, an big IRA self-direct IRA promoter, came and spoke to our CCIM chapter, and he came in and he was pitching, self-directed IRA as an alternative to 1031, which obviously they’re apples and oranges. And I get whatever somebody’s position is on using IRA 401k money in real estate, that’s their position. But typically the arguments against doing so are they won’t hold water. But if you look at the OZ deal when it first happened. For those of you who know me, I like cars, boats, planes, toys. And we used to do lots of high-end cars. And so, we lost the OZ, took it, took our cars and boats and planes, those transactions away, art, too.

David Moore: But, that is the tool. And we used to do a lot of business exchanges also, but you’re still looking at like kind, you’re talking about a car or a car rotorcraft for rotorcraft. Those things were like kind. Where the OZ, I think really opens up so many opportunities for people who want to get into real estate. You made a comment earlier and I just, I smile because you think… Look at the number of TV shows on flipping properties these days.

Greg Genovese: Yeah, good point.

David Moore: All these home improvement, everybody, anybody could make money in the last few years on this stuff. How many a times we hear an ad on the radio or see an ad on TV for some company promoting flips. Well, flipping properties not an investment. Okay. It’s a business. And no matter how long you hold these things, you’re paying normal income tax on them, regardless of what you think. And you do a few of them, you’re going to figure it out. It’s not the right way to go, pretty quickly, you start working on this stuff. But I think you’re right because right now, with respect to what you’re doing, the project you’ve got going on, obviously you’re not going to probably go into QOZ in an office development right now.

Greg Genovese: No.

David Moore: But this type of assets you guys are building are things that are needed and in high demand and pretty darn safe investments to make.

Greg Genovese: It’s very much so. And I think, and I loved your analogy about flipping homes. I’m all for that business. It’s not that it’s a bad business. I like to use sports analogies. And it’s like saying, well, in football, it’s pretty… All you need to do is you take the ball and then you get across the goal line and see how great that is. That’s all you got to do. And then you win a Super Bowl. So, yeah, flipping property the same way, it’s not that it doesn’t work, it does, and it’s a wonderful business, but everything always comes down to the corpus. How is the business run? How are you mitigating the risk? How are you getting the opportunities? Is there long-term returns? So, whether you’re doing a 1031 exchange, whether you’re doing an opportunity zone investment, whether you’re buying property, whether you’re buying stocks, I don’t care what it is, whatever the business is you have, I look at everything first by the demographics.

Greg Genovese: And I don’t just mean the area demographics, it’s the corporate structure around the area, because I look at everything from home values. So, for instance, let’s use opportunity zones. At the end of the day, holding something for 10 years, you have to do strong risk mitigation modeling. You can’t just go to where all the bright shiny objects. So, by the way, I am not against Austin, Texas. I love Austin, Texas, I’m there a lot. Phoenix, Arizona, I love it. I’m from the Bay Area, so I go into San Jose a lot. But our own philosophy, because you have to hold these projects for 10 years, you can’t turn them in four or five years. This is just our philosophy. We want to purposely stay away from, what I call, equity-rush areas for a couple reasons. One is a lot of the values have already been burned off, because the value’s been pushed up.

Greg Genovese: And number two, if you’re in areas that actually can build out, like let’s say, I’m just use Phoenix as an example, in 10 years, there’s still going to be a lot of desert. And let’s face it, the project that I build in 2023 is going to be the older project in the area in 2033. So, when I go to sell that property, I’m now competing with David Moore Gardens down the street. And so, I may have to put a lot of money into this project to keep the value up. So, my philosophy on demographics, especially with opportunity zones, is infill areas that have better than average population growth, better than average income growth. But a lot of barriers to entry to that particular area. A great example is you told me you’re from Santa Cruz. There’s a wonderful area there called Saratoga and Los Gatos.

Greg Genovese: And I remember the days in the ’60s or not ’60s. I was born in the ’60s. And I remember the ’70s and ’80s, early ’80s when, those were just little shacks. And they’re now they’re $6 million, $7 million. Well, not because the architecture is so great in those properties, but because of the barriers to entry, there’s just no…

David Moore: You got geographic limitations, there are mountains.

Greg Genovese: Exactly. And so, I look at opportunity zone investing the same way, you want to be in infill areas, in good strong demographics and good population growth, but also good strong corporate structure around it. So, you mentioned our project in Tacoma. Well, Tacoma’s infill, meaning there’s a lot of areas that you can build. It’s right next to the University of Washington Tacoma. There are some major headquarters that are right in the area.

