How to Invest in Opportunity Zones

Opportunity zone investing. That’s today’s show. Let’s dive into it. I have to say one topic has
come up more than any others recently that people
have been demanding, wanting to know about. And that is opportunity zones. What in the heck is
an opportunity zone? Hey, everyone, I’m Clayton
Morris, longtime real estate investor. And on today’s show, we are
going to deep dive opportunity zones with someone who
knows it inside and out. It’s Eddie Lorin. He’s the founder of
Strategic Realty Holdings. And he’s always been a champion
of the underdog in real estate investing. He’s done billions of
multi-family deals. He’s done everything
in this business. And he joins us on
today’s show to talk about opportunity zones. Eddie, welcome to the show. Pleasure to be here. Thank you. So before we dive into
opportunity zones, give our audience some
context of your history in real estate investing. Take us back to your first deal. What got you excited about
getting started in real estate investing? Paint a picture for us. Wow. You know, in the downturn of
’94, ’95 here in Los Angeles, there was a lot of distress. And we had the earthquake. And so we stumbled upon
an interesting deal where it was just dilapidated. And there was no vision. And so we brought our
own vision to trying to rehab this property. So we started off on a quest
to take blight and make light. So over the years, we’ve done
incredible transformations of these properties. So I’ve done over 40,000 units
over the past three decades. And really, have been able
to transform and create value for investors, for residents,
and for our management company. So it’s a great business. It’s a unique business. We’re value creators. So it’s kind of like the
fake Gucci bag concept. You can either afford
to buy an A property and pay $3,000 rents. Or you can pay
$1,000, $1,200 rents and get the same thing that
the brand new guys have. So Suave does what there is does
for less than half the price. I like that. Well, I think you and
I are in alignment on the affordable
housing front, in wanting to bring value to properties. You know, just this past week
was at 10 of my properties. And you know, knee deep
in trying to add value. Trying to help transform
a particular neighborhood. You know, you have the
choice whether to make the outside look nice,
put siding on there, cap the windows, make it pop
so that you can kind of help transform the neighborhood,
or you could be a slumlord. And just to try to make money. And you’re not helping anybody. So you’ve really
keyed in on how to try to fix the affordable housing
crisis in this country. It’s become a passion of yours. Why did that become
so appealing to you? Well, I grew up of modest means. My father died when I
was 10 months and my mom when I was 17. So I put myself through UCLA. And I’ve always known and
taken pride in the fact that I had love. I was clean and respectful. And I had a decent
solid upbringing. But I didn’t have
a lot of money. So I just have always felt
that everyone deserves a clean, safe,
affordable place to live, to be treated with
respect and dignity. And you know what, we’ve
found that they’ve stayed, paid, and referred
their friends. And it’s a very simple formula,
but it’s a very meaningful one. Isolation in social settings can
be a very, very difficult thing for people. And it can create a lot of
social ills in our society. So the ultimate impact
investment for us, and we’ve been banging this
drum with the foundations and endowments
across the country, is if you can provide either
food, clothing, or shelter, we’re providing shelter. What’s more impactful than that? You know, incomes
are stagnating. And rents are rising. It’s a recipe for disaster. That’s why you see a lot
of people on the streets. And so I’ve made
it a quest to try to give everyone in this world
that clean, safe, affordable place to live. That’s really powerful. And you’re right. I mean, we’re a rental
nation right now. And there’s no sign of
that shifting anytime soon. And there is such a demand
for affordable housing. Before we kind of dive
into the opportunity zone discussion here. Do you think we’re going
to see more of a push by larger companies
into affordable housing? Or are you kind of the vanguard? Well, look, all
the time Microsoft has dedicated $500 million to
Seattle affordable housing. That’s great. Blue Cross Blue Shield
has made a commitment. So it’s starting. It’s just way too late. And we got to get
everybody up to speed. So I have a multifaceted
approach to it. And you know, we have to build. We have a very– at least here in California–
we have a huge shortage of housing. And the reason is called
CEQA, California Environmental Quality Act. Anyone can stand up
and stop a developer and make them wait
five, six years to get something built because
