Tim:0:22This is my favorite outcome is when the facts become the solution versus the issue. And that means you've properly vetted the facts. You've asked all the right questions, and maybe you found an element of the facts that weren't front of mind, even for those that are providing you with the facts.
Announcer:0:43Welcome to The OZExpo Podcast where we talk with the people who really know the Opportunity Zone market. From investors, fund managers and developers to tax experts, politicians and attorneys. The most influential voices in the Opportunity Zone industry are here on The OZExpo Podcast.
:1:02All right, welcome back everybody to the OZExpo podcast. I'm your host Jack Heald, and I'm joined today by Tim Trifilo, who's a partner with CohnReznick. Welcome, Tim. Thanks for joining us today.
Tim:1:16I appreciate you having me on the podcast this morning, Jack. Looking forward to it.
:1:21So tell us a little bit about yourself to start with, who are you and how did you get started?
Tim:1:29I'm Tim Trifilo. I'm a national real estate tax leader at CohnReznick. I've had a long career in public accounting focused mainly on tax issues for real estate, private equity and cross border investors. I´ve been working on the Opportunity Zone program most recently along with many of the other impacts that the Tax Cuts and Jobs Act had on the commercial real estate industry. And this opportunity to work on the Opportunity Zone program, or incentives I think is the best way to capture the notion of the overall opportunities zone incentive program, has come to me and piqued my interest in a number of different ways. One, our firm has traditionally done event work with community development type investors and developers and those are different types of tax incentives over time, like low income housing tax credits, new markets, tax credits, historic tax credits, et cetera. And this Opportunity Zone incentive, not only being part of the Tax Cuts and Jobs Act program overall tax bill not program, really kind of brought together, the opportunity for me to blend my experience with, broadly speaking, real estate investors with impact or community development or responsible type investing, which is an item that's front of mind for a lot of different reasons.
Jack:3:11Let's talk about that a little bit, responsible investing. I know the Opportunity Zone portion of the TCJA is, at least it appears, the intent is to spur development, job growth, economic growth in traditionally low income areas. We're not terribly far into it. What, less than a year and a half into it. What are you seeing in terms of the actual impact from the TCJA and the Opportunity Zone in particular as regards responsible investing? You seen any positive developments or for that matter, negative developments?
Tim:3:50Yeah, I am. I think that the timing of this incentive is perfect in the sense that some of the trends that are a little bit atypical from the norm when we look at the investor to developer or an investor to value creator matching, we have seen a lot of, I'll give you an example from a silicon valley and the tech where there's a lot of angel investors and younger folks that are, that are experiencing large capital gains and cash inflows from IPOs for you name it sort of tech companies or some of the, you know, the Uber's of the world and things like that where, younger folks are coming into some significant wealth and those folks I have more front of mind to do.
Tim:4:48Were referring to this as responsible or social impact investing, more as part of their thought process and DNA , then the traditional investors in real estate may have had, not in large part, but I mean in terms of a significant amount of capital with renovation and with reinvigorating and with giving back as somewhat front of mind mantras for a number of these people´. On the other hand, larger scale private investors maybe first, second and third generation may have the same sort of thought process as front of mind.
Tim:5:31And if you think through some of the things that have happened in Brooklyn, in New York and Washington DC where the younger people are moving into neighborhoods that might not have been appealing or attractive in the past for economic reasons, but also the whole idea of bringing back small businesses and people returning to doing things, like craft brewing and whiskey. And you know, you could even use the example of being a glass blower could be kind of a cool thing today versus 20 years ago.
Tim:6:10No one would really even think of doing that unless it was really an outlier or maybe as part of your family. So, I use that just as a hypothetical example, but then you combine that with the notion of organic farm to table. All of those kinds of things are returned to somewhat of a grassroots type concept and this program hits right on top of all of that. So, I think that's one thing, a number of things to think about on the private side, on the institutional side, also doing socially responsible investing has become a mandate for a number of pension fund and other institutional investors as part of their overall allocation. So, all of those things I think line up perfectly in terms of the timing of this Opportunity Zone incentive program, which in addition has multiple tax benefits, which most of the listeners are probably aware of at this point.
Jack:7:13Let's talk about the institutional investing side. And the reason I'm asking is because frankly, I'm really ignorant about that and I'm curious, I just want to understand the requirement that an investor hold this, hold this investment for five, seven or 10 years in order to get the full impact from, from the, tax deferral, the step up in basis. Is that a negative for an institutional investor? Do you, are you, are you getting any resistance as a result of those particular parts of it?
