Like learning how to optimize your taxes/wealth?
Then heads up, because Opportunity Zones may be really relevant to you.
In a nutshell: It’s a government investment program designed to spur economic development in certain geographic zones; in return, it provides a way to snag huge tax breaks and tax-free investment gains.
Think of it as a turbocharge for your 4×4 FIRE framework “save” & “invest” pillars.
But the O-Zone program is not well-understood or even well-known by most investors.
So this week, I invited David Sillaman, one of the pioneers in Opportunity Zone fund creation, to the podcast to explain key rules and benefits of the program.
We talk about:
- Goals of the program and tax benefits to investors
- Where Opportunity Zones are located and how to view an O-Zone map
- Rules on contributions, deferred capital gains tax, and tax-free investment gains
- What type of investments inside Opportunity Zones qualify for favorable tax treatment
- How to research Qualified Opportunity Funds
Is this program attractive to you as an investor? What questions do you still have about it that you want me to answer? Let me know by leaving a comment.
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My guest today is David Sillaman.
David is the founder and CEO of Eazy Do It, a real estate opportunity zone fund creation company based in Virginia that, according to David, has built one-sixth of all real estate opportunity zone funds in America, totaling $16 billion in raised capital.
David is a member of the Forbes Real Estate Council and regularly speaks at opportunity zone conferences. So I wanted to invite David to the podcast to share his insights and knowledge about opportunity zones, what they are and how real estate investors like you and me can benefit from them.
David, thanks so much for joining us today.
David Sillaman 1:55
Sure. Absolutely. Thank you. My honor.
Andrew Chen 1:57
I would love to start just by learning a little bit more about your background in terms of how you got into becoming an expert on opportunity zone. What’s your story for how you got into this space?
David Sillaman 2:06
Well, I built a business once before on a government program, the HAMP/HARP program. And I just understood how things were going to unfold.
And nothing ever unfolds from the government in just a really clean one-done “Here you go. We’ve given you a Picasso.”
When you look at how this program [the opportunity zone program] unfolded, we got four and a half pages. It’s now up to 900 pages of tax code, but we originally got started with four and a half pages.
And when I looked at it in a context setting of the entirety of the TCJA that this was added into, and when you go through that 900 pages and you start to get a picture that gets painted, if you’ve ever done a startup or been in business, it really gave an easy understanding of how to go about the fundamental mechanics of it.
There really isn’t anything new about it other than the fact of all the tax benefits and the intricacies of how to play the game. But setting up the game has been established since the ‘30s and ‘40s.
So it was just something that I looked at and said, “There’s going to be a yield curve in this thing. It’s going to go like this and then shoot straight up.” “Where am I going to fit in in that?”
And I happened to be involved in a hotel deal in Florida. I got involved in the deal in May of 2018.
In April, the IRS did the announcement. And then in June, they gave the four and a half pages, the IRC 1400Z-2(a). By July 9th, I had opened up the second opportunity fund in the country.
All we simply did was take the real estate deal in hand. It just happened to meet all the parameters for how the deal was structured and met the initial guidelines. And it was off to the races as an OZ fund.
And having set up the second one in the country, that then led to starting with small conventions, and then they got larger and larger, and then they started going national. And then it just started snowballing.
And then it went from “If you did one, what else is it applicable for?”
And then I was very blessed to meet with an amazing tax guy. His name is John Hewitt, Liberty Tax, Jackson Hewitt, H&R Block, that guy. And he was interested in looking at, from a business standpoint, what the application was, or the potential application.
This was back before we had anything, before the second tranche of guidelines that came out in May for businesses, before the October guidelines came out. This was before all of that.
And he just was a pioneer in looking at it and saying, “Hey, there could be a usage for this for business.” And then it just started snowballing from there. And then it led to us doing the first business fund.
And once you do the second fund in the country, you’re promoting that. Now you’ve done the first business fund in the country, you’re promoting that. It just snowballed.
And we’ve just been really diligent in wanting to build out a safe way for this space to grow in a healthy manner. And so we’ve gone more into relationship-focused and more transformational because we see the program being incredibly transformational across the country.
But that’s how we got started.
Andrew Chen 5:25
Just so I understand and our audience understands clearly, is that to say that opportunity zones as a concept precede the TCJA, the Tax Cuts and Jobs Act, but the Tax Cuts and Jobs Act actually introduced a lot of the tax benefits and things like that?
