Bipartisan and bicameral legislation was introduced last week that would improve the Opportunity Zones program, and extend the tax incentive’s deferral date by two years, from 2026 to 2028.
So how likely is it that the program will be extended? AltsDb co-founders Andy Hagans & Jimmy Atkinson discuss.
Click the play button above to listen to the conversation.
- Details on the new proposed legislation which would improve and extend the Opportunity Zones program.
- Five key changes to the program that are included in the proposed legislation (including two changes which surprised Jimmy).
- Jimmy’s prediction on whether any legislation extending the OZ program will pass in this Congressional session.
- An invitation to viewers to join an upcoming webinar with OpportunityDb, OZWorks Group, and the Economic Innovation Group.
Watch On YouTube
Featured On This Episode
OpportunityDb was founded in 2018. The company provides world-class tools, education, and analysis to help individual investors, family offices, real estate developers, and industry service providers navigate the ins and outs of the Opportunity Zone program.
- Visit OpportunityDb.com
- Follow OpportunityDb.com on LinkedIn
- Follow OpportunityDb.com on Twitter
- New Legislation Would Extend and Improve Opportunity Zones
- Upcoming Webinar: How To Advocate For Opportunity Zone Improvements
About The Alternative Investment Podcast
The Alternative Investment Podcast covers new trends in the alternate investment landscape. Hosts Jimmy Atkinson and Andy Hagans discuss tax-advantaged investment strategies to help you grow your wealth.
Andy: Welcome to the Alternative Investment Podcast. I’m Andy Hagans.
Jimmy: And I’m Jimmy Atkinson.
Andy: Welcome to the show, everyone. Today we have a great topic, big news. Last week, this news is right up Jimmy’s alley. Of course, bipartisan legislation was introduced that would extend the Opportunity Zones program. Now, Jimmy, you’ve called the Opportunity Zones Program the greatest tax incentive in US history, which is a big, bold statement. Right. So how excited are you about this proposed legislation? I mean, is it even likely that it could become law?
Jimmy: Well, yeah, I use that term greatest tax incentive in US history half to get people’s attention, but also half because I actually think it’s true. Right. So and this proposed legislation is going to do a lot of things that will put additional guardrails on the program, but also extend the program and improve the program in many different ways. And the best part is, I actually do think that this legislation will get passed eventually. It’s only a matter of time because it is very much a bipartisan effort and it was introduced by Cameron Lee also. So there’s supporters on both sides of the aisle and in both houses of Congress.
Andy: Wow. There’s not a lot of bipartisan legislation in.
Jimmy: This not these.
Andy: Days, this day and age. So so here’s a couple of interesting things, Jamie. I’m going to talk just really high level strategically. I totally agree. The fact that this is bipartisan, that’s always been the strength of the Opportunity Zones program, right. Is that it was sponsored by representatives and senators from both the two political major political parties in Washington. That gives it more staying power. It’s a little bit less of a political football. But so I know the proposal is to extend the program by two years. And I’m thinking, you know, isn’t that just kind of kicking the can down the road and they’re just going to have to extend it every two years? But the fact that it also has some proposed improvements, I think is a very good thing. Because if I could try and summarize what you’ve told me before, you think if the program can be tweaked or improved a bit, it’s going to be a good thing because it’s going to be a lot more likely that the program would be made permanent if it’s improved. So even if it’s just kicking the can two years forward, if we get some of these improvements in the program, then then you’re an optimist that it could become sort of an indefinite tax incentive. Is that.
Jimmy: Right? I think there’s a chance for that, yes. And the reason why they introduced it as a two year extension, there’s a couple of reasons, really. One is just because of how long it took for the IRS to come out with their final regulations on how the incentive structure works. The the statute, the actual piece of legislation that made opportunity zones reality is about this thick and really leaves a lot more questions than answers in many cases. So the IRS came back with regulations this thick on how the program actually works and how different funds and different investors can comply with the program, how the IRS interpreted the statute and how they are moving forward with the tax policy. The best way that they see the to do.
