Michael Fitzpatrick
The Opportunity Zone Expo Podcast
Alternative OZ Financing? Nobody Listens Better
Transcription
Jack: Welcome back everybody to the Opportunity Zone podcast. I'm your host Jack Heald and I'm here today with Michael Fitzpatrick, who's a partner with the Baker-Tilly and executive vice president and principal of the Baker Tilly Capital LLC. Welcome, Michael. Good to have you today.
Michael: Yeah, thanks Jack. Glad to be on.
Jack: So tell us a little about, a little bit about yourself. Who are you and how'd you get started in this business?
Michael: Sure I'd be happy to. You know, I've been in transaction services most of my entire career. I started out as a commercial lender focusing not exclusively, but mainly on commercial real estate. So, I've got a strong credit background in commercial real estate underwriting. I joined Baker-Tilly in 2000 and you know, that was coming at a time right around the time the tech bubble burst and we formed a wholly-owned, a broker-dealer subsidiary so that we could help clients invest in real estate because real estate was really becoming the sought-after asset class in the wake of the tech bubble burst for clients who are looking to get some non-correlated asset exposure out of this stock market.
Michael: And from there we've just really organically evolved into a project finance group that specializes in alternative sources of capital such as EB5 financing, a New Market tax credits where we're probably the leading consulting firm in that space, low-income housing tax credits and other sorts of federal and state level incented types of capital sources. So kind of complex, “niche-y” sources of capital where a lot of tax related expertise is important. And that's where we, that's what led us into the Opportunity Zone space. It's really a tax incentive that drives investment and it's really closely correlated to the New Market tax credit program.
Jack: As I did my research in preparation for this interview, I ran into that New Market tax credit term. Talk to me a little bit more about that, cause to be honest, I've never heard that term before.
Michael: Sure. Yeah. The New Market tax credit program. That was a program that was conceptualized back in the Clinton administration and was operationalized I think around 2001 or 2002. Baker-Tilly has been in that space since its inception. It's a federal tax credit, designed to give incentive for a commercial investment within what are defined as low income communities.
Those are communities with less than 80% of the area median income is less than 80% of the state median income. And in those qualified areas, the way the New Market tax credit program works is there's an intermediary called a community development entity. It's a generic term for groups that apply to the Treasury Department for what we call tax credit allocation authority. So they're really kind of a public/private partnership type of relationship between Treasury and the administration of this program.
And you know, kind of the interesting thing is that it's a little bit of a nomenclature issue in that, it's not really a tax credit per se that the project receives. It's a tax credit that the community development and the, the CDE receives and they monetize it by selling it to tax credit investors.
And then the CDE takes the cash proceeds from selling that tax credit and uses it to make a low-interest, rate-interest only loan to a qualifying project. So it's really kind of an interesting program that provides subordinated, low or inexpensive financing that typically fills a gap in the capital stack in order for a project that can't receive conventional financing to move forward within a low-income community.
Now the really interesting thing about New Market tax credits is that there are requirements for these CDEs to track community outcomes that are generated from their activity. So, for instance, job creation or, you know, the provision of goods and services that are unmet within that community that, you know, basically a CDE has to answer the question, how does this financing activity actually provide tangible benefits to the low income residents of that community?
And that information is collected, quantified, and aggregated and reported to Treasury. So there is a real important reporting requirement that goes with that program. And what that does is it creates a level of accountability so that these CDEs are truly engaging in activities that create benefit, to the areas that they serve. From the project standpoint, it's a project that generally needs this subsidized source of financing in order to move forward.
And the really big benefit of New Market tax credit is after our seven-year compliance period. That low interest rate loan they received from the CDE is actually in most cases for given into the project and doesn't require repayment. So it's a substantial financial incentive for these projects occurring within low income communities and the connection then to the new Opportunity Zone Program.
Jack: I was going to ask you to talk about that, good.
Michael: Yeah, sure. So the connectivity there is that when the Opportunities legislation came into effect at the end of 2017, it called for using the New Market Tax Credit eligible Census Tracts as the, if you will, starting place or the basis for creating Opportunities Zones. And the way the legislation was drafted was that each, the governor of each state, was instructed to designate 25% of their New Markets Census Tracts as Opportunity Zone, so it's interesting how under the New Market program, that designation of a Qualified Census Tract is strictly driven by data and Census data and, and then moving over into the Opportunity Zone space, you introduce a little bit of a political element into it that, where, the governor of each state had the freedom to choose 25% of those tracts, to qualify for the Opportunity Zone benefit.
Jack: You mentioned something about, sounds like a significant part of the New Market Tax Credit is the forgiveness of the loan. Talk about the role of debt financing with Opportunity Zone financing.
Michael: Yeah. In order for an investor who has capital gains to receive the Opportunity Zone tax benefit, their investment actually has to be made as an equity investment. And even though they might be making an equity investment into what we call a Qualified Opportunity Fund. Nonetheless, the proceeds from that equity investment still has to flow down to a Qualified Opportunity Business as equity. Certainly the QOB that the project entity, if you will, can use leverage as a source of capitalization.
It is certainly possible to twin Qualified Opportunity Zone equity with other types of incentive programs. You know, there's a little bit of certainly extra complication in doing so, within the New Market structure, really the only way that the Opportunity Zone equity can be used as equity at the project level, even though it may receive some New Market subsidize debt. So, what we call the leverage source in a New Market structure, would have to something other than Opportunity Zone equity.
Jack: So, is it fair to say that with the New Market tax credit program, it's primarily debt-focused, whereas Opportunity Zone is primarily equity-focused?
Michael: Certainly not by definition or statute because you can use the New Market program to make equity investments, but there's some additional testing requirements that go with an equity investment in the New Market program. And you know in our experience, is that typically most New Market financings get structured as a subordinated debt.
Jack: So, let's focus now exclusively on Opportunity Zones. What's the single biggest challenge that you're currently seeing out there when putting together an OZ Program?
Michael: There's a couple of big challenges. Certainly the biggest challenge I think facing fund managers who aspire to create multi-asset funds, and offer a diversification strategy to investors, is that there's too many unanswered questions in the current guidelines that make it really feasible for that to be an effective vehicle to raise and deploy Opportunity Zone equity.
And then moving over to what's currently a functioning methodology, which is what we call the single-asset, single-fund strategy. You know, I think one of the challenges that structure is facing is kind of an educational structure or problem with respect to educating investors and how to look at these investments because these investments are designed to be by their nature 10-plus year hold position. So you might have some period of development risk that would really kind of, ultimately mature into a holding a mature assets, for a period of time.