David Sillaman 5:40
No. When you look at the opportunity zones themselves, they’re extensions of existing low income census tract, CDFI tracts.
And then there were add-ons each locality did for the state level, etc., and went up the food chain.
But what I was talking about earlier from the ‘30s and ‘40s was from a structural standpoint. This is not just a program that is a tax or IRS program. There’s a lot of confusion in that.
“In the world of opportunity zone funds, you just simply fill out a self-certification form, and that’s it.” Well, that’s not the reality when you’re raising money.
You’ve got the Securities and Exchange Commission that gets involved. You’ve got to file Form D’s. You’ve got to know what type of reg offering you’re doing, what type of documentation that goes along with that.
But all of those rules on the mechanics of raising money and the precedents that people have been following for decades now has all been in place. If you follow that same type of mechanical structure, all you’re doing is just understanding the rules of the game at that point.
Because it’s a tax program, how it benefits the investor. But it’s money that’s flowing in one entity out into others.
Andrew Chen 6:51
What is the two-minute quick summary of what opportunity zones are in the first place? Just to level set.
Where do they come from? What’s their purpose? What are the tax benefits to investors?
And at a high level, before we get into details, how do they work?
David Sillaman 7:07
At a very high level, the idea is this is a job creation program that was going to look at real estate in business for the purposes of creating short term and long term jobs.
The idea is that we can circumvent government and just allow private investors to directly invest in real estate projects and businesses, and they get very specialized tax advantages.
For example, as an investor, I get a 10% step up in my basis.
First and foremost, I get to defer whatever I pay in tax. If I do an investment today, I’m deferring paying tax on that from 2020 tax season to 2026 tax season.
So no tax today. I’m pushing it off to tomorrow. When I do pay the tax in 2026, I get a 10% step up in basis.
So if I put $100,000 in, I only pay tax on $90,000.
And that’s at the six-year mark. At the 10-year mark, you get a full step up in basis to fair market value at time of exit.
So what that means in real simple terms is if I bought something at $1 and it rose to $5, that $4 difference, that gain, I pay no tax on at the end of the 10-year period.
Andrew Chen 8:24
Got it. Were opportunity zones birthed by the Tax Cuts and Jobs Act as a concept, or did the Tax Cuts and Jobs Act just make them now a lot more attractive?
David Sillaman 8:39
The Tax Cuts and Jobs Act took what was a bipartisan-supported concept and made it into a reality.
You had groups like EIG, for example, Economic Innovation Group. Steve Glickman, Shay Hawkins, these are figureheads that are in this space from a legislative standpoint that helped to be able to craft and get it to the point to where we had that bipartisan support in the TCJA, and then ultimately to get it signed by the President.
Andrew Chen 9:11
Okay, cool. So where are these opportunity zones located? And how do they get selected? Who decides?
David Sillaman 9:19
First and foremost, the location answer. There’s approximately 8700 plus opportunity zones across all 50 states, Guam, Puerto Rico, and the U.S. Virgin Islands.
How they got selected was they used low income census tract data. They used the CDFI census tract data. And then they also had input from locality agencies and then also from the state governor and the state CEOs.
And what they did is each state filed with the Department of Treasury, saying, “Hey, these are our zones.” And that’s what they identified on a state by state level as the areas for need.
Andrew Chen 10:01
I see. So in each state, are the zones essentially decided by the states themselves? The federal government doesn’t have a say in that?
David Sillaman 10:12
Yeah. It was at the state level that they were submitted to the government for the approval at the treasury level.
Let’s say we’ve got a re-designation of a zone. It’s going to have to go through a process back to resubmitting new zones, stuff like that. But it originated at the state level and executed at the federal.
Andrew Chen 10:35
I see. So it sounds like the idea is that a state government will look at its borders and say, “Where do I want to encourage or incentivize real estate development to drive better community and economic development, jobs, etc.?”
And they’ll try to get those geographic areas approved as opportunity zones. Is that roughly what it was?
David Sillaman 10:57
That was the crux of it. Yeah.
They looked at localities and were like, “The median income is below par.” Standard cost of living, all the stuff where they’re looking at, saying, “Okay, we’ve got a lower income populated community.”
And there are some outliers. In every state, you’ve got definitely pockets that you scratch your head and you look at it and say, “How did that get in there?” And they’re just the diamonds.