Andy: It’s kind of nice that Congress passes laws that. Right. Right. They just it’s like they shoot out a quick little three line email and they’re like, we want to pass a law, but we’re just going to kind of outsource this to whatever federal agency. So you guys just do whatever you feel like doing it.
Jimmy: I’m kidding in many ways that that that is that is more or less true in some ways more than more than, you know, I would guess. Yeah. The statute could have been much more comprehensive and more detailed. But I think they do rely on the IRS attorneys to to put forth those regulations to to make sure that everybody complies properly. But the reason for the two years so that’s one reason it actually took the IRS is pretty much exactly two full years between when the statute was passed and it was passed as part of the Tax Cuts and Jobs Act at the end of 2017 and when the regulations were finalized in December of 2019. And then another reason why they want to extend it by two years is because the marketplace received, I guess, was kind of victim to a pause or a disruption. That was the COVID 19 pandemic. So the press releases around this new legislation references both of those bullet points as reasons for the two years. But the hope is certainly that the additional two years and the improvements that are made to the statute will allow for more investors to come into the program, more communities to lead community sponsored efforts to drive more capital into these opportunities and locations. And additional transparency and reporting, which we’ll discuss in a minute, will allow congressmen and their constituents to be able to analyze the program and be able to determine whether or not it is a success. So the hope being years from now. But before we get to the end, which is currently 2026, the legislation is proposing 2028. Hopefully before we get to that point, it is extended again or possibly made permanent.
Andy: Right. Yeah. And just to sort of a sidebar, if we have any advisers or investors listening, watching right now who haven’t yet invested in an opportunity zone and a qualified opportunity fund, you know, it’s really popular tax incentive program with a lot of advantages because it allows an investor to defer any type of capital gain. So unlike a 1031, it doesn’t need to be a capital gain from the sale of real property. Right? It could be a capital gain from the sale of a business or mutual funds, stocks, bonds, you name it can be deferred into the Qualified Opportunity Fund. You get to defer that capital gain, which is nice. But then the big benefit, I mean the really enticing thing is then any subsequent gains inside that qualified opportunity fund come out after ten years with that stepped up cost basis. Right, Jimmy, and without you don’t owe any capital gains taxes on that subsequent capital gain that would occur within the fund. So it’s a very attractive program. I mean, just just financially, when you do the math, you’ve sort of made the comment to me that you don’t even want to look at any real estate investments that are not in an opportunity zone. And, you know, I wouldn’t go quite that far myself personally, but looking back on the past year, I’m like, yeah, all of the investments I made, well, they were all in opportunity zones because it’s just once you crunch the numbers, it’s hard for the IRR to compete once you account for that tax incentive. Right. So very, very attractive program, especially for high net worth, very high net worth, ultra high net worth investors who are in those higher tax brackets. So, Jimmy, we’ve seen some news recently about the amount of assets that have shifted into the Opportunity Zones program. Right, like the amount that qualified opportunity funds have raised. Could you give us a quick update on how much capital has actually flowed into this program?
Jimmy: Yes. And to contextualize this, I want to go all the way back to early 2018. Then Secretary of the Treasury Steven Mnuchin estimated that this would become a $100 billion program, that $100 billion or more of private capital would flow through qualified opportunity funds. And I think that just within the first, it’s been almost four years now. We’ve already possibly hit that $100 Billion mark. And that is going against a lot of headwinds that I just mentioned, the regulations being a very lengthy process that took two years to finalize the COVID 19 pandemic. I think we may have already hit $100 billion. Now, the reason why I have to say we may have is because nobody really knows for sure. But there are two studies that I will cite that kind of point into the direction of $100 billion. One is the Government Accountability Office. The GAO released a report that calculated that $29 billion had flowed into the program just as of through the end of 2019, which is the most recent tax year that they were able to compile aggregated data on. So that’s pretty impressive right off the bat. That doesn’t take into account 2020, doesn’t take into account 2021 or the first, what, three and a half or so months of 2022 here.