Tim:7:49Sure. I think it really depends because I take the point and I agree with the point that a traditional, let's just say an institutional investor profile that may be more private equity centric and then leaving aside the Opportunity Zone incentive program that they may be more inclined to do three, five, seven year investing, which would be more of a traditional private equity kind of model to maximize returns for an institution. Maybe that be his insurance company or something along those lines. Institution in this context, I think what we're seeing the movement would be into the foundations for example that have missions that might align with the Opportunity Zone incentive.
Tim:8:42One of the groups that I've seen talk about in a few different venues recently would be Kresge, the Kresge Foundation. Ultimately coming out of high net worth family. But Foundation's mission aligns really well with the Opportunity Zone incentive and they are happen to be based in Detroit, which has a large portion of Opportunity Zone. It's hard to say Opportunity Zone without using the word opportunity in most different ways it comes up.
:9:17I deal with that a lot.
Tim:9:19Yeah, it's true. It's funny. It makes you realize how much you really use the word opportunity outside of this realm. But that that's the type of institution I think that may be more inclined to have patient capital. To your point, because if you, if you're looking at a traditional fund, I think that is one of the pressure points and one of the reasons why we find ourselves in somewhat of a inefficient market still with that 10 year holding period being longer than the norm and a decision variable that a lot of investors are simply just not used to yet.
Jack:9:57Right. That's the right word. Um, you know, when I was first looking at the program, it was the very first thing that struck me was, oh boy, this capital is tied up for 10 years. That's,
:10:12that´s going to change the profile. And the reasons are obvious. But you know, I wanted to hear an expert's opinion of it. As I was researching you, I stumbled across a quote from you that said, you said that the TCJA is the most significant tax reform since the 86 tax reform bill. You know, I'm old enough to remember that. I'd like to hear your thoughts on that. Why, why is this the most significant?
Tim:10:43If you look at it in totality, and I've been focused primarily on the real estate commercial real estate and or other tax incentive programs, portions of the, of the bill. But if you look at it from the context of a lot of the provisions that were focused on multinationals and bringing cash back to the U.S. The limitation on business interest expense broadly, the availability of having a 20% exemption or reduction of your income for private businesses in the form of flow through and sole proprietorship, the corporate tax rate going down so significantly to 21% maximum rate. So, on a global basis, the ability for the U.S. To be more competitive and the corporate context, the hopefully the economic stimulus we see with bringing cash back onto shore, through the other taxes that were anti leaving cash off shore, some of the basis of erosion tax issues, et Cetera, all the way down to some of the things that I've been talking much more about.
Tim:11:59Um, with respect to Opportunity Zones, as you know, which has been somewhat of the leader. It was almost like the fourth quarter of the game play that ended up being the one that was on the highlights, over and over and over because Opportunity Zones, were sort of in the back of the bill. It was added late, yet it has such an impact for some of the reasons we talked about already with state of mind of investors and desire to kind of give back. But the broad, the broad scope of that, this tax bill and frankly sort of what some of the people as you read and look at the press and in say some, some view this as an open, overall positive, some are viewing this right now as we sit here on April 15 people are, individuals are really starting to say, hey, this is tough because I'm only able to deduct 10,000 of my state and local taxes on my 1040.
Tim:13:03Some of the rubber is really just sort of hitting the road right now as we file extensions and tax returns for individuals. So, I mean, going back to answering the question, the individual impacts I think, which are significant corporate private equity in terms of business interest limitations and the ability to potentially shield 20% of your income and then all the way down to real estate. Where my daily focuses in in terms of really attractive bonus depreciation on purchases, of short life assets. Um, you know, it just, the gamut is so broad and so complex and we don't even still have guidance on a number of issues that are important. So, those things, and it was a long winded answer, but it's a tough one to answer in a short way to justify something that's most significant in 30 plus years.
Jack:14:03In general, what questions do you have for clients who are, who show an interest in Opportunity Zone investing?
Tim:14:09One of the things that I felt when I first read it as you referred to it in, what popped out to you was the 10 year holding period. What popped out to me was, was that, because we CohnReznick have so many clients that have already been active in these markets through the programs that I mentioned to you before, that are impact investors or community developers through affordable housing. Being somewhat of the leading industry that we serve as a firm, traditionally. Versus the, and you're aware of this as much as I am, if not more. The interest and the level of education and the amount of panels and forums that there has been around Opportunity Zones. Everybody has had an interest in this, it seems like, and I used the word everybody somewhat loosely, but certainly within the real estate community to vet and to evaluate this program, either A, because again, I can't underestimate the idea of people thinking more about doing a responsible investing.