And investors don't really have the, the field of vision yet or the experience to compare different options, whether their frame of reference really becomes maybe what they would see in a typical real estate private placement that's designed to offer fairly solid returns for taking development and startup risks, but a relatively early exit strategy saying, when an asset stabilizes and somewhere between three and five years and it's really kind of comparing apples and oranges. So I think what we're finding is that in order to get traction with investors, there's a little bit of extra education that has to happen to help give them a, maybe a slightly different framework through which to evaluate an Opportunity Zone investment.
Jack: I have two questions as follow-up. One is, I just want your opinion on something. As I've looked at this program it has occurred to me, that almost probably not intentionally, but certainly a very explicit result of the structure of the Opportunity Zone program is it's going to appeal more to a younger investor simply because the exit is no less than 10 years out. Is that an accurate view?
Michael: You know, I think it appeals broadly? I don't know that it necessarily is materially more appealing to a younger investor because some of the older investors that we're talking to have interest in it because they're thinking about maybe the next generation and they're not really focusing on their need for that, for that investment to become liquid in a time that's 10 years or less. So I think we're, seeing a good spectrum of investors from an age perspective.
Jack: Okay. I've got another question going back to the regulations of the Opportunity Zone in particular. I'm wondering if you have an opinion about which part is currently unclear, Treasury would clarify.
Michael: Yeah. I think one of the things that I think would be important to clarify from a, especially from a real estate perspective is the parameters in which a debt finance distribution would be permitted. So, a lot of questions that we're getting are, “Well in 2026 when my deferred capital gain is, will the project be able to make a distribution to me that will help me pay my deferred tax?” And in certainly the first round of guidance, actually had some parenthetical notes that said this guidance is not intended to disrupt the normal business activities or methodologies within investing and certainly within the world of real estate investing an accepted practice is build it, stabilize it, create some value, get a new appraisal and then do a debt finance distribution, leverage it back up and then distribute cash to investors. And there's a concern right now that if you did that under the current situation, there's a risk that that distribution could be construed as returning equity to the investors nullifying their OZ benefits. So we're looking for specific rather than in absence of saying you can't do it, we're looking for the presence of saying you can do it.
Jack: What surprised you the most? We're almost a year-and-a-half since, since this became law. What surprised you most about the Opportunity Zone Program?
Michael: You know, I think one of the things that's kind of on the disappointing side is that, just the lack of guidance, presently, relating to operating businesses. Everything that's come out so far has been really skewed toward, you know, creating fairly recognizable guard rails around real estate investing. And there are just a lot of open questions about how it works for an operating company and in the legislation was probably intended more for operating companies, as a job generator in these areas. Then real estate investments. So, I'm a little surprised and disappointed that that wasn't better laid out.
Jack: Yeah, I've wondered about the New Market tax credit and the reporting requirements and the accountability that it drives. It occurred to me that it would be very, very useful, at least from a societal standpoint for somebody to step in and provide that kind of reporting and if not legal, at least social accountability. I don't know if you want to comment about that or not. Just one of those thoughts in my head.
Michael: I think it's a point well taken, right? Because when the government offers any kind of any form of tax incentive, we're, essentially permitting some portion of the population to pay less taxes than they otherwise would have. And, so that is a use of government funds. Then the question become the return on that investment, right? So if we look at that as the government foregoing some tax revenue, it's another way to say it is they've invested in something.
And so, you know, what is the societal return on that foregone tax revenue certainly in the New Market tax program has a way of measuring it and reporting on it. Now, I think from a practical implication standpoint and maybe one reason why that element of accountability didn't find its way into the Opportunity Zone legislation is that maybe it felt like it would be hard to get traction from investors and developers in the program, had that level of sort of reporting and accountability been really framed into the program.
Jack: Oh sure.
Michael: Yeah. And, and maybe the thought process was capital investment in these areas is needed, period. There will be some good things happening because of it, but the problem is there could be some unintended consequences as well. And then that's where I think the local communities have to step in because if the development is trending in a direction in these areas that's counterproductive to the community and you know, by displacement rather than creating things that are desired by the committee, then I think the community, I think they have two options. You know, one would be to maybe not approve certain types of development are not consistent with their development goals and also conversely to offer additional incentives in those areas to drive the kind of development that's consistent with our community plans. So I think that, I think there's a local accountability level that can come into play here that didn't have to be legislated.
Jack: I would amend one of your comments. There might be unintended consequences. I think there will be unintended consequences.
Michael: You know, like they say, beauty's in the eye of the beholder and abusive behaviors a little bit in the eye of the beholder, right? So, you know, there are what we call accidental Opportunity Zones, these are areas that qualify for the Opportunity Zone benefit where you, if you went to the, to that area, you'd look around and say, “I have no idea why this is an Opportunity Zone.” And it's, it's an anomaly of data is what it really comes down to. And, but the thing is, you know, that's practical to manage for things that are on the margin, right? So these accidental Opportunity Zone probably represent, it's gotta be, I would bet less than 5% of the eligible Opportunities Zones. And so people are going to capitalize on it. You know, it's kind of like it's they're lucky day. But at the same time, I don't think that makes it what's potentially a good program, a bad program.
Jack: What questions should an investor be asking, prior to putting his money into a Qualified Opportunity Zone Fund?
Michael: I think there's two ways to come at that. One would be, if an investor is looking at what I call a blind fund, where they know there's a manager that's identified, there's a strategy that's identified, but there aren't any specific examples of investments that are ready right now. I'd be concerned about that because, multi-fund assets, barring future guidance that maybe changes my opinion on this, as of today, there's a lot of complexity in the execution on the frontend and on the backend of multi-asset funds.
And while it sounds good because we all believe in diversification and how we invest, but every single asset that we invest in doesn't have to be a diversified asset. What we really should have is we should look at the totality of our assets and make sure in the totality that they're diverse. And so, my first advice is an Opportunity Zone investment is just like any other investment. It just has a tax advantage to it. Okay.
So, first and foremost, make sure that the asset class that you're investing in fits with your overall diversification strategy and just recognize that it just has a tax benefit, but when specifically looking to invest in a fund, there's this whole timing issue. So certainly the investor is in control of their 180-day gain period and making sure they make an investment into a QOF within 180-days. However, when investing in a multi -asset fund, with the intent of getting diversification, the risk is that that fund has 180-days from the date it receives capital to deploy 90% of it into projects.
So the question is, how many projects does that fund have right now that it can actually deploy money into and do the projects receiving the money have a plan to use that money within 31 months. So the projects have 31 months of working capital, safe harbor to deploy the funds into project costs.
And the QOF has six months to deploy at least 90% of its proceeds into projects. And so the thing is, is if during that 180-day period when that fund has my money, if they only have one project, I'm not getting diversification. I'm getting one project and they have to separately. So I'd want to understand how many projects are going to be invested in during my 180 days so that I get the diversification that I'm bargaining for and show me that you've got the tracking and reporting mechanisms internally to ensure that my money is actually being traced into specific projects so that my money is meeting the 90 or 180 at a test for 90% within the fund and that those projects are going to meet the 31-month test once they receive the funds.