Jimmy: The second study is Nova Graphic, which is the Professional Services Organization, National Organization that has really deep expertise in opportunity zones. They do a lot of tax accounting for opportunities on funds. They have over 1000 different qualified opportunity funds in their Rolodex that voluntarily report to them regularly on how much capital they’ve raised. And their last update was as of December 31, 2021, just a few months ago, they estimated that or no, they got the answer, aggregating all the data that $24.4 billion had been raised through just that segment of the total universe that they’re tracking. And they estimate that the actual number is likely 3 to 4 times higher than that based on their know how of the program. So that would put us already close to 75 to $100 Billion range. So that’s why I say it’s it’s quite a bit of money that’s already been raised. I think maybe you could also say with a straight face that if you include debt financing or other sources of equity, it’s possible that there are close to half a trillion dollars of opportunities on projects already out there. And I think that number, of course, is only going to grow as we head into the last several years of the program here.
Andy: Right. So that 100 billion numbers, only the equity financing. That’s correct. And these developments and of course, a lot of multifamily being built in opportunity zones. We live in a country with a shortage of, what, 5 million or more housing units, so at least really. Yeah, really incredible program. I mean, when I when I talk with advisors, when I talk with high net worth investors, a lot of interest in DSPs right now, but also a lot of interest in opportunity zone funds. So I think within that world of private equity, real estate, these are they’re already important to me. And I think to the extent this program is extended, I think these kickoffs are going to become increasingly important. So can you give us kind of a high level walk through what exactly does this proposed legislation do? How does it tweak the program? What would be the new reporting requirements? Are there any new regulations for sponsors that sponsors would need to be aware of? Are there any new aspects that an investor or adviser would need to be aware of?
Jimmy: Yeah, I know a great question, Andy. So there are first of all, I’ll reiterate, this is really bipartisan, the effort here. There were some assets that are more popular with the Republican side and there are some asks that go into this legislation that are more popular with the Democrat side. But I would say that the first and I’m going to go through five, I’m going to go through five bullet points. The first three are particularly important. And the last two actually kind of surprised me because I had really only heard about the first three. So the first one truly was a bipartisan ask everybody. I’ve talked with both sides of the aisle. Even fund sponsors want this first one and it is increased transparency and reporting. The problem is there isn’t a lot of data that is collected on the qualified opportunity funds and there’s not it’s very difficult to know how well the program is working, where the money is going. That was actually originally part of the original legislation that was. But the reporting part got stripped out of the final legislation and the Tax Cuts and Jobs Act in 2017 due to a Senate procedural rule. They’re attempting to put that back in now. And what it would do is without getting into the nitty gritty too much, it would call for a little bit more data from each qualified opportunity fund, and it would also require Treasury to issue regular reports on the state of the program. So that’s that’s bullet point number one, really transparency reporting so we can determine as a country whether or not this program. Is working in how well it’s working.
Andy: And sponsors. Sponsors know it’s working. Right. So they’re in favor of this because it’s like we’ll give them evidence or proof that this program is a good thing, that it’s benefiting communities where, for instance, multifamily housing is being built with ground up development.
Jimmy: That’s exactly right. Yeah. Sponsors know it’s working. Sponsors want this data to get out there so the program doesn’t come under increased negative scrutiny, but instead is positively praised and extended by two years. Extended by four years, maybe extended permanently, indefinitely at some point in time in a future session of Congress. So the the second way that this is going to improve the opportunity zone program, this is really an ask more by the Republican side was they’d like to see it extended for better or worse. This program got branded early on as a Trump program. The Trump administration was the one who initially finalized it into law and initially put all the regulations around it.
Andy: So what’s the big deal? Jimmy Trump wasn’t controversial at all. I don’t see why that.
