Jack: Welcome back everybody to the OZExpo Podcast. I'm Jack Heald your host. And joining me today is Jessica Millett who is a tax attorney and a partner with the firm of Duval & Stachenfeld. Jessica, welcome to the OZExpo Podcast.
Jessica: Thanks. I'm glad to be here.
Jack: It's good to have you. You are in New York, Manhattan, I guess.
Jessica: Yeah. Our office right here in midtown.
Jack: All right, very good. So, I always like to find a little bit more about the person that I'm talking to. So, tell us about Jessica Millet. Who are you, where'd you come from and how'd you get here?
Jessica: Okay, sure. So as you mentioned, I'm a partner here at Duval & Stachenfeld, I'm cochair of the tax group. I didn't grow up too far away. I grew up in New Jersey and went to school down in Baltimore at Johns Hopkins. Took a little bit of time off before going to law school at Duke University down in North Carolina. I actually started my tax law career with Linklaters magic circle firms based in London. And I moved over to Duval & Stachenfeld I guess about seven years ago with my partner Steven Land to start the tax practice here at Duval & Stachenfeld, and Duval & Stachenfeld was a real estate firm through and through and before we showed up, they actually didn't have any tax flourish. They just outsourced everything. So I think it was really helpful to the firm to sort of have an in-house tax team, because real estate is so tax sensitive in certain respects. It was fun for me to come here and really start the tax practice from the ground up. And when the Opportunity Zone legislation came along, it was kind of a slam dunk. Right?
Jessica: It's a true tax program. Our investments have been so real estate-focused that firm right now is swimming in Opportunity Zone work, which is great.
Jack: I can imagine. I want to know about your BA at Johns Hopkins. What did you study?
Jessica: I majored in international relations.
Jack: You know my daughter did that. My oldest daughter got an international relations degree. I have no earthly idea what that actually means. Now she lives in Switzerland. So maybe that's what it means. It was how to live in another country.
Jessica: The cross or the international stuff always seemed so fascinating to me. I do a fair amount of cross border, the international relations degree and what that translates to.
Jack: I don't know what it translates to either. Then you ended up in London. Where in London did you live?
Jessica: Well, I was actually based here in New York. There's an office here in New York, but I did spend a fair amount of time in London and going back and forth and I had a couple stints there where I was living in London for three to five months at a time. I think my favorite area was Essington, it was a little bit, a little bit further out, a little bit more interesting than the center of London. Europe is a lot of fun. I don't know what's going to happen with Brexit, but I guess that's a topic for another discussion.
Jack: Yeah, that's another discussion. I lived in London for about 15 months. It's strange. I've lived in a lot of places. I'm an American through and through Oklahoma, lived in Texas and London felt like home. It was the strangest thing.
Jessica: Oh wow.
Jack: So, from Johns Hopkins, you did something interesting in between. Tell us about that.
Jessica: Yeah. I graduated from Hopkins, not really sure what I was going to do with my life. I didn't know what I wanted to be when I grew up yet. I actually joined the Peace Corps. I was a Peace Corps volunteer. I lived in a country in West Africa called Burkina Faso, which a lot of people haven't heard of. It's completely landlocked. So, we like to say there is a lot of beach but no ocean.
Jack: Yeah, I have that here. I'm in Phoenix. We've got all the beach you want.
Jessica: Yeah, exactly. So I was there for two years, which was just a transformative experience.
Jack: Okay. Yeah, I can imagine. So, what did you do there?
Jessica: My primary role there was to be an English teacher in the school. I lived in a little village. My village was on the main road. If you kind of think about the middle of nowhere, when you see those pictures about Africa, I mean, I had no running water. I had no electricity. It was, I was out there. But you know the people in my village, they just adopted me. They took care of me. I lived in a little house that was sort of in a little compound with a family and they took care of me.
They were very protective of me. If anybody tried to come and see me and they didn't know who the person was, they stopped them at the gate of the compound and kind of ran them through the inquisition trying to find out who they were and why they wanted to see me. Forget about the only America I was the only white person around for miles. So I was under a microscope all the time. If I left my little house to go to the market, all these people would be following me. What's, what's she doing? Oh, she's going to the market. Okay. Everybody knew where I was.