Greg Genovese: I don’t know if you’ve heard of Amazon and Starbucks and Costco and just some… But good strong corporate structure around it, so that over that 10 years, these are areas where the income growth is going to keep pace. And so, from my perspective, that’s called risk modeling or risk mitigating the investment. So, that at the… Like I said, getting out of the investment is as important as getting in. And so, how do we maximize the value over a 10-year period of time? So, right now, we do, from a demographic standpoint, the asset classes that we like are the ones that are most recession resilient. But just being recession resilient in the asset class doesn’t mean it’s going to… Again, what’s really going to count is the area demographics from a population standpoint, etcetera. So, we like multifamily, we still do, if you have the ability to be near student housing, combined corporate with student housing is just an extra benefit.

David Moore: And you made a point of the Tacoma project. You made a point of delineating that saying, “Hey, it may appear to have some of the benefits of student housing, but this is not a student housing project.”

Greg Genovese: Correct. And it’s just like anywhere you could be… If you went to UCLA, you’re going to be living in the Westwood area, it’s not student housing, but students live there. So, that’s an extra benefit. But medical office is another area that we like from a demographic standpoint, storage is another good area. And then if some industrial warehouse, where you have a good strong tenant like an Amazon or those types, or Costco or whatever the case may be. But you’re right, you’d mentioned earlier, we’re not going into office right now.

Greg Genovese: So, what I would… And I’m not, to be perfectly frank, I’m not here to pitch our deal, but I think when it comes to opportunity zone investing, we look at these investments, again, risk mitigated modeling. What’s the asset class you’re going to be in? Can it hold for a long period of time? And then also, what are the demographics like in the area? And how are they going to hold over a long period of time? To me, that’s the key. And then lastly, from an asset management perspective, because as I mentioned to you before, at some point investors are going to say, “We want your return. This all sounds great, I want my return.” So, we really believe in a strong, almost like a wealth advisor asset management model, where we’re the sponsor, we raise the equity, but we represent our investors.

Greg Genovese: So, what we’ll do is we’ll co-partner with the developer for the project. We don’t give them the money. We co-partner with them, so that we can oversee and have accountability metrics in place, so that we can control the costs. because at the end of the day, the costs are going to dictate… The costs and the rents are going to dictate your cashflow returns and ultimately your total return.

David Moore: Well, and they’re invested with you that way, too. And the other thing he just said, and this is one of the things you start looking at, one of the biggest objections to DST or institutional TIC ownership is that hold period. Now it’s typically it’s five to seven years, but you made a comment, I think it’s very important for people to understand. You build something, you finish it, it starts wearing out. Alright? So, five to seven, you start having things breaking typically, but your max return typically somewhere in that range, the OZ’s going to require a 10 year. So, you better have people involved that understand that and are keeping the assets in good stead, so that when they do go full cycle, if they choose to.

Greg Genovese: And let me say this. I’m assuming that the people on your webcast and yeah. These are… A lot of them are 1031 people. So, I’m speaking directly to them, because I’m a 1031 person myself. You know how many people out there, your clients have bought… First bought a house, that they used as a rental? Then they went and bought a duplex. Now they own a triplex. And how many times have they purchased something and they only found out like three years down the line that they had to pull all the plumbing out?

Greg Genovese: I hope there’s people right now that are going, “Yeah, that was me.” Same thing for us. We want to make sure what we’re building, it’s… Again, you’re not going to find that in a new development where like the plumbing’s bad. But my point is, you have to.

David Moore: Well, it’s happened.

Greg Genovese: Yeah. Right. But you have to contain the costs and where the costs are really, what are the upfront costs. And So, what’s neat about the development deals these days is you can get what’s called a GMP, which is a guaranteed max price contract from the contractor. So, we go through great pains to make sure that we get a guaranteed max price contract from the contractor. And so, if it goes over, the contractor’s actually responsible. And right now with lumber and concrete pricing and things like that, we’re able to put something out to our investors and say, “Here’s the max price.”

David Moore: And that’s critical for you to be able to do that. I didn’t know that.

Greg Genovese: Yes, sir.

David Moore: That’s really a neat deal. because my general rule is you got to buy something, build it personally, and it’s like a twice as long, twice as much. That’s just the way it is.

Greg Genovese: No, no, we definitely, we do it two ways. We contain it through the guaranteed max price of the contractor, but we also do it with our partnership with the developer. Again, we’re business people. We always give any overages in our costs, actually go to the developer and that’s nice for our investors. But we have to give them a carrot, too, if they go under budget, we let them keep that difference.

David Moore: That’s right. Yeah.

Greg Genovese: So, we dangle that carrot. But our investors would rather know what their number is going to be. And you base your returns on that, versus trying to manage it, trying to go under. But it could just very well be over. So, what we do is we mitigate the risk to make sure that our investors know what their hard-line number is going to be on the cost of a development.

David Moore: Nice. Well, David Moore, Equity Advantage, 1031exchange.com with Greg Genovese, USG Realty Capital. Thank you. We’ll be right back.