But in those lower income type of communities, the idea was, from a real estate perspective, to hopefully help everybody across the board with new development, spur economic growth.
The jobs, from a business perspective, being able to give those businesses in those lower income communities the ability to have access to capital that they might not otherwise have access to.
Andrew Chen 11:43
I see. Are opportunity zones coming online all the time, or was there a deadline?
David Sillaman 11:49
No. What you’ve got is you’ve got a distinction between what are the zones and then what you’ve got are funds.
And the funds themselves are what’s coming online, where you’re getting basically an opportunity fund market space that’s beginning to develop.
But the zones themselves have been preset. They’re pre-designated. They may do an adjustment later on or they may add something where the states can periodically readjust them or submit for readjustments.
But the zone is just simply the designated area. That’s it.
The entry point into all of this, especially for real estate investors, is through the OZ fund level. That’s the front door to the program. That’s the bridge in.
Andrew Chen 12:33
Got it. So the geographic areas, we’re not going to expect that they change too much going forward.
David Sillaman 12:41
We’ll see minimal. I think we’ll see some, but I don’t think it’s going to be such a dramatic today to tomorrow type thing where it’s like “Okay, that’s kind of weird” huge change.
I think what will happen is just that as the program begins to go through its reporting cycles and everything, and they can begin to see how it’s actually playing out, they’ll have room for adjustments that way.
So we’ll see it shift a little bit, but I don’t anticipate massively.
Andrew Chen 13:10
Is there a tool or a map where people can go and actually see where the zones are and see which ones are near them and which ones are in other places that investors may be interested in investing in?
David Sillaman 13:23
Yeah. There’s a lot of resources. I’ll recommend ozfunds.com.
We’ve got a map on there, for example, where you can pop an address in and it will tell you whether it’s in the zone or out of the zone.
Andrew Chen 13:34
So let’s jump into a little bit more in detail on the rules and benefits of how opportunity zone funds work.
First question I wanted to ask is, I heard you can’t just put any type of money in there. It has to be capital gains funds that actually have to be invested.
Can you say more on that? What kind of money must be invested to be eligible for this program in an O-Zone fund?
David Sillaman 14:00
And that’s a good distinction, that word “eligible” because you’ve got certain tax benefits. And those tax benefits, as it’s written right now today, are only applicable to capital gain investors, people who have realized some sort of a capital gain.
And then they’ve got a 180-day window to make a decision to take advantage of the program or not.
In real estate cases, a lot of those, you’ve got a little bit different than a 180-day window because you have until the end of the year to start your 180-day calendar based on a real estate K-1. So real estate is a little different for those types of investors.
But at the end of the day, whether your time clock starts the moment you realize it or whether it starts at the end of the year, you got 180 days.
Andrew Chen 14:49
Is that any type of capital gains?
So I sell stock in Vanguard Total Stock Market or I sell a house and I have some capital gain. Either type will be…?
David Sillaman 14:58
Either type. You can sell art. You can sell a car, whatever the capital gain comes from.
Andrew Chen 15:02
I see. Earlier when you said you get a 10% basis step up if you hold it for six years in the 2026 year’s tax filing season, it sounds like that’s referring to just that piece: what you invested, which would normally have been taxed in full because its capital gain, is now going to get a 10% basis step up if you hold through 2026. Is that accurate?
David Sillaman 15:28
Yeah. That’s the idea.
You’re going to basically defer paying taxes today. You’re going to pay a reduced tax rate tomorrow. And then in the future, when you go to fully exit, you’ll pay no tax.
Andrew Chen 15:40
You’ll pay no tax on the gain above and beyond that.
David Sillaman 15:42
On the gain. On the growth.
Andrew Chen 15:44
But whatever you put in is still going to be taxed at 90% at that point, at the 10-year mark?
David Sillaman 15:50
Yeah, if the investment has been made in calendar year 2020.
Andrew Chen 15:55
Got it. Just so everyone is clear about this because I know it can sound a little confusing.
So the process is: You sell some investment elsewhere in your portfolio. That has some capital gain.
You take only the capital gain from that sale and you invest it into an O-Zone fund. You hold it until 2026 at a minimum. At that point, whatever you put in will get a 10% basis step up.
Then if you hold it through the 10-year mark, any gain or growth above and beyond what you put in, that part will be completely tax-free. Have I got that right now?