So, that's where I say there's a lot of complication around the execution of a multi-asset fund. Now if you're looking at a single-asset, single-fund structure, the project is identified. I'd want to know, you know, then I'd want to just evaluate the project, the way to evaluate any other project economically. But then from a compliance standpoint, you know, is it shovel ready? Is there a plan to use my funds within 31 months? Much more straightforward type of an analysis to make sure that your funds are going to be in a compliance situation. And then on the backend, the liquidation side of this on a multi- asset fund, the investors step up in basis to essentially eradicate the gains on their Opportunity Zone investment. It happens at the fund level.
Jack: That was my question. Yeah.
Michael: Yeah. So, imagine if you will on the backend, you get your 10 years or more down the road and you're in a fund that maybe your funds went into assets A, B and C of this fund. And what's important to you is that the assets that you can trace your funds to, those assets are all liquidated in the same tax year so that you can get a distribution and then you can dispose of your interest in the fund and get the step up in basis and get what you bargained for, which was tax free gains.
The problem is that diversified basket of assets can't be sold in the same tax year to maximize value, then there will be taxable gains passed to the investor until they dispose of their interest in the fund. So that really puts a fund manager in a corner where they have to maybe liquidate all of the assets to relate to each specific investor, holdings in the same tax year and essentially except the fact that they can't optimize the value of each asset.
Jack: I'll tell you. I have been trying to wrap my head around that end of it since I first started studying Opportunity Zones. Your explanation is the first time I've actually gotten it. So, thank you. That really helped. My follow up question, you may have just answered it. From your perspective, what kinds of deals right now are making the most sense in QOZ investing. not just in theory but in practice. I realize we don't have a whole lot practice right now currently making the most sense.
Michael: Yeah, I mean certainly what's getting traction with investors are multifamily, kind of middle of the fairway development risk in these so-called accidental Opportunity Zones. I mean by far and away the deals that are getting funded kind of fall into that category. Certainly, I hear of funds claiming that they raised money. I think what they have are soft commitments pending actual projects that they can show investors. I'm not aware of multi-fund projects, actually deploying capital across a broad spectrum of assets to create a diversification. So I think what's really happening right now, a couple of things. One is there are a number of developments that were happening regardless of the Opportunity Zone legislation. And you know, one morning those developers woke up and realized that lo and behold, we're in an Opportunity Zone and they called their attorney or their tax firm and said, "Hey, what can we do to take advantage of this?" And so they made some pivots and what they were doing and a little bit of a windfall, right time, right place. And then there were some other projects that are happening right now, one that we're actually working on that's in an accidental Opportunities Zone. And, you know, they were in the development stage and other shovel ready and it's ready to go. So I think those are the ones that are really getting traction right now.
Jack: There's a couple of phrases that I know have, at least to Treasury have a specific meeting. And I'd like you to talk about those. First of all, what is a “substantial improvement?”
Michael: Yeah, so “substantial improvement”. We did get some guidance on that back in October. And again, the guidance was really more real estate oriented. So you know, I don't know how to apply that definition yet to an operating company, but with respect to a real estate company, eligible assets, for Opportunity Zone treatment are assets that are acquired after January 1, 2018. And so if a developer were to acquire a land, property, in an Opportunity Zone, it has to meet the substantial improvement test. And the way that this works is you would look at the acquisition of the existing property.
And, and like in all cases, when you acquire property, you have to allocate your purchase price between land and improvements. Okay? And you have to do that in a way that's defensible and rational. So you, so let's say you acquire a property for $10 million and you have an appraisal that tells you to allocate or made a tax bill or an appraisal or some rational basis, say the land basis is $2 million.
So I have $8 million of improvements. Now, in order for this project to qualify for Opportunity Zone benefits, I have to double the basis of the improvements. So in this case, I would have to invest another $8 million of improvements into this property, so I'd really have to be acquiring this $10 million property with a point of view that I'm going to have $18 million of capital invested in it, and then I'm going to have a business model that's going to generate an economic return for $18 million of investment. And then at that point, the whole $18 million costs would qualify for the OZ benefit.
Jack: Okay, the second phrase I've seen is "acquired by purchase" and the reason this one hit me was, I've asked this question a couple of times, and I'm still not a hundred percent clear on the answer. Suppose I own a property prior to December 31st, 2017 and I wake up on January 1st, 2018 and find out that it's inside an Opportunity Zone. How do I take advantage of the Opportunity Zone program to turn that into a tax benefit?
Michael: Sure. There's two ways that you can make that happen. First of all, you have to have some intent to meet the substantial improvement tests. There has to be some activity on it. It just can't, you know, with the flip of a switch become an Opportunity Zone benefit. So for example, let's say you're a developer that you acquired land five years ago and over that five year period, maybe remediated some Brownfield issues, you've maybe gotten the zoning changed, you've been working on plans, and then all of a sudden you realize you're in an Opportunity Zone and you've held this property, owned this property before 2018 in order to then go forward with your development in a way that, yourself and your investors could get Opportunity Zone benefits. One method would be to sell this land into a new CO and, and have a new CO acquire the land.
So now, now it's acquired property after 1/1/18. Um, the caveat there, you still have to meet the substantial improvement tests. So, maybe that's pretty straight forward. But the other caveat is, as the previous owner of the property, can only have up to, or I have to have less than a 20% ownership interest in the equity of the new entity.
So I'm required essentially to bring in outside capital to dilute myself to under 20% in order for the OZ benefits to work. The other way that that could be structured, rather than an outright sale into a new entity is you could have the new entity ground lease it from the existing entity, now the land basis wouldn't count for OZ benefits, but all of the, improvements that are financed by the new entity would count for OZ benefits.
Jack: Okay. Talk real quickly if you would about a 1031 exchange.
Michael: Yeah. Two great vehicles for deferring taxes. So certainly, you know, with the 1031, you know, there's pros and cons. On the 1031, it only applies to real estate, whereas, an Opportunity Zone, it applies to anything that you would report as a capital gain on your tax return.
So it could apply to marketable securities in your brokerage account, the sale of your business, the sale of artwork, anything that would qualify for capital gains. So there's more flexibility in terms of what can get a tax deferral. With respect to the 1031 program, if I owned a piece of land, let's say I acquired it for $10 million and I sold it for $20, in order to get 1031 treatment, I have to reinvest the whole $20 million.