Jessica: So they speak French. French is be, I'm sort of the official language. There's a bunch of different dialects. And in my village we spoke something called a different dialect which I used to know enough to get by. But at this point it's been many years since I've had to use it. So I'm, a little rusty, say the least.
Jack: Alright. I've got to drill down deeper into this, because this is really interesting. How did that experience change you? I know it was transformative. Just give us some tastes. What kinds of things did it affect in your life? How you live today?
Jessica: It gives you a lot of perspective. It’s very easy to get caught up in the day-to-day and to get annoyed about something or mad about something. But if you think about, in this country, even in some areas of this country that are less well off and more in need of Opportunity Zone investments, we have so many opportunities. I was living with a family. There were no toys, forget about toys.
We take for granted so much. The thing that is probably the most impressive is that the people who lived in my village who all kind of took care of me and adopted me, they, had so little and yet they shared it all. If you were walking past somebody's house, they would stop and they would invite you to come and sit and eat with them.
They just were so genuine, um, and so and so warm. If you take away a lot of that materiality, you just find the people, right? It's just people. It's about being nice to people and getting to know people and look, and obviously that's a little bit of rose colored glasses, but just the attitude and just the warmth and friendliness, in a sense, that's all you have, right? All you have is your family and your friends. You have to take care of them. And they do. They really do.
Jack: It reminds me, in an oblique way, I guess. I lived in Texas for 18 years. There are few places on the planet that are less hospitable to human life than the environment of Texas. Every Earth Day I publish my article about what life is like in Texas, because Mother Nature is not your friend in Texas. Mother Nature wants to kill you seriously. But on the flip side, the just in general, the nicest people I've ever met are Texans.
And I think it's related, I think privation and difficulty on a broad scale somehow promotes trying to make life easy for each other and for ourselves by that kind of human interaction. I could be wrong I’m hardly a sociologist, but, fascinating. Okay. Jump forward here a dozen or 15 years and now you're a tax attorney in Manhattan, I guess you could hardly make a bigger. . .
Jessica: Yeah. It's been from one extreme to the other I suppose. Okay. When I came back from the Peace Corps, I had a focus on international law and I knew I wanted to drill down and study that. And someone said to me, “Well, if you're going to study international law, you should go to law school.” That's a great idea. Why don't I go to Law School?
When I was in law school, that's when I really found my love of tax. It’s so interesting and everyone gave me like a sideways look. But tax law is very analytical. It's problem solving. It's puzzles, you know, I need to get from here to there. What can I change going forward? Or how can I, how can I look at this in a different way?
Or it’s figuring out how to get from here to there. It’s a process and it's something that I find fascinating. The statute in the regs and we can talk about all the technical stuff and it drives some people crazy and including me some days. But, it's fascinating to me. I'm like, this is so interesting, right? Because if the rule is this and what about that? And you have to look about that. Oh, and don't forget, there's another rule over here. And you know, tax law at this point, it's just so massive and complicated, it’s know, quite a brain teaser.
Jack: I haven't thought of it this way, but the picture that comes to mind. You are the kind of person I say, "Can I do X?” You say "Yes". And then I say "How,” and you say, "Let me figure that out". A positive and interesting and exciting approach. That's the flavor you're giving me here. So now I'm going to a technical question or technicality. Because this is not really me but pretending here. So, I want to form a Qualified Opportunity Fund. What have I got to do?
Jessica: To form a Qualified Opportunity Fund? You mean to form the legal entity or the requirements for it to be good QOF?
Jack: I come to you I say, "Jessica I think I want to do this, guide me."
Jessica: So, I would start fact gathering. I would say, okay, well who are you? Are you doing this yourself or are you having other people invest with you? Do you have the right gains? What was the timing of these gains? What are you going to do with the money? Do you have a project or are you looking for a project?
Jack: Yeah. Let's, consider the two different big categories on a completely different direction. I've got kind of a blind fund that I know eventually I want to get into different projects, so talk about those two things and then guide me as a complete bozo who doesn't know what I'm doing. I'm not asking you to give away work.