David Sillaman 16:30
Andrew Chen 16:31
David Sillaman 16:32
Andrew Chen 16:33
Okay. So then my question is, for an investor who is interested in investing in an opportunity zone, can they invest directly or do you have to go through a qualified opportunity zone fund?
David Sillaman 16:46
You have to go through a fund. The fund is the front door. There’s no back door. There is no side window to open.
It’s through a fund. Either you’re setting up your own or you’re collecting outside investor money in.
Because as an investor into a fund and an investor in real estate, you’ve got certain rules that are applicable to you because you’ve got an ownership rule. You can’t have anything more than a 20% ownership in the property as an investor in the OZ fund.
Andrew Chen 17:17
Say more about that.
David Sillaman 17:20
Okay, now we’re going to get technical.
When you’re an investor, the idea for this program is not “I had a $5 million capital gain. Let me just go set up my own opportunity fund to transfer money from bank account A to bank account B for tax purposes. And then I just spend my $5 million according to the program.”
It wasn’t designed for you just to do a transfer that way. It was designed for people to put money into funds, funds to then put money in, because the fund is doing all the reporting at that level.
So what you’ve got is an 80/20 rule for investors.
If I own property and I’m looking to develop that property, and I own it right now and I’ve got capital gains and I put capital gain money into an opportunity fund, and that money is going to go ahead and collect other money from other investors and invest into the development of that property, then I’m subject to a 20% ownership rule on that property.
I can’t have anything more than a 20% equity ownership stake in the property.
Andrew Chen 18:19
The fund cannot or the sponsor?
David Sillaman 18:21
So if I’m the investor and I own property right here, and this fund is going to put money into this property, and if I’m investing my capital gains, starting my own fund for the purposes of putting money into my own project, that’s what this is trying to avoid.
And that’s why you’ve got that 80/20 rule.
Andrew Chen 18:42
Is it that no investor can hold more than 20% or just the fund creator?
David Sillaman 18:49
No. No one single investor in a property.
If you own it, if you’re setting up your own fund with your own capital gains and you’re using that fund money, your capital gain money, to now develop your project, you’re subject to an 80/20 rule. You personally can’t own anything more than 20% of the property,
Andrew Chen 19:11
Which is to say, then, you need other investors to make up the other 80%.
David Sillaman 19:15
And that’s why the fund was the front door because it takes a collective group of investors, puts it into basically a bridge, for lack of better words, because it’s all they are.
It comes in. The fund has got a timeline. It’s got to get out the door out of the fund account.
So it’s just pooling and bridging it and then going into however the fund is structured, whatever their highlights are for their project’s property, etc.
Andrew Chen 19:40
Can anyone set up a qualified opportunity fund, or only certain people?
David Sillaman 19:46
This was designed for anybody to be able to take advantage of the program. It’s just understanding the intricacies of what’s involved in setting up a fund where people have stumbling blocks.
You’ve got three tranche guidelines, 900 pages of tax code. You’ve got SEC stuff you’ve got to take into consideration. You’ve got blue sky laws on a state level.
You’ve got your entity registration, entity formation, your financial documentation, understanding the private placements. You’ve got all of that that goes into it.
And that’s where most people get a little leery of saying “I’ll just set up my own.” They typically will hire a professional to set the fund up for them.
Andrew Chen 20:27
Are there any rules or restrictions around what assets the funds are allowed to invest in to qualify for all the tax benefits, or is it, as long as it’s inside the opportunity zone, it counts?
David Sillaman 20:40
First and foremost, you’ve got a 90/10 rule, a high level ruling which says generally 90% of what comes in must go back out into opportunity zone funds. 10% can go toward anything.
By the time you figure out the net in and everything else like that, you’re really looking at about 70% going into an opportunity zone fund of what comes in after fees and stuff like that.
It’s designed to either go into investments being made into zone stock, where one fund is purchasing stock from, let’s say, XYZ widget business in an opportunity zone.
Or a fund is taking a partnership position as an investor into typically a real estate development because most of the real estate deals are typically partnership-based structures. So it’s taking some sort of partnership position in that.
Or it’s going to directly purchase and own [and operate] the QOZB property itself [as the principal]. And then that’s where you then become subject to the “substantial improvement” versus “original use” rules.
But most of these investments aren’t directly owning the property themselves. What they’re doing is they’re making an investment into a partnership, like a development, coming in as a limited partner, or they’re taking a stock position in a company.