And not only that, but I have to specifically trace it so the money has to go into escrow. I've got a short period of time in which to identify replacement properties and all $20 million has to go into the replacement property. So I can't really even have constructive receipt of the funds. Um, but the upside is the whole $10 million of gain is deferred indefinitely. So there's, I've not created any kind of situation where I have to pay a tax. On the Opportunity Zone side, and that same example, if I had sold land for $20 million.
I'd acquired for $10 with my $10 million gain. I have a choice. Well, I mean if my choice is if I want to take $10 million off the table so to speak, I only have to invest up to $10 million of gain. So I can put, I can take some chips off the table if I want to create. So if I'm a real estate heavy investor and I want to create diversification, maybe in, you know, this is kind of the flip side.
If I want to create diversification through marketable securities or other investments, I can take money off the table and I can at least get some kind of a deferral and discount benefit in the Opportunity Zone program where I reinvest the $10 of gain. I get it, I get a deferral on paying my capital gains tax out to 2026 and if I hold my new Opportunity Zone investment for at least five years, I get a 10% discount. And if I hold it for seven years, which means I'd have to make the investment by the end of this calendar year, I'd get a 15% discount.
So I am consciously making the decision, I'm going to pay some tax, but I'm at least getting the most advantageous way of doing that by getting a deferral in a discount. And then it gives me the flexibility to pull some money out of the real estate market and into something else, whether it's estate planning or what have you.
Um, so there are scenarios where it could make sense for a real estate investor to go with the Opportunity Zone if it fits a strategy. But typically what we'll find is most real estate investors love the idea of the permanent deferral. They do the 1031 and then you get what's called the ultimate step up in basis, you die.
At that point in time, your heirs really benefit because all of your property at that point, it gets stepped up to market and all of the gains permanently gone. So the 1031 strategy is really a strategy for the permanent eradication of gains. Um, but you're doing so knowing that in order for that wonderful thing to happen, you have to pass away.
Jack: You gotta die.
Michael: You gotta die. But with the on the Opportunity Zone side, you don't have to make that kind of commitment.
Jack: I've got one more Opportunity Zone question. I'm going to ask you a couple of personal questions too. How do you expect the Opportunity Zone regulations to change over time? And the thing I am specifically wondering about is post January 1, 2021 when the opportunity for a step up in basis as I understand is gone.
Michael: A couple of things in, in the short term, my short-term crystal ball would tell me that certain activities are going to become, clearly allowed. For example, what we mentioned the debt finance, distribution. Um, if I were a betting person, I would bet that that is in the next round of guidance that comes out that it's clear that's as long as the investor doesn't go below zero, debt finance distributions will be allowed. I think that should be a kind of a layup.
I think my suspicion is there will be guidance in the next round of that makes it probably easier and maybe even efficient for these multi-asset funds to actually get to work. Because, if these multi asset funds aren't given sort of the bandwidth within guidance to operate the way that a typical private equity fund would operate, it's going to slow down the flow of capital into these areas, and so, you know, the single asset, single funding today really is probably the safest and most efficient way to invest in Opportunity Zones, but it's not going to create what I call like an institutional flow of capital.
Jack: Right.
Michael: And if the desire is to really get an institutional flow capital going, they've got to fix some of these issues, which would be, as I mentioned, the complication on the deployment, the issues on the backend of liquidating the fund, but also even interim, the ability to divest of something during the 10 year holding period and reinvest and have good guidelines on what allows that tax benefit to stay in place. If there's a divestiture and our reinvestment and what happens to those interim gains if there's a way that those interim gains can get put into the mix and in that pass through to the investors on a current basis. So, I'm not sure if it'll happen, but I think if the goal is to get institutional flow, it has to happen.
Looking longer term, one thing, I'm on the fence on. I don't know if there's really going to be any kind of hard and fast community benefits reporting or standards put on the program. I think the horse is out of the gate a little bit on that. And in terms of where the programs and putting it train the layer that in right now would be, I think, pretty challenging.
But I also know that there are watchdogs out there who are going to be closely watching what happens in the program. What, in terms of where the flow of capital is going, what type of investments are being made? And, you know, there will be a concerted effort to ensure that whatever's happening doesn't appear to be just flatly abusive.
Jack: Right.
Michael: Certainly so from that perspective, anyone who's looking to either make an investment or raise capital for an Opportunity Zone project, my advice would be to think of what they call the Wall Street Journal Headline Test. You don't want your name on that headline. And so I would think very carefully about what investors and project developers are doing and how it could be construed and be thoughtful and that may be too cute about the strategies they're trying to employ.
Jack: Thank you, that's good stuff.
Michael: We do get a lot of questions along those lines. We talked to a lot of people who they've got very creative ideas and you know, you might look at these ideas and say, well, you know, within the context of what's written, I think you can do that. I'm not so sure you should do that. And so, you know, my advice would be for people to be cautious.
Jack: So I want to, I want to turn the discussion just a little bit into a little bit more about Michael Fitzpatrick, the man. What are you best at?
Michael: Well, gosh. I think one of the things I do pretty well, whether it's within my personal life or in my professional life, I learned a long time ago to listen and to be a very active listener. And it does well for me, whether it's with my children, my friends, my family life or my professional life. So I've heard, I really do believe and I've actually been complemented by a few of my clients where it's like nobody listens better than I do. And I and I cherish that comment because, I think it makes me better at what I do.
Jack: Alright, well let's flip it around to the other side. What drives you absolutely crazy?
Michael: Um, I have little patience for red tape and ...
Jack: Oh my lord, you’re a banker, come on!
Michael: Well, actually. I'm a recovering banker.
Jack: Ah.
Michael: Let's be clear about that. I was a banker at a time when it was quote "fun to be a banker". And even then it drove me crazy. That's why when, when I meet with my commercial bankers, I tell them, “I just could not do what you're doing right now and how you're doing it.” Because, you know, in the wake of 2008, all of the additional regulation like, oh my gosh, yeah. So no bureaucracy, red tape. And also iif people don't take ownership for their mistakes. It's okay to make a mistake. But you know, let's not skirt it. Let's not avoid it. Just own it. Move on.
Jack: Yeah.
Michael: Yeah.
Jack: Well Michael, I appreciate the time. This has been great. You've got a gift for explaining the complex in a way that allows even a dummy like me to understand it.
Michael: I'd like to say I'm a simple guy and so I've got to figure out how to explain it to myself before I explain it to anyone else.
Jack: I understand. So if folks want to get a hold of you. What's the best way for them to do that?
Michael: Sure, yeah. I mean, certainly through the Baker Tilly website, so it's just bakertilly.com Or email me direct. michael.fitzpatrick@bakertilly.com. It'd be great to talk to anyone who's interested in talking more about Opportunity Zone investing, either from the developer or investor side.
Jack: And I want to remind our listeners that as always, contact information for our guests and will be posted with podcast itself. Michael, I want to thank you for being with us. And, I hope we talk to you again.