Tim:15:19I, there's another term for that that just hasn't come out. Impact investing maybe, as part of their plan. This is a best, is a turbo charge way to think about it given the tax benefits. But going back to the point of what sort of popped out at me at me was that it's very difficult, I think depends, no matter what industry you're in, and I'll use the medical, you know, if you were a doctor and if you are a heart specialist and I'm a podiatrist and your neighbor comes over and says, Hey, my foots really killing me, what do you think I should do? Most likely you'll be able to answer the question having studied medicine better than the average person, but you'd probably refer your neighbor to me as a podiatrist because you're just not focused on all of the critical pieces that might need to come out in order to help that person. By seeing patients with that same issue day in and day out.
Tim:16:20I use that same analogy for the commercial real estate industry where it's very different to be a developer or an investor in gateway cities with large towers and Class A buildings than it is to do and create value in a very, very different market.
Tim:16:39Which may have different regulatory hurdles and they may have different underwriting standards. It has a different risk profile. It has a different maybe how you build, and the cost structures you use and on and on and on. So, I felt in the beginning that this is most beneficially and in a positive way, it's going to benefit those that are already in these markets doing these types of projects and it's going to be very challenging for someone to retool what they're doing and be competitive. Particularly around the points that you raised, Jack, in terms of you're now having to talk to somebody about a 10 plus year investment. Um, even after the tax benefits, the underwriting may be somewhat less appealing when you think of the time and the risk of if you build it, they will come sort of that element of an Opportunity Zone. So, I think you lose a lot of the people along the way once you sort of go down to the nitty gritty of the modeling and show the after tax benefits versus do I just continue doing what I was doing in the Class A space gateway markets or do I really try and compete?
Tim:17:53So I think it's, it is going to be very interesting to see those that have been doing the Opportunity Zone type developments and investing already to see how much better they fair or how much more they're able to continue doing the good work that they've already been doing.
Tim:18:16The traditional equity investor for many affordable housing deals, would be a tax credit investor or a tax credit syndicator that might be interested in putting the equity into a project for the benefits associated with tax credits. And the benefit on the community. Here we've seen our clients who have traditionally done market rate apartments or multifamily deals start to consider going into affordable the affordable space, leaving aside the Opportunity Zone program. So, let's call this somewhat of a three year trend where market rate developers were considering going into affordable for the social piece for the demand there.
Tim:19:04There's a lot more demand. I think that in many markets for affordable housing space, at least components of maybe, you know, you may have a blended investment where you have market rate and affordable in the same, in the same development. So, people were thinking through those strategies to begin with. Um, and those investors would traditionally get their capital from more of a generic private equity market than they would from a tax credit investor, for example. So, that would be one change. The other piece to it is that the trajectory that I've seen over my career in the real estate space has been if you and I have a good enough track record and we've traditionally been getting our equity from friends and family, our next step would be kind of into the institutional space. For example, endowments or tax exempts or maybe even ultimately to offshore investors in that order. But once we've done deals that we've kind of tapped out our friends and family either in terms of size of the investment or velocity of investments, I see this as somewhat of an opportunity to return to those friends and family because of the capital gains nature of the, the requirement to reinvest capital gains into the Opportunity Zones.
Tim:20:34This may be an opportunity, here we go again, another opportunity to go back to that original friends and family and say, maybe this is a decent time to think about rebalancing your portfolio. And what about the those old utility stocks that grandpa left you. And maybe it's time to dump those and put it into real estate. And by the way, you're going to, you know, do good and feel good at the same time because it's going to benefit underserved communities so that´s another tranche as somewhat of a return to, to the original friends and family in a different way using a tax benefit in a deferral to help in, in sweetening the, the offer to invest. And then, last is it goes back to what I said a little bit earlier where we find a number of market entrance, which would be unlikely for those that had just so happened to sell a business.
Tim:21:34Uh, just so happened to be part of it big a IPO event, like I mentioned the angel investors indoor to the Silicon Valley folks. So, those are people who just have meaningful gains and are interested in hearing about ways to defer tax on those. Um, and you can, if you can pair that with some generational wealth planning, which would be beneficial or more in concert with that 10 year holding period that we were talking about. Then you have a whole new, a whole new environment of people who might be interested in investing in real estate, in Opportunity Zones or even businesses in Opportunity Zones.
:22:19I don't want to ask you to give away proprietary information, but are you seeing foreign interest in Opportunity Zone investing? And I'm wondering if and how that foreign interest cannibalizes the EB5 market.