Jessica: Let's talk about the project-specific stuff first because there's still some fair number of questions about certain aspects of the rules, that's one that I can get you from here to there. So if you are setting up a project specific QOF, there's the two sides of the equation, right? It's like, well, what about the money? What kind of gains do you have? Do you have the right kind of eligible gains to invest in a QOF?
And to focus on that for just a second. There’s one of the reasons why I think the Opportunity Zone rules are so vexing for some people. There's different rules and different timing requirements, every level of the structure. So to start up at the top with an investor. If you want to be an investor in a QOZs, everyone needs an entry ticket, right? And your entry ticket to the Opportunity Zone program is having the right kind of eligible gain. Youcan come in if you don't have the right kind of gain, but you don't get any of the benefits. But we don't say you can't come in, but you're not really going to have so much fun.
Jack: Let me ask you question real quick. I've had several people asking me this question when I've told them about it and I simply don't know the answer. Suppose I get into a fund but I'm not putting in a capital gain. I know I'm not eligible for the step up in basis after the five- and the seven-year thresholds. But what about the 10 year?
Jessica: Nope. The tax benefits, they come in a bundle. If you invest the right kind of eligible gain, then you are eligible for the full suite of tax benefits. It's a regular investment. They're all or nothing essentially.
Jack: I didn't realize that. Good. Okay.
Jessica: Yeah. We can get into some of the nuances about the different 180-day periods. There's some new rules in the most recent regs that apply to 1231 gains, which the tax community is kind of getting all in a flutter about. But if we assume that you have the right…
Jack: I'm sorry, I've got to stop you. The tax community getting all in a flutter about. I have this image that triggered this image in my mind.
Jessica: Of these tax attorneys running around wringing their hands.
Jack: Yeah. I'm sorry. That one's kind of amusing. Carry on.
Jessica: I'll just leave you leave you with that image it will probably amuse you later. If we assume that you have the right kind of gains and have the right timing, you have to invest your gains into an Opportunity Fund and it's your last can be either a partnership or corporation for tax purposes cannot be a wholly owned LLC. So you could essentially have a QOF if you want it to do that. If you had a bunch of money and you didn't want anybody else to come in, but you need to do some structuring to make sure the QOF was still a partnership for tax purposes.
Jessica: Now, once you have your money in the QOF, the, there's to be two basic structures that were kind of outlined in the code. First one is a single-tier structure or the QOF owns the property directly.
That's not a very user-friendly structure because the asset test at the QOF level, it's a strict 90% asset test and that test has to be met every six months and no wiggle room. And cash is a bad asset. There’s a little bit of flexibility. They threw it in with the most recent round of regs.
You have a little bit more time for the QOF to invest recently-contributed cash before it really becomes a problem and can jeopardize the 90% asset test, but it's still a 90% asset test. The better structure, the one that I think everybody is using is what we called the two-tiered structure and under the two tier structure, the QOF invests in a lower-tier partnership or corporation. But mostly we're seeing partnerships. And then you have that lowered to your partnership, that joint venture, JV entity owning the property.
And in a typical real estate JV, you've got a money partner developer. So here basically QOF would be a no money partner. That's really how we're seeing those deals being structured at this point. ANd I mean, that's a single asset QOF. To talk for just a second about the commingled funds, the blind pools, I don't like those. I don't like them for a couple of reasons. The first one is, I think it's pretty difficult to get all of the pieces lined up with respect to the percentage asset test at every level and the timing requirements at each level. It's hard enough to do that with a single asset. But now all of a sudden you got multiple assets, you've got things being developed at different times.
You've got a bunch of investors. I mean it's, I mean it's a ton of work for the lawyers and the accountants that needs to figure it all out. I just think in practice it's going to be very difficult to do. Okay. That being said, I do have clients who want to accomplish something like a commingled fund structure. And there's a couple different ways you can get there.