Michael: Yeah Jack, I enjoyed it. Thank you.
Jack: Certainly. For the Opportunity Zone Expo, I'm Jack Heald. We will talk to you next time.
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Michael: Yeah, thanks Jack. Glad to be on.
Jack: So tell us a little about, a little bit about yourself. Who are you and how'd you get started in this business?
Michael: Sure I'd be happy to. You know, I've been in transaction services most of my entire career. I started out as a commercial lender focusing not exclusively, but mainly on commercial real estate. So, I've got a strong credit background in commercial real estate underwriting. I joined Baker-Tilly in 2000 and you know, that was coming at a time right around the time the tech bubble burst and we formed a wholly-owned, a broker-dealer subsidiary so that we could help clients invest in real estate because real estate was really becoming the sought-after asset class in the wake of the tech bubble burst for clients who are looking to get some non-correlated asset exposure out of this stock market.
Michael: And from there we've just really organically evolved into a project finance group that specializes in alternative sources of capital such as EB5 financing, a New Market tax credits where we're probably the leading consulting firm in that space, low-income housing tax credits and other sorts of federal and state level incented types of capital sources. So kind of complex, “niche-y” sources of capital where a lot of tax related expertise is important. And that's where we, that's what led us into the Opportunity Zone space. It's really a tax incentive that drives investment and it's really closely correlated to the New Market tax credit program.
Jack: As I did my research in preparation for this interview, I ran into that New Market tax credit term. Talk to me a little bit more about that, cause to be honest, I've never heard that term before.
Michael: Sure. Yeah. The New Market tax credit program. That was a program that was conceptualized back in the Clinton administration and was operationalized I think around 2001 or 2002. Baker-Tilly has been in that space since its inception. It's a federal tax credit, designed to give incentive for a commercial investment within what are defined as low income communities.
Those are communities with less than 80% of the area median income is less than 80% of the state median income. And in those qualified areas, the way the New Market tax credit program works is there's an intermediary called a community development entity. It's a generic term for groups that apply to the Treasury Department for what we call tax credit allocation authority. So they're really kind of a public/private partnership type of relationship between Treasury and the administration of this program.
And you know, kind of the interesting thing is that it's a little bit of a nomenclature issue in that, it's not really a tax credit per se that the project receives. It's a tax credit that the community development and the, the CDE receives and they monetize it by selling it to tax credit investors.
And then the CDE takes the cash proceeds from selling that tax credit and uses it to make a low-interest, rate-interest only loan to a qualifying project. So it's really kind of an interesting program that provides subordinated, low or inexpensive financing that typically fills a gap in the capital stack in order for a project that can't receive conventional financing to move forward within a low-income community.
Now the really interesting thing about New Market tax credits is that there are requirements for these CDEs to track community outcomes that are generated from their activity. So, for instance, job creation or, you know, the provision of goods and services that are unmet within that community that, you know, basically a CDE has to answer the question, how does this financing activity actually provide tangible benefits to the low income residents of that community?
And that information is collected, quantified, and aggregated and reported to Treasury. So there is a real important reporting requirement that goes with that program. And what that does is it creates a level of accountability so that these CDEs are truly engaging in activities that create benefit, to the areas that they serve. From the project standpoint, it's a project that generally needs this subsidized source of financing in order to move forward.
And the really big benefit of New Market tax credit is after our seven-year compliance period. That low interest rate loan they received from the CDE is actually in most cases for given into the project and doesn't require repayment. So it's a substantial financial incentive for these projects occurring within low income communities and the connection then to the new Opportunity Zone Program.
Jack: I was going to ask you to talk about that, good.
Michael: Yeah, sure. So the connectivity there is that when the Opportunities legislation came into effect at the end of 2017, it called for using the New Market Tax Credit eligible Census Tracts as the, if you will, starting place or the basis for creating Opportunities Zones. And the way the legislation was drafted was that each, the governor of each state, was instructed to designate 25% of their New Markets Census Tracts as Opportunity Zone, so it's interesting how under the New Market program, that designation of a Qualified Census Tract is strictly driven by data and Census data and, and then moving over into the Opportunity Zone space, you introduce a little bit of a political element into it that, where, the governor of each state had the freedom to choose 25% of those tracts, to qualify for the Opportunity Zone benefit.
Jack: You mentioned something about, sounds like a significant part of the New Market Tax Credit is the forgiveness of the loan. Talk about the role of debt financing with Opportunity Zone financing.
Michael: Yeah. In order for an investor who has capital gains to receive the Opportunity Zone tax benefit, their investment actually has to be made as an equity investment. And even though they might be making an equity investment into what we call a Qualified Opportunity Fund. Nonetheless, the proceeds from that equity investment still has to flow down to a Qualified Opportunity Business as equity. Certainly the QOB that the project entity, if you will, can use leverage as a source of capitalization.
It is certainly possible to twin Qualified Opportunity Zone equity with other types of incentive programs. You know, there's a little bit of certainly extra complication in doing so, within the New Market structure, really the only way that the Opportunity Zone equity can be used as equity at the project level, even though it may receive some New Market subsidize debt. So, what we call the leverage source in a New Market structure, would have to something other than Opportunity Zone equity.
Jack: So, is it fair to say that with the New Market tax credit program, it's primarily debt-focused, whereas Opportunity Zone is primarily equity-focused?
Michael: Certainly not by definition or statute because you can use the New Market program to make equity investments, but there's some additional testing requirements that go with an equity investment in the New Market program. And you know in our experience, is that typically most New Market financings get structured as a subordinated debt.
Jack: So, let's focus now exclusively on Opportunity Zones. What's the single biggest challenge that you're currently seeing out there when putting together an OZ Program?
Michael: There's a couple of big challenges. Certainly the biggest challenge I think facing fund managers who aspire to create multi-asset funds, and offer a diversification strategy to investors, is that there's too many unanswered questions in the current guidelines that make it really feasible for that to be an effective vehicle to raise and deploy Opportunity Zone equity.
And then moving over to what's currently a functioning methodology, which is what we call the single-asset, single-fund strategy. You know, I think one of the challenges that structure is facing is kind of an educational structure or problem with respect to educating investors and how to look at these investments because these investments are designed to be by their nature 10-plus year hold position. So you might have some period of development risk that would really kind of, ultimately mature into a holding a mature assets, for a period of time.
And investors don't really have the, the field of vision yet or the experience to compare different options, whether their frame of reference really becomes maybe what they would see in a typical real estate private placement that's designed to offer fairly solid returns for taking development and startup risks, but a relatively early exit strategy saying, when an asset stabilizes and somewhere between three and five years and it's really kind of comparing apples and oranges. So I think what we're finding is that in order to get traction with investors, there's a little bit of extra education that has to happen to help give them a, maybe a slightly different framework through which to evaluate an Opportunity Zone investment.