Jimmy: Would be in some circles. He was apparently so. The program received a lot of bad press out of the gate because of that. And there was actually some talk during the election cycle that, hey, if if Bernie Sanders gets elected or another Democrat gets elected, could the program potentially be shut down at some point? There was some serious concern and discussion about that. Joe Biden, when he was campaigning, he actually put out some positive messaging on his campaign website about the program. But it this ask to extend the program by two years is really more Republican led and for the reasons I just gave. So it would push out that deferral period that you referenced earlier, Andy, you get to defer that capital gain until the end of 2026 and that is also the final date, December 31, 2026, on which you can realize a capital gain and still have it be eligible for any of the tax benefits of this program. It pushes that data out until December 31, 2028. I think we’ve already talked about that quite a bit. So that’s bullet point number two. Bullet point number three, if I may. Go on, please. Really, more of a Democrat ask, and that is they wanted to unwind a little bit of the opportunity zone designations.
Jimmy: In particular, they’re asking that a handful of opportunity zones and it probably be several dozen, maybe 100 or so that they be decertified or early sunsetted is the term that some are using. So there are a handful of zones out there that you look at them and you think, why the heck is that an opportunity? And it’s not particularly low income, especially given the trends of the last several years. And if you were to update the census data, they would have very high levels of income, sometimes six figures or more. So this this particular provision of the legislation would call for any zone whose median household income is 130% or more of the median national household income, that those zones be decertified early, sunsetted, so to speak. Most likely there would be some sort of grandfathering provision that would not completely destroy a fund or an investor who had already made money or had already put money into those zones. But how this bill continues to unfold and what gets passed is still a matter of time. We have to we have to see what happens. But but most likely, that grandfathering provision would be in there.
Andy: And again, this is something that I think most sponsors are in favor of, because this is an issue that has sort of dogged the Opportunity Zones program with some bad press. Right. With all of these with all of these opportunity zones. A journalist for The Washington Post, for instance, could find one and say, well, this shouldn’t be an opportunity zone and they’d probably be right. Right. So they sort of opportunity, I think, for a little bit of a PR facelift. And I point out that wasn’t weren’t some of these designated at the state level. So I mean, some of these who knows who is responsible for these sort of mistakenly identified opportunity zones. But in any case, getting these fixed, I think, would be a good move for the program as a whole to just be perceived as helping communities that need the investment the most.
Jimmy: 100%, right, Andy I think the vast majority of sponsors and other advocates of the program would like to see something like this get passed. So again, it reduces the amount of scrutiny that the program comes under. There is a very famous case. Storey County, Nevada, the opportunity zone there. That was the subject of a very bad piece of PR by The New York Times about two years ago. We’ll try to link to that one in the show notes. But if we can just remove some of those bad apples, it gives less ammunition for somebody at at some of these big mainstream media publications to go after the program in the future. I think that’s exactly right. It it reduces the headline risk. Sure. I guess you could say so. Bullet point number four and five I’ll touch on briefly because I haven’t really delved into them too much. I was much more familiar with these first three, but the fourth one would allow for a fund of funds. Currently a qualified opportunity fund has to invest directly into. Qualified opportunity zone property or a qualified opportunity zone business, they can’t just simply invest in another qualified opportunity fund. This provision would unwind that restriction and would allow for a qualified opportunity fund to invest in another qualified opportunity fund.
Andy: Which Jimmy, if I may interject, I think this is this is a game changer because if you have a capital gain of 100,000 or 200,000 and the minimum investment amount for many shops is $100,000, it’s hard to achieve that diversified portfolio. Right. But if there were any mutual funds or fund of funds that, say, invested in five or ten different kickoffs, then you could take that same $100,000 capital gain, put it in a fund of funds, and bam, you have a diversified opportunity zones portfolio right there.