Tim:22:38I have not seen a lot of foreign interest in the program so far. That being said, I don't think it's off the radar or it's outside the realm of possibility that, that foreign investors could become more invested in this program as it goes forward. But I'll give you some for instances. So, a lot of times on, on, one of the classic examples that we're looking at would be a family office for example, that might have a very liquid portfolio of stock and it could easily sell stock A and invest in opportunities zone B. And that's very appealing because you can easily sell back to the public markets shares of stock with a phone call for example,
Jack:23:39Uh huh.
Tim:23:40Foreign investors in, unless you own a substantial amount of the company, the shares is not, are not going to have gains on selling that stock. So, they won't really have that U.S. Tax burden associated with disposition of the shares of the stock just under normal tax rules. So, we come back then to maybe what types of gains would be taxable in the U.S. whether you're foreign or US. Real estate comes to mind because real estate gains are taxable for foreign investors, except for a few limited circumstances that have to do mainly with REIT investing. So, that could be an interesting platform where a number of and a substantial amount of non us investments in U.S. real estate are done through U.S.corporations. So, U.S. corporation will have tax, and a U.S.corporation then might be interested in reinvesting.
Tim:24:47I think the friction there comes back to your point about 10 years and do they really want to be into in one asset for 10 years or more or not. And then you start to bump into some of the political, more of the political risk and socio economic sort of global economic considerations of how long do I want to be in the U.S.versus other options. Uh, so I have not seen a lot of that yet, but as foreign investors dispose of assets that are in U.S. Corporations, real estate assets, that would certainly be an option that we're talking to foreign investors about. And then on the upside, the other than the macro or the really large sovereign wealth fund investors, I do a lot of work with non US investors in US real estate and the smaller investors that maybe either high net worth individuals or smaller institutions have been.
:25:59Year over a year my comment has been that they've traditionally been looking at secondary and tertiary markets in order to get the returns that they're interested in. Uh, and pricing and competition in the gateway cities have really made it difficult for those investors to be competitive. So, we may be looking at investments in Cincinnati or parts of Texas or you name it, that may not be Dallas, New York, Chicago, etc. As gateway markets, already.
:26:32And so this Opportunity Zone program really is another tick along that secondary and tertiary market. A vantage point that foreign investors have had on. The other thing that I've seen most recently with a few of our clients have been in this exact example, foreign investor us corporation, whether or not they do a like kind exchange or think about an Opportunity Zone investment. So, I think it's coming and I think it will be there. I think you'll be most likely real estate for real estate state type track transactions for foreign investors because many of the other markets that are more liquid would not have us tax associated with it.
Jack:27:22Gotcha. What's your biggest concern about the Opportunity Zone program and how are you managing that concern?
Tim:27:28My biggest concern is that investors and I'll call them value creators, which would be, you know, the developers or owner operator type partners that would traditionally have a minority amount of equity that the due diligence process is very thorough. Because we have a lot of, as we touched on this earlier, Jack, we have a lot of people who are now looking to do business together in still somewhat of an inefficient market. Only because the buyers and sellers don't know each other yet, right at the most basic levels. So, that process of vetting your capital source for unique and new capital sources as the developer for example, is incredibly important and vice versa. And making sure that the modeling that you would normally do is sound. And that the returns are really going to be there because you really don't want to wind up locking up your money for 10 years with the idea of having this great after tax return.
Tim:28:38And, and then it turns out there's really no tax because there's no gain. And I keep, I keep cautioning folks to say that even if the tax rate was 100%, if you have zero return, your tax is zero. So, be very careful on the underwriting and the due diligence process. And then the next piece is making sure you get it right, right out of the batter's box and making sure you have good legal counsel and good tax and accounting counsel to make sure you know the one beauty of this program today is that it's a self nominating program. There's not a lot of regulation that goes into authorizing or approving these projects. But that just means it's more important to make sure what steps are there aren't overlooked because it's somewhat easy in comparison to other incentive programs to make sure that you have a good team.
Jack:29:38That's good. That is good advice. Good advice for life.
Jack:29:46So, speaking of life, what gets you excited in the morning? What gets you wound up and ready to hit to hit it every morning?
Tim:29:54I really enjoy helping others. And in client services is all about helping others to achieve their goals. I've always been interested in, in the gap between haves and needs. And, and I think CohnReznick as a firm embedded in their DNA has that as a backbone, as a background is to say that even if it doesn't mean there´s service that we can charge for today, putting our clients together that that would be helpful to each other.