Andrew Chen 22:04
Okay. So just to summarize, it sounds like you can invest as a partner in a real estate development company. You can buy a physical real estate asset itself, but then that subjects you to “substantially improved” rules, which I want to talk about in a moment.
And then you mentioned this third one which I hadn’t heard of, which is you can buy stock in a company located in the opportunity zone.
David Sillaman 22:30
Just like you would if you bought stock in Facebook or a private company purchasing shares of their stock.
Andrew Chen 22:35
I thought the point of the program was for real estate development. So if you buy stock in a company that happens to be located in the zone, how is that real estate development?
David Sillaman 22:44
The point of the program was never real estate development. I know we’re on a podcast talking about real estate development and how real estate plays into this.
But the point of the program was never real estate development. The point of the program was always job creation.
When you look at the IRC 1400Z-2(a) and how it’s written, the very first thing they talk about investing into is zone stock.
So this was always designed to spur capital investments into opportunity zones with the purpose of creating jobs. You can’t leave business out of that equation,
Andrew Chen 23:18
I see. So that makes a lot more sense. So if you invest in stock in a company, you’re basically injecting fresh capital in the business that can then be used to expand, grow the business.
David Sillaman 23:29
Grow the business. Hire. Yep.
Andrew Chen 23:30
If you invest in a partnership in a real estate development company, presumably that partnership or that company is going to then redevelop the community, which might attract new business, etc.
And if you buy a real estate asset directly, then you have to substantially improve it, which essentially has the same effect. I guess all these things are pointing toward community development and, hence, job creation.
David Sillaman 23:51
Yep. And you have a left hand and a right hand where both support. The business injection at the stock level is typically a little bit more longer term job creation piece, whereas the real estate piece is typically a little bit more short term.
So you’re getting the quick injection and then you’re also getting the longer, stabilized injection as well. Conceptually, that’s the idea.
Andrew Chen 24:12
So if you do buy a physical real estate asset in the opportunity zone, now you’re subject to substantially improved rules.
Could you comment a little bit about what does “substantially improved” mean? And over what timeframe are we talking about that you have to meet these criteria?
David Sillaman 24:36
The substantial improvement is going to be your purchase price minus the cost of land, so basically your basis into it minus the cost of land plus $1. You got to do 100% of your basis plus $1.
That’s a “substantial improvement,” unless the property qualifies as “original usage.”
And there’s been some recent updated guidelines on the original usage and narrowing down what that looks like and making it a bit easier – where after a year of vacancy, it could be reclassified as original use to avoid the substantial improvement aspect of it.
But there’s a 36-month safe harbor provision for real estate.
There’s a 60- to 64-month safe harbor provision for businesses.
But with real estate, basically the fund itself has got an initial 180-day period when the money comes in. And then it’s got an additional safe harbor of another 31 months to deploy that money into the project so it doesn’t all have to just go in at one time.
Andrew Chen 25:39
So the 31 months is the deadline before which you have to make all the substantial improvements?
David Sillaman 25:47
That would be the deadline.
Andrew Chen 25:50
David Sillaman 25:51
Because it’s going to be based on the reporting.
Andrew Chen 25:53
What does “original use” mean?
David Sillaman 25:56
I’ll give you an example. Let’s say we wanted to invest in a hotel.
We’ve got this nice hotel. It would be easier probably to renovate it and keep it as an existing hotel, using it originally.
But we’re looking at it and saying, “You know what? Let’s convert this thing into nothing but studios.”
Going from what it was to something different, now you’ve got substantial improvement. So that’s a real simple kindergarten level type of example of the idea behind it.
Andrew Chen 26:32
So if you stick with its original use, then you do not have to substantially improve it or just improve it less?
David Sillaman 26:38
No. You don’t have to substantially improve it at all.
Andrew Chen 26:41
David Sillaman 26:43
The substantial improvement only comes into play if it does not meet the original usage criteria.
You’re still investing into it. And odds are you’re still going to have some sort of improvement. But the difference between original use and substantial improvement is that substantial improvement, you have to meet x, y, z.
You have to do 100% minus your basis plus $1 to improve it, in order for that property to qualify as an eligible investment that the fund would then in the future be reporting, saying, “Hey, we made an investment in this property, and we improved it and met that threshold.”
The original use is, you don’t have that minimum threshold that you have to meet. So that’s really the only difference.