The first one is to really have a true commingle fund. You need to in that instance, have the Qualified Opportunity Fund be set up as a REIT Real Estate Investment Trust to facilitate some of the issues that happen at exit when you're trying to sell and get out after 10 years. And we can talk about those. But the other structure that we're seeing that commingled fund structure is people have different names for it, but we're calling it, you know, a master subscription facility.
And the way that works is that you go out, you find the investors, investors find subscription agreements and say, okay, I promise I'm going to give you $10 million,$ 50 million, $100 million, whatever it is, you tell me when you need it. And then if you're the sponsor, you go out, you look for deals and if you find a deal, you call capital from your investors and you invest, you put them into essentially put them in single asset QOF.
Jack: That makes sense yeah.
Jessica: You have these sort of siloed QOF, but you have the same investors in each deal. That’s kind of the way right now to accomplish that using partnerships. It’s a little bit tricky because you know, cross promotes don't really work so well in that structure because you really want to have the separateness of each structure and be respected. BUt you know, people are trying to come up with ways to accomplish the same results. And you know, again, complicated, but you know that's what we're here for.
Jack: That's why you’re there.
Jessica: You tell me where you want to get to, and I'll get you there.
Jack: I really liked that. Real estate obviously has got the bulk of the attention with the OZ program, but there's another side of it that frankly I think is key to the ongoing success. And that's the operating business side of things. Talk a little bit about that. What do you see in there?
Jessica: Yeah, so we were all left in the dark for quite a while, until a couple weeks ago with the release of second rounds of regulations about how operating businesses could really take advantage of these rules. We knew the rules were coming, we knew that the government wanted this to work for both real estate as well as non-real estate. Nobody really knew how that was going to happen.
The regs that came out a couple of weeks ago shed a lot of light. They are now giving people the pieces that they need to move forward on operating business type investments. And,, on paper the rules look really good. We're just now starting to try and apply those rules to real facts and help people move forward on those. Cause we've only had the rules for a couple of weeks. And as that happens, more of the questions are going to bubble to the surface. But on paper the rules look pretty good.
I am really happy that they came out with some workable rules for operating businesses. And this is why you're right that the real estate side of this got a lot of attention out of the gate. And that's great. Most of most of my clients happened to be real estate clients that everybody's very happy. But you know, this is a political program. There's no way around it.
People feel strongly about it one way or the other typically. And while there's been a lot of support on the right side from the Republicans, a lot of Democrats and people are more left leaning, have been attacking the program as a tax break for people who don't need a tax break and it's gentrification and you're going to do all this new development, you're going to push people out.
I think the key to really winning the hearts and minds of all of the skeptics out there is the operating business side of this. Because if you think about that, the policy of this program is to encourage investment in these designated Opportunity Zones. It’s helpful to have actual buildings and things there for people to live in and people to work in and all the rest of it. That is really what's been fueling a lot of each gentrification concerns.
But if you think about an operating business, if you started a new operating business in the zone and you meet all the requirements, you're now bringing new economic activity into these zones, right? People who come and work in that business, in that new office that you set up, they're going to need to go out to lunch. They're going to go get coffee, they're going to stop on the way home and buy something and that is really what's going to drive all of economic activity that is supposed to happen with this program. And so, I think that is really the key to making the program really thrive and succeed on a long-term basis.
Jack: Difficult social engineering I guess is probably the right phrase for it. It's kind of like pushing on a rope and yet it's about the only tool that we have at the policy level. And honestly, you know, in 35 years of watching public policy, this is one of the better ideas I've seen come along. It's still got to deliver, no question about it, but it seems like it's pointing in the right general direction.
Jessica: I certainly hope so.
Jack: Well, let's talk about Jessica Millet the person. With this kind of puzzle solving mind, what do you do for fun? How do you relax?
Jessica: Let's see, I have two little kids at home.
Jack: I asked how you relaxed.
Jessica: I spend a lot of time building Legos, I'm excited that summer is coming. Cause in the summer we spend a lot of time at the beach. We drive out to Long Island and you can get a permit to actually drive on the beach if you have a four-wheel drive car. It’stechnically the permits for fishing and other things. It’s so beautiful up there, we like to drive around the beach for a little bit, hang out. I'm excited for summer. Summer is great. I like hanging out with, we've got a dog, two kids, me and my husband, we like to cook. We like to hang out go to the beach in the summer. Whenever I can get home and get out of the office, you know, I've got a fun little family waiting for me
Jack: Are you a problem solver in the kitchen? Are you good at cooking?