Jack: I have two questions as follow-up. One is, I just want your opinion on something. As I've looked at this program it has occurred to me, that almost probably not intentionally, but certainly a very explicit result of the structure of the Opportunity Zone program is it's going to appeal more to a younger investor simply because the exit is no less than 10 years out. Is that an accurate view?
Michael: You know, I think it appeals broadly? I don't know that it necessarily is materially more appealing to a younger investor because some of the older investors that we're talking to have interest in it because they're thinking about maybe the next generation and they're not really focusing on their need for that, for that investment to become liquid in a time that's 10 years or less. So I think we're, seeing a good spectrum of investors from an age perspective.
Jack: Okay. I've got another question going back to the regulations of the Opportunity Zone in particular. I'm wondering if you have an opinion about which part is currently unclear, Treasury would clarify.
Michael: Yeah. I think one of the things that I think would be important to clarify from a, especially from a real estate perspective is the parameters in which a debt finance distribution would be permitted. So, a lot of questions that we're getting are, “Well in 2026 when my deferred capital gain is, will the project be able to make a distribution to me that will help me pay my deferred tax?” And in certainly the first round of guidance, actually had some parenthetical notes that said this guidance is not intended to disrupt the normal business activities or methodologies within investing and certainly within the world of real estate investing an accepted practice is build it, stabilize it, create some value, get a new appraisal and then do a debt finance distribution, leverage it back up and then distribute cash to investors. And there's a concern right now that if you did that under the current situation, there's a risk that that distribution could be construed as returning equity to the investors nullifying their OZ benefits. So we're looking for specific rather than in absence of saying you can't do it, we're looking for the presence of saying you can do it.
Jack: What surprised you the most? We're almost a year-and-a-half since, since this became law. What surprised you most about the Opportunity Zone Program?
Michael: You know, I think one of the things that's kind of on the disappointing side is that, just the lack of guidance, presently, relating to operating businesses. Everything that's come out so far has been really skewed toward, you know, creating fairly recognizable guard rails around real estate investing. And there are just a lot of open questions about how it works for an operating company and in the legislation was probably intended more for operating companies, as a job generator in these areas. Then real estate investments. So, I'm a little surprised and disappointed that that wasn't better laid out.
Jack: Yeah, I've wondered about the New Market tax credit and the reporting requirements and the accountability that it drives. It occurred to me that it would be very, very useful, at least from a societal standpoint for somebody to step in and provide that kind of reporting and if not legal, at least social accountability. I don't know if you want to comment about that or not. Just one of those thoughts in my head.
Michael: I think it's a point well taken, right? Because when the government offers any kind of any form of tax incentive, we're, essentially permitting some portion of the population to pay less taxes than they otherwise would have. And, so that is a use of government funds. Then the question become the return on that investment, right? So if we look at that as the government foregoing some tax revenue, it's another way to say it is they've invested in something.
And so, you know, what is the societal return on that foregone tax revenue certainly in the New Market tax program has a way of measuring it and reporting on it. Now, I think from a practical implication standpoint and maybe one reason why that element of accountability didn't find its way into the Opportunity Zone legislation is that maybe it felt like it would be hard to get traction from investors and developers in the program, had that level of sort of reporting and accountability been really framed into the program.
Jack: Oh sure.
Michael: Yeah. And, and maybe the thought process was capital investment in these areas is needed, period. There will be some good things happening because of it, but the problem is there could be some unintended consequences as well. And then that's where I think the local communities have to step in because if the development is trending in a direction in these areas that's counterproductive to the community and you know, by displacement rather than creating things that are desired by the committee, then I think the community, I think they have two options. You know, one would be to maybe not approve certain types of development are not consistent with their development goals and also conversely to offer additional incentives in those areas to drive the kind of development that's consistent with our community plans. So I think that, I think there's a local accountability level that can come into play here that didn't have to be legislated.
Jack: I would amend one of your comments. There might be unintended consequences. I think there will be unintended consequences.
Michael: You know, like they say, beauty's in the eye of the beholder and abusive behaviors a little bit in the eye of the beholder, right? So, you know, there are what we call accidental Opportunity Zones, these are areas that qualify for the Opportunity Zone benefit where you, if you went to the, to that area, you'd look around and say, “I have no idea why this is an Opportunity Zone.” And it's, it's an anomaly of data is what it really comes down to. And, but the thing is, you know, that's practical to manage for things that are on the margin, right? So these accidental Opportunity Zone probably represent, it's gotta be, I would bet less than 5% of the eligible Opportunities Zones. And so people are going to capitalize on it. You know, it's kind of like it's they're lucky day. But at the same time, I don't think that makes it what's potentially a good program, a bad program.
Jack: What questions should an investor be asking, prior to putting his money into a Qualified Opportunity Zone Fund?
Michael: I think there's two ways to come at that. One would be, if an investor is looking at what I call a blind fund, where they know there's a manager that's identified, there's a strategy that's identified, but there aren't any specific examples of investments that are ready right now. I'd be concerned about that because, multi-fund assets, barring future guidance that maybe changes my opinion on this, as of today, there's a lot of complexity in the execution on the frontend and on the backend of multi-asset funds.
And while it sounds good because we all believe in diversification and how we invest, but every single asset that we invest in doesn't have to be a diversified asset. What we really should have is we should look at the totality of our assets and make sure in the totality that they're diverse. And so, my first advice is an Opportunity Zone investment is just like any other investment. It just has a tax advantage to it. Okay.
So, first and foremost, make sure that the asset class that you're investing in fits with your overall diversification strategy and just recognize that it just has a tax benefit, but when specifically looking to invest in a fund, there's this whole timing issue. So certainly the investor is in control of their 180-day gain period and making sure they make an investment into a QOF within 180-days. However, when investing in a multi -asset fund, with the intent of getting diversification, the risk is that that fund has 180-days from the date it receives capital to deploy 90% of it into projects.
So the question is, how many projects does that fund have right now that it can actually deploy money into and do the projects receiving the money have a plan to use that money within 31 months. So the projects have 31 months of working capital, safe harbor to deploy the funds into project costs.
And the QOF has six months to deploy at least 90% of its proceeds into projects. And so the thing is, is if during that 180-day period when that fund has my money, if they only have one project, I'm not getting diversification. I'm getting one project and they have to separately. So I'd want to understand how many projects are going to be invested in during my 180 days so that I get the diversification that I'm bargaining for and show me that you've got the tracking and reporting mechanisms internally to ensure that my money is actually being traced into specific projects so that my money is meeting the 90 or 180 at a test for 90% within the fund and that those projects are going to meet the 31-month test once they receive the funds.