Jimmy: I think that’s exactly right. Andy Yeah. So it should help the smaller investor. It should also help some of the smaller projects that are looking for additional financing. I think it’s going to help open up the marketplace a little bit more to some of the the smaller type investors and projects. I think that’s exactly right. And then the the fifth and final point that I’ll touch on is it’s going to this this this legislation would establish what they refer to as a state and Community Dynamism Fund. And frankly, I’m not too familiar with with what this is exactly. I’m hoping to learn more about it in the coming days and weeks. Sounds dynamic. It does sound dynamic. But essentially, it would allow for flexible grants that would provide operating support and technical assistance to underserved communities all over the country. How the funds are created and distributed. I don’t know if that’s been clarified yet, but that was the that was the fifth point there. So overall, a lot of ways that the opportunity zones, tax incentive tax policy is going to be improved, some additional guardrails on the program, but also more opportunities for investors to use the program favorably and to use the program for a longer period of time.
Andy: Okay, Jimmy, all that sounds great. So, I mean, it sounds like you think it’s fairly likely that it’s going to be extended. Probably legislation like this often gets marked up and changed and sort of evolves right as it goes through the process. But I’m going to put you on the spot. Will the Opportunity Zones program be extended, yes or no?
Jimmy: Yes. And then we have a chance of we can increase the chance of that happening with the help of a lot of our viewers and listeners. If they could write to their congressmen and write to congressional leadership, get in front of the Senate Finance Committee or the House Ways and Means Committee, some of the decision makers who end up marking up this legislation and packaging it into a larger tax omnibus bill or a tax appropriations bill, potentially we could get it passed maybe later this year. I don’t know if it’s going to happen prior to the midterm elections. It may end up happening in a lame duck session of Congress in November or beyond potentially. We’re going to have was.
Andy: That was my follow up question. Jimi, you think it will be extended by this Congress?
Jimmy: Do I think it’ll be extended by this Congress? Ooh, that’s that’s a really good question. I think it will I think it’ll get extended during the lame duck session. I’ll go out on a limb and say that I think it’ll get extended before before this current session of Congress is up. But it might take might take several months till it might be after the midterms.
Andy: Wow. You know, as a co founder of AltsDb, I think that’s pretty exciting because I think the ozone program is just an increasingly important part of this larger private equity real estate world. Because, like I said, I think it’s just it’s such an amazing program. It’s unlocking new ground up development, multifamily development, especially in a lot of communities that really need it. And the other thing I love, again, I like DSTs too, don’t get me wrong, but comparing it to a 1031, there’s just a lot more investors with applicable capital gains. Right?
Jimmy: That doesn’t have to be real estate.
Andy: Exactly. Exactly.
Jimmy: Yeah. And so, by the way, what we’d like to do, if I may, before we wrap up here, I’d like to give a plug for our upcoming webinar coming up on April 28th of 2022. Here we are. And by we, I mean opportunity. Db My other website and platform specifically focused on Opportunity Zones is teaming up with AWS Works Group and the Economic Innovation Group, AIG, which was the Washington, D.C. Economic Research Organization that really spearheaded the initiative in the first place several years back. We’re teaming up to put on a webinar that will be an advocacy effort, really. And it’s my first foray into the world of legislative. Give or congressional advocacy. So I’m really looking forward to it. And we’re basically going to give our viewers and our listeners a step by step method for how they can address letters to Congress, how they can sign their name onto our huge sign on letter that is going to be targeted at congressional leadership, asking them to make this legislation a reality. So for more information on that, check out the show notes for today’s episode and we’ll make sure we have a link to that webinar registration on their.
Andy: Excellent. So Jimmy Atkinson heads to Washington. I love it.
Jimmy: That’s right. That’s right. Well, that’s it for today, Andy. It was a pleasure being the guest on today’s episode of the Alternative Investment Podcast. For our listeners or viewers out there today, if you want to learn more about the resources that we discussed on today’s episode. Be sure to check out the show notes at Alt DB podcast and please remember to subscribe to us on your favorite podcast platform.