:30:29Is a value proposition that's somewhat intangible but builds trust and and also it was just nice to be able to see that you were part of the equation to help other people achieve their objectives in a positive way. And so that matches with, with you know, from the, from my childhood, I can remember always being interested in something new and then finding out who were the sort of best and brightest resources in that area and then seeing if I couldn't be a part of that directly or indirectly. And I think that's what good client service is really all about.
Tim:31:17And the facts are always different. The facts always changed so it doesn't get stale for me. And that's important,
Jack:31:21Right? I got to go back to this childhood thing though. Cause, if I heard you right if what you said was you'd find some area that you were interested in, something new to you and you'd find out who was best at it and you'd figure out how to get involved.
Jack:31:41Am I hearing that right?
Jack:31:42So, give me an example. Preferably outside you're, what you're doing today, you remember something from childhood like that. I'd love to hear about that.
Tim:31:52Well, my age group, like BMX bicycles was the big thing in the early eighties, at least where I grew up. I grew up in a somewhat small town where the place that you could actually race those bikes, the places were limited and you had to travel where you could get the parts and things where. You know, there was only one real bike shop in my, in my town growing up. And so finding a way without the internet as an example to get magazines and to mail order stuff and you know, going back to the old research and hitting the yellow pages to find out who might have this minuscule little part that would make my bike faster or lighter. I, you know, I would find a way to find out, I'd find a way to join a group that was sort of likeminded that might be able to help carpool to the race track on the weekends. That's sort of an example. I can remember hitting the yellow pages and calling around and reading everything I could possibly find.
Jack:33:05Was that a family value? Was that something you came from the factory wired for? How did you come to be that way?
Tim:33:13To some degree, it's just the way that I was wired, but otherwise I just think some people are, we're more wired to being that way. And you know, whether you're doing research for medicine or BMX bikes, you know, I think it's somewhat of the same quality.
Jack:33:30I think you're right. Well, I'm going to ask you my favorite question on all these interviews. What drives you crazy?
Tim:33:38Ah, that's a good one. And I would say the corollary to what we were just talking about is when you, I kind of refer to this between my wife and I in a personal context. Sometimes when we're traveling, when we're stuck in the "no" cloud and the answer right off the bat is no, is there any way we can do X, Y, Z? No.
Tim:34:06And the same, the same goes for the professional is I like to really be sure the answer is "no" before we say it's "no". It's very easy to say no as an advisor, because there's no risk in saying "no". He's just, you don't have to really think through the facts and kick the tires and triangulate and whiteboard and do all the things I mentioned before about palling around and getting points of view and spending the time to research.
Tim:34:34It's so easy to just say no, but it's not helpful unless it's clearly a "no". And then if it's clearly a "no", then I would like to know the reason why it's "no". So, that I can feel comfortable with "no". But I find the occasion when the friction around getting to the right answer or getting to a very nicely negotiated common ground is just forwarded by, "no, can't do it". Sky's falling. Never been done before or can't be done ever. You know, that's the thing that really drives me nuts. And I would say that thevbeautiful thing in the work that I do has to do with, this is my favorite outcome. Is when the facts take care of, or when the facts become the solution versus the issue. And that means you've properly vetted the facts. You've asked all the right questions and maybe you found an element of the facts that weren't front of mind even for those that are providing you with the facts.
Jack:35:35Well that is a, that's an outstanding way to end what I think has been a very interesting conversation.
Tim:35:47I've enjoyed it too. Thank you.
Jack:35:48Your expertise here is obvious, and my head is spinning with a lot of these things. Tim, if folks want to get ahold of you. What's the best way for them to do that?
Tim:36:01The best way would be my email address, which is
Jack:36:21All right. I do want to remind our listeners that, all of our interviewees contact information is available on the website where the podcast is posted. Tim, anything else you'd like to say before we sign off for the day?
Tim:36:35No, only if I'm a but piqued anyone's interest. Feel free to reach out. I'd love to brainstorm and to, help you try and evaluate your situation or whatever needs you might have, basic or complicated.
Jack:36:51All right. Thank you.
Tim:36:52Thank you for the opportunity, Jack, it's been enjoyable.
:36:55Absolutely. Well, for the OZExpo podcast. I am Jack Heald thanking Tim Trifilo for being with us today. We will talk to you next time.
Announcer:37:09This podcast is for informational purposes only and does not constitute legal tax or investment advice. For specific recommendations, please consult with your financial, legal, or tax professional.
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