So, that's where I say there's a lot of complication around the execution of a multi-asset fund. Now if you're looking at a single-asset, single-fund structure, the project is identified. I'd want to know, you know, then I'd want to just evaluate the project, the way to evaluate any other project economically. But then from a compliance standpoint, you know, is it shovel ready? Is there a plan to use my funds within 31 months? Much more straightforward type of an analysis to make sure that your funds are going to be in a compliance situation. And then on the backend, the liquidation side of this on a multi- asset fund, the investors step up in basis to essentially eradicate the gains on their Opportunity Zone investment. It happens at the fund level.
Jack: That was my question. Yeah.
Michael: Yeah. So, imagine if you will on the backend, you get your 10 years or more down the road and you're in a fund that maybe your funds went into assets A, B and C of this fund. And what's important to you is that the assets that you can trace your funds to, those assets are all liquidated in the same tax year so that you can get a distribution and then you can dispose of your interest in the fund and get the step up in basis and get what you bargained for, which was tax free gains.
The problem is that diversified basket of assets can't be sold in the same tax year to maximize value, then there will be taxable gains passed to the investor until they dispose of their interest in the fund. So that really puts a fund manager in a corner where they have to maybe liquidate all of the assets to relate to each specific investor, holdings in the same tax year and essentially except the fact that they can't optimize the value of each asset.
Jack: I'll tell you. I have been trying to wrap my head around that end of it since I first started studying Opportunity Zones. Your explanation is the first time I've actually gotten it. So, thank you. That really helped. My follow up question, you may have just answered it. From your perspective, what kinds of deals right now are making the most sense in QOZ investing. not just in theory but in practice. I realize we don't have a whole lot practice right now currently making the most sense.
Michael: Yeah, I mean certainly what's getting traction with investors are multifamily, kind of middle of the fairway development risk in these so-called accidental Opportunity Zones. I mean by far and away the deals that are getting funded kind of fall into that category. Certainly, I hear of funds claiming that they raised money. I think what they have are soft commitments pending actual projects that they can show investors. I'm not aware of multi-fund projects, actually deploying capital across a broad spectrum of assets to create a diversification. So I think what's really happening right now, a couple of things. One is there are a number of developments that were happening regardless of the Opportunity Zone legislation. And you know, one morning those developers woke up and realized that lo and behold, we're in an Opportunity Zone and they called their attorney or their tax firm and said, "Hey, what can we do to take advantage of this?" And so they made some pivots and what they were doing and a little bit of a windfall, right time, right place. And then there were some other projects that are happening right now, one that we're actually working on that's in an accidental Opportunities Zone. And, you know, they were in the development stage and other shovel ready and it's ready to go. So I think those are the ones that are really getting traction right now.
Jack: There's a couple of phrases that I know have, at least to Treasury have a specific meeting. And I'd like you to talk about those. First of all, what is a “substantial improvement?”
Michael: Yeah, so “substantial improvement”. We did get some guidance on that back in October. And again, the guidance was really more real estate oriented. So you know, I don't know how to apply that definition yet to an operating company, but with respect to a real estate company, eligible assets, for Opportunity Zone treatment are assets that are acquired after January 1, 2018. And so if a developer were to acquire a land, property, in an Opportunity Zone, it has to meet the substantial improvement test. And the way that this works is you would look at the acquisition of the existing property.
And, and like in all cases, when you acquire property, you have to allocate your purchase price between land and improvements. Okay? And you have to do that in a way that's defensible and rational. So you, so let's say you acquire a property for $10 million and you have an appraisal that tells you to allocate or made a tax bill or an appraisal or some rational basis, say the land basis is $2 million.
So I have $8 million of improvements. Now, in order for this project to qualify for Opportunity Zone benefits, I have to double the basis of the improvements. So in this case, I would have to invest another $8 million of improvements into this property, so I'd really have to be acquiring this $10 million property with a point of view that I'm going to have $18 million of capital invested in it, and then I'm going to have a business model that's going to generate an economic return for $18 million of investment. And then at that point, the whole $18 million costs would qualify for the OZ benefit.
Jack: Okay, the second phrase I've seen is "acquired by purchase" and the reason this one hit me was, I've asked this question a couple of times, and I'm still not a hundred percent clear on the answer. Suppose I own a property prior to December 31st, 2017 and I wake up on January 1st, 2018 and find out that it's inside an Opportunity Zone. How do I take advantage of the Opportunity Zone program to turn that into a tax benefit?
Michael: Sure. There's two ways that you can make that happen. First of all, you have to have some intent to meet the substantial improvement tests. There has to be some activity on it. It just can't, you know, with the flip of a switch become an Opportunity Zone benefit. So for example, let's say you're a developer that you acquired land five years ago and over that five year period, maybe remediated some Brownfield issues, you've maybe gotten the zoning changed, you've been working on plans, and then all of a sudden you realize you're in an Opportunity Zone and you've held this property, owned this property before 2018 in order to then go forward with your development in a way that, yourself and your investors could get Opportunity Zone benefits. One method would be to sell this land into a new CO and, and have a new CO acquire the land.
So now, now it's acquired property after 1/1/18. Um, the caveat there, you still have to meet the substantial improvement tests. So, maybe that's pretty straight forward. But the other caveat is, as the previous owner of the property, can only have up to, or I have to have less than a 20% ownership interest in the equity of the new entity.
So I'm required essentially to bring in outside capital to dilute myself to under 20% in order for the OZ benefits to work. The other way that that could be structured, rather than an outright sale into a new entity is you could have the new entity ground lease it from the existing entity, now the land basis wouldn't count for OZ benefits, but all of the, improvements that are financed by the new entity would count for OZ benefits.
Jack: Okay. Talk real quickly if you would about a 1031 exchange.
Michael: Yeah. Two great vehicles for deferring taxes. So certainly, you know, with the 1031, you know, there's pros and cons. On the 1031, it only applies to real estate, whereas, an Opportunity Zone, it applies to anything that you would report as a capital gain on your tax return.
So it could apply to marketable securities in your brokerage account, the sale of your business, the sale of artwork, anything that would qualify for capital gains. So there's more flexibility in terms of what can get a tax deferral. With respect to the 1031 program, if I owned a piece of land, let's say I acquired it for $10 million and I sold it for $20, in order to get 1031 treatment, I have to reinvest the whole $20 million.
And not only that, but I have to specifically trace it so the money has to go into escrow. I've got a short period of time in which to identify replacement properties and all $20 million has to go into the replacement property. So I can't really even have constructive receipt of the funds. Um, but the upside is the whole $10 million of gain is deferred indefinitely. So there's, I've not created any kind of situation where I have to pay a tax. On the Opportunity Zone side, and that same example, if I had sold land for $20 million.