Andrew Chen 27:29
So just to tie it together, it sounds like if you change the use, you have to substantially improve it. And that means at least putting in $1 more than you invested toward improving it.
So essentially you have to budget twice the amount of money, and more, part to actually acquire, and then more than that part to improve it. That’s if you change the use.
If you keep the use the same, there’s no such rule around having to substantially improve. But obviously, if you want a return, you’re probably going to have to.
David Sillaman 28:01
Yeah, like a real estate investor would look at it and say, “I’m going to come into residential real estate investing. I’m going to set up an opportunity zone fund.”
“Me and my golfing buddies, we’re going to throw our money into a fund collectively together as a partnership. We’re going to go buy real estate, residential.”
Well, they’re keeping the use residential. The idea is that they’re going to put a homeowner in there or a renter in there. But you’re going to go in and improve it.
Andrew Chen 28:22
Are there any other gray areas in the rules that the IRS still has not issued definitive guidance or regulations on that investors should know about?
David Sillaman 28:33
Really it’s not something that I think would be at the investor level. It really is more at the fund reporting level.
We’ve still got a lot of debate right now on both sides. We’ve got a lot of legislative bills that are still up regarding opportunity zones and really just how they’re supposed to be reporting. We’re still getting all that.
We’ve got drafts, but we don’t even still have the actual finalized, set in stone “Here you go. This is the form. Fill it out. You’re late.” For just the funds to do their first set of reporting yet.
It’s still in draft mode. So those are the gray areas.
But that’s not really something that is concern to the investor because at the investor level, the idea is that you’re passive for the most part. It’s really a time play than it is anything.
And at the fund level is where all the mechanics have to work.
Now, in partnership, if you’re coming in as a general partner, which you can do, as an investor into a QOZB or into a QOF. You can come in as an investor partner into it if it’s structured that way. But beyond that, it’s all at the fund level.
Andrew Chen 29:40
Got it. So if you’re just a limited partner investor, the rules and how it works are basically set in stone. You don’t have to worry.
It’s more that if you’re at the GP level and you’re having to deal with reporting, then some of that stuff is still being worked out.
David Sillaman 29:54
Yeah. And especially since you’ve got a lot of higher net worth investors listening, if the fund is structured the right way, even as a partnership, it should still have the third party custodian or third party fund administrator that will be handling a lot of that compliance aspect for both the investors and for the fund reporting compliance as well.
Andrew Chen 30:14
At a macro level, who would you say this strategy, i.e., investing in opportunity zones, is good for? And who is it not good for?
David Sillaman 30:25
It’s great for everybody.
The only one that it’s really not good for is if I’m putting basically post-tax money. I’ve saved money and I’m putting it into an opportunity zone fund.
I can ride the yields up, but I’m going to pay the gains each year on that. I don’t get that specialized tax benefit.
So that’s really right now the only group that is left out of it.
If we look at the RIAs, the family offices, the wealth managers, the broker dealers, now with the CRA credits being readjusted for banks for the first time in nine years, we’re going to see more traditional outlets be heavily involved with this. So this is a rock star program.
This is really one of two things.
This is either, in my opinion, the biggest game changing, economic changing tax bill for our country, probably even more so than what the Industrial Revolution was, for what we will see it.
Because this has the ability to impact everything, both real estate and business. And when you look at what that reach looks like, you’re talking technology, you’re talking medical, you’re talking innovation, you’re talking A to Z for the most part.
Even space, for example. As long as, whatever, their manufacturing rocket is located in an opportunity zone, they can take advantage of the program.
So it’s got that type of far reach. It’s either going to be that much of a landscape change for the U.S. or it’s going to be the biggest tax giveaway for investors in the U.S. history.
One of the two.
Andrew Chen 31:55
Where can people find out more about different opportunity zone funds out there, which ones are accepting new investors, as well as each fund’s investment strategy, their portfolio holdings, the credentials of the team and their track record?
Where can people get more information about that?
David Sillaman 32:12
That’s a great question.
The answer to that it’s all over the place because there’s not really a true set centralized source yet for this.
And we’re trying to be one of those first pioneers. We’re doing a set resource.
We’ve got a website, ozfunds.com. Easy if that’s what you’re looking for, an OZ fund.
So we’re hoping to be able to have the most detailed directory listing. We’re trying to get this launched by the end of the month, actually.