Jessica: Yeah, I love to cook. At this point I just wish I had more time for it. But whenever I have time, like on the weekends, usually I'll take a day and I'll have like one cooking project for the weekend.
Jack: What's your favorite thing to cook?
Jessica: I started cooking by doing a lot of baking. I still do, especially now with kids, that part's easy. They're always happy to help you to help you. My husband's favorite thing, he always asked me to make it as those peanut butter cookies that have the Hershey kiss in the middle. They're kind of a pain though, they are a lot of work.
There's a lot of steps and you've got to stick to Hershey kiss in and all that. And whatever, it's not that hard. But you know, whenever I make a batch of those, they do not last long between my husband and the kids. Cookies tend to disappear pretty quickly. Non-baking aside, unfortunately I'm not too adventurous with different ethnics food. I has not been very successful with it. I guess I have most success with the cookies and things like that.
Jack: Are you a cast iron aficionado?
Jessica: We have two cast iron pans. We have some gear that we tend to bust out and use every now and again. But some of the stuff that I was like, “I'm going to buy this, I'm going to use it all the time.” I'm sure I have like a gazillion appliances that are just collecting dust.
Jack: Oh, my daughter-in-law loves being in the kitchen but she also likes buying gadgets. She's got more gadgets. I don't know how to shake a stick at. So, it's time for me to ask my favorite question. This is the one everybody enjoys answering. It reveals far more about you than you may suspect. Put on your imagination hat. You get to be queen of the world for a day. All right? You get to solve one problem and one problem only during your one-day rein. What's that problem you're going to solve?
Jessica: Oh boy. Does this get to be like a huge global problem?
Jack: Hey your queen of the world, you get to pick.
Jessica: I would really like to try fix some of the inequality. I think that a lot of times things are stacked against people in an unfair way. There was a written article at some point, a couple of weeks ago about the rungs of the social ladder. A lot of people have been able to climb up historically. You know, they're getting further and further apart. It's really hard now for people to climb that social ladder of mobility. grew up in a family. I am solidly in the middle class. Um, and you know, I was able to go to Johns Hopkins for Undergrad. I would be able to go to Duke for law school. I was able to do those things and to set myself up for a successful career. Um, and I'm just worried that that's harder today for kids that are growing up. I'm worried that they, the opportunities are harder to come by. That’s disappointing to me. I think that American people who live here have so many opportunities, right. And they're getting harder to access and that's what’s making this country a little bit fragmented right now, I think. And so if I could fix one thing, I would, I would love to just put people on more of an even ground if I could.
Jack: Good answer. Well Jessica. It has been a delightful conversation. I appreciate your time today. Any last words for our listeners before I let you go?
Jessica: I guess I would just sayI think that the Opportunity Zone program is most fascinating. I mean, from a technical tax side,. Yes. It's also just a social, I don't know that experiment is quite the right word, but you know, as a program that really is intended to drive economic development, I think it's an amazing program. It has a ton of potential. And I'm really excited to be part of it. You know, I’m really excited to see what happens over the next couple of years.
Jack: Alright, well if folks want to get ahold of a hold of your firm, what's the best way for them to do that?
Jessica: Sure. So our firm is called Duval & Stachenfeld over in New York City. And you can Google us and look us up. I'm pretty easy to find. We're a small firm. If you look at the tax group out there aren't too many of us, you'll find me.
Jack: Alright, very good. And we'll provide that contact information on the podcast website as well. Well for Jessica Millet, I am Jack Heald of OZExpo Podcast. I appreciate you taking the time to listen to us today. Be sure to hit that subscribe button so you get all of the episodes on the OZExpo Podcast. We'll talk to you next time.Announcer: This podcast is for informational purposes only and does not constitute legal tax or investment advice or specific recommendations. Please consult with your financial, legal, or tax professional.
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