I'd acquired for $10 with my $10 million gain. I have a choice. Well, I mean if my choice is if I want to take $10 million off the table so to speak, I only have to invest up to $10 million of gain. So I can put, I can take some chips off the table if I want to create. So if I'm a real estate heavy investor and I want to create diversification, maybe in, you know, this is kind of the flip side.
If I want to create diversification through marketable securities or other investments, I can take money off the table and I can at least get some kind of a deferral and discount benefit in the Opportunity Zone program where I reinvest the $10 of gain. I get it, I get a deferral on paying my capital gains tax out to 2026 and if I hold my new Opportunity Zone investment for at least five years, I get a 10% discount. And if I hold it for seven years, which means I'd have to make the investment by the end of this calendar year, I'd get a 15% discount.
So I am consciously making the decision, I'm going to pay some tax, but I'm at least getting the most advantageous way of doing that by getting a deferral in a discount. And then it gives me the flexibility to pull some money out of the real estate market and into something else, whether it's estate planning or what have you.
Um, so there are scenarios where it could make sense for a real estate investor to go with the Opportunity Zone if it fits a strategy. But typically what we'll find is most real estate investors love the idea of the permanent deferral. They do the 1031 and then you get what's called the ultimate step up in basis, you die.
At that point in time, your heirs really benefit because all of your property at that point, it gets stepped up to market and all of the gains permanently gone. So the 1031 strategy is really a strategy for the permanent eradication of gains. Um, but you're doing so knowing that in order for that wonderful thing to happen, you have to pass away.
Jack: You gotta die.
Michael: You gotta die. But with the on the Opportunity Zone side, you don't have to make that kind of commitment.
Jack: I've got one more Opportunity Zone question. I'm going to ask you a couple of personal questions too. How do you expect the Opportunity Zone regulations to change over time? And the thing I am specifically wondering about is post January 1, 2021 when the opportunity for a step up in basis as I understand is gone.
Michael: A couple of things in, in the short term, my short-term crystal ball would tell me that certain activities are going to become, clearly allowed. For example, what we mentioned the debt finance, distribution. Um, if I were a betting person, I would bet that that is in the next round of guidance that comes out that it's clear that's as long as the investor doesn't go below zero, debt finance distributions will be allowed. I think that should be a kind of a layup.
I think my suspicion is there will be guidance in the next round of that makes it probably easier and maybe even efficient for these multi-asset funds to actually get to work. Because, if these multi asset funds aren't given sort of the bandwidth within guidance to operate the way that a typical private equity fund would operate, it's going to slow down the flow of capital into these areas, and so, you know, the single asset, single funding today really is probably the safest and most efficient way to invest in Opportunity Zones, but it's not going to create what I call like an institutional flow of capital.
Jack: Right.
Michael: And if the desire is to really get an institutional flow capital going, they've got to fix some of these issues, which would be, as I mentioned, the complication on the deployment, the issues on the backend of liquidating the fund, but also even interim, the ability to divest of something during the 10 year holding period and reinvest and have good guidelines on what allows that tax benefit to stay in place. If there's a divestiture and our reinvestment and what happens to those interim gains if there's a way that those interim gains can get put into the mix and in that pass through to the investors on a current basis. So, I'm not sure if it'll happen, but I think if the goal is to get institutional flow, it has to happen.
Looking longer term, one thing, I'm on the fence on. I don't know if there's really going to be any kind of hard and fast community benefits reporting or standards put on the program. I think the horse is out of the gate a little bit on that. And in terms of where the programs and putting it train the layer that in right now would be, I think, pretty challenging.
But I also know that there are watchdogs out there who are going to be closely watching what happens in the program. What, in terms of where the flow of capital is going, what type of investments are being made? And, you know, there will be a concerted effort to ensure that whatever's happening doesn't appear to be just flatly abusive.
Jack: Right.
Michael: Certainly so from that perspective, anyone who's looking to either make an investment or raise capital for an Opportunity Zone project, my advice would be to think of what they call the Wall Street Journal Headline Test. You don't want your name on that headline. And so I would think very carefully about what investors and project developers are doing and how it could be construed and be thoughtful and that may be too cute about the strategies they're trying to employ.
Jack: Thank you, that's good stuff.
Michael: We do get a lot of questions along those lines. We talked to a lot of people who they've got very creative ideas and you know, you might look at these ideas and say, well, you know, within the context of what's written, I think you can do that. I'm not so sure you should do that. And so, you know, my advice would be for people to be cautious.
Jack: So I want to, I want to turn the discussion just a little bit into a little bit more about Michael Fitzpatrick, the man. What are you best at?
Michael: Well, gosh. I think one of the things I do pretty well, whether it's within my personal life or in my professional life, I learned a long time ago to listen and to be a very active listener. And it does well for me, whether it's with my children, my friends, my family life or my professional life. So I've heard, I really do believe and I've actually been complemented by a few of my clients where it's like nobody listens better than I do. And I and I cherish that comment because, I think it makes me better at what I do.
Jack: Alright, well let's flip it around to the other side. What drives you absolutely crazy?
Michael: Um, I have little patience for red tape and ...
Jack: Oh my lord, you’re a banker, come on!
Michael: Well, actually. I'm a recovering banker.
Jack: Ah.
Michael: Let's be clear about that. I was a banker at a time when it was quote "fun to be a banker". And even then it drove me crazy. That's why when, when I meet with my commercial bankers, I tell them, “I just could not do what you're doing right now and how you're doing it.” Because, you know, in the wake of 2008, all of the additional regulation like, oh my gosh, yeah. So no bureaucracy, red tape. And also iif people don't take ownership for their mistakes. It's okay to make a mistake. But you know, let's not skirt it. Let's not avoid it. Just own it. Move on.
Jack: Yeah.
Michael: Yeah.
Jack: Well Michael, I appreciate the time. This has been great. You've got a gift for explaining the complex in a way that allows even a dummy like me to understand it.
Michael: I'd like to say I'm a simple guy and so I've got to figure out how to explain it to myself before I explain it to anyone else.
Jack: I understand. So if folks want to get a hold of you. What's the best way for them to do that?
Michael: Sure, yeah. I mean, certainly through the Baker Tilly website, so it's just bakertilly.com Or email me direct. michael.fitzpatrick@bakertilly.com. It'd be great to talk to anyone who's interested in talking more about Opportunity Zone investing, either from the developer or investor side.
Jack: And I want to remind our listeners that as always, contact information for our guests and will be posted with podcast itself. Michael, I want to thank you for being with us. And, I hope we talk to you again.
Michael: Yeah Jack, I enjoyed it. Thank you.
Jack: Certainly. For the Opportunity Zone Expo, I'm Jack Heald. We will talk to you next time.
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