But there’s a lot of other different directory listings out there.
You can search CoStar Group, for example, if you’re into real estate. Novogradac, the NCSHA for real estate investors, the National Council for State Housing Agencies. It’s got a pretty thorough list of OZ funds.
But there’s not a real centralized source yet.
I think early in our market, 2018, was basically saying, “Hey, we’re going to give birth. We’re pregnant.”
2019, with the way everything played out with the start of January, with going into a government shutdown into the start of 2019, to not getting the final regulations until the end of December 2019.
So 2018 is “Hey, we’re pregnant.” 2019 is “We just gave birth.” 2020 will be the metric year.
Andrew Chen 33:28
So if you’re an investor who’s interested in potentially putting money in an opportunity zone, are you just left to Google or the ozfunds.com website for looking up which funds are actually accepting new investors and what their strategies are?
David Sillaman 33:46
Unfortunately, right now, that’s just what you’re left to.
They’re private investments, so they’re not going to be like, “Let me go search the Dow or the NASDAQ,” or something like that. There’s one that’s on the pink sheets.
Probably one of the better resources, I think what municipalities are trying to do right now, is really begin to get an idea of who’s operating in the OZ space in their localities from a fund level, from a project level.
At the state and localized level, I know a lot of resources are being developed. And this year, we’ll see a more clear path for investors. They’re having to rely on their CPAs doing research.
Far and few of these are brokered out.
You’ve got a couple of big dog players, like Morgan Stanley, for example. I know that they’ve brokered $2 billion worth of OZ funds already.
So you’ve got a couple of big dog players you can get into that way.
I know that PNC Bank and Woodforest National Bank, that bank in Walmart, for example, just set up an OZ fund. So you’ll probably be able to get in some of that kind of stuff.
There’s a few of them that are Reg A offerings where you can find them out there on these equity crowd raising type platforms.
But most of them are just your Google searching and just going through directories and dialing for dollars.
Andrew Chen 35:11
Are you seeing a lot of institutional money flow into this? Like traditional private equity firms or investment funds that are pouring money into opportunity zones?
Or is this really geared toward retail investors?
David Sillaman 35:24
No, this isn’t geared toward any one set type of investment.
We got a $6.4 trillion 2017 market cap of capital gains between corporate and individuals. That’s a huge window from here to all the way down here where we’re at right now, where we’ve had about a size of $25 billion for 2019 that flowed into opportunity funds.
When we looked at 2018, we had about $4.5-$5 billion that moved into OZ funds. So huge step up, but nowhere near where it will be.
The institutionalized investors, broker dealers, you got to understand that they’re still private. These things have no prior performance history.
You’re trying to run a FINRA 10-22 on this thing or due diligence underwriting on these OZ funds. What do you get, all pro formas for the future?
So you’ve got a few outlets, like Walker Dunlop, for example. They’re doing a lot of stuff with trying to give more credence and credibility to projects with OZ funds.
But that’s what we’re seeing right now.
And the delay in guidelines didn’t help things either. Getting finalized stuff until December for an investor is like, well, “I’ve been waiting all year long.”
Andrew Chen 36:36
So are you actually seeing institutional capital pour into these funds, like the Blackstones of the world, etc.?
David Sillaman 36:42
Absolutely. Blackstone has set up their own Opportunity Fund. Griffin Capital has got an opportunity zone fund.
Actually, I’ve got a list of a bunch of them here. I can’t pull them up right now, but I got a list I could send you.
But you’re starting to see this year will be a big year all the way around: between banks, between traditional brokers, RIAs, family offices.
Last year, we saw a lot of family office money that were holding summits and bringing opportunity zone funds and opportunity zone speakers to their summits, trying to help educate their family office money. But last year, like I say, was a birthing year.
Andrew Chen 37:18
Awesome. This has been super insightful in helping folks, I hope, understand a bit more about how this program works and how the tax benefits work and how to consider whether this might be a sensible part of your investment portfolio going forward.
David, where can people find out more about you and your work and services?
David Sillaman 37:40
They can visit us online at eazydoit.com or ozfunds.com.
Andrew Chen 37:49
Perfect. We’ll link to both of those in the show notes. Thanks so much again for taking the time to share your experience and insights with us on this important investment topic.
David Sillaman 37:58
It’s been an honor. Thank you so much, Andrew, for having me on.
Andrew Chen 38:00
Take care. Cheers.
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