of that concept of NIMB, not in my backyard. So that’s really critical. We’ve got to get rid
of those barriers to entry in terms of
building new product. Building product
is very expensive. It takes too long. So if we can shorten that time. If we can come up with
modular ways to build housing. If we can come up
with some vouchers, some opportunities that
can mitigate the rental so that these deals can pencil. If we can avoid
property taxes when we provide affordable housing. I’m working on various pilots to
try to exemplify that concept. Because it’s not
just one solution. It’s a multifaceted solution. And it has to happen quickly. And unfortunately, foundations,
endowments, governments, they all go very slowly. Just one example. For three years, we’re finally
refinancing the first NOAH property in the
city of Los Angeles. Naturally occurring
affordable housing is a concept I came up
with with HCID at the city. And it’s taken three
years to get to the point where we can get it through. We bought it. Took it down. And we’ll be refinancing
after we finally get through the red tape. But you know, everything’s
set up for new development. But my concept is buy as much
existing product as we can. Deem it affordable before
it becomes unaffordable. Makes common sense. Right. Which brings us to
opportunity zones. First of all, at a
high level, take us to what an opportunity zone is. And then we can dive into
some of the specifics of how it’s a benefit to investors
and lower income communities. OK. Booker and Scott, the senators
on a bipartisan basis, slipped past the goalie in
the 2017 Tax and Jobs Act when we passed that
tax reform this law called Opportunity Zones. So again, on a high level, there
are about 36,000 census tracts that are low income across
the country in every state. And so each governor
was allowed to designate 25% of those census tracts,
which, again, are low income areas across the
country and deem them to be opportunity zone areas. So you’ve got 8,700 opportunity
zones across the country. The goal of this was
to take the gains that are sitting on the sidelines
of about potentially $5, $6 trillion and allow those gains
to be invested in these census tract communities. It’s really a brilliant concept. And it’s great because the top
three states in this country have gotten 80% of the venture
capital in the last 50 years. We can all guess, right? New York, California,
Massachusetts. This is meant to level
the playing field and allow anyone with a gain to
invest in any of these census tract areas. The problem is it was
written poorly because it was slipped by quickly. So we’re waiting for a lot of
regulations to be finalized. And we can get
into that in a bit. So on a high level, there
are three components to the opportunity
zone legislation. One, it’s a deferral
of your taxes. It used to be that only like
kind exchanges could happen. So in essence, you bought
a piece of real estate. You sold that real estate. And you took your gain and
invested in another piece of real estate, like kind. Now, you can take your
gain on your Apple stock, your Facebook,
you can sell real estate, you can even sell your
business for $50 million and take that gain and
defer your taxes till 2026. So it’s, in essence, an interest
free loan from the government. So you sell your $5
million worth of stock. You got $4 million in gain. You put it into an
opportunity zone fund. And you can avoid taxes on
that $4 million until 2026. So you’ve got to be
careful not to invest all your gains because you still
have to pay the piper in 2026. If you do it in 2019, there’ll
be seven years before 2026. And you get a discount or a
step up in your basis of 15%. So in essence, you’re going
to save your taxes of 15%. And you’re going to get
an interest free loan. So now, let’s say we’re
at 2026, and you’ve paid your taxes on that first
down leg, we’ll call it. Your $4 million gain. If you hold your
investment for 10 years, so until 2029, if
you invest this year, the new gain– let’s
say that $4 million becomes worth $8 million. You’ve already paid your
taxes on the four million with a 15% discount. The extra $4
million is tax free. Hmm. That’s the game. It’s amazing. Boom. It’s awesome. And it’s every governor
designated certain census tracts. Some politically. You wonder how they became
opportunity zones like you might have read about Amazon. They’re moving to
Long Island City. That’s all an opportunity
zone across the East River. But primarily, these are
low income census tracts that need and are
starving for investment. Now, what are the
qualifications? Now, you mentioned
three areas, right? You take the gain, defer
the taxes until 2026. If you do it by the year 2019,
you get that 15% discount. What are the other two
caveats here in this plan? Then we can get
into what’s limited and what things you
have to adhere to. Well, there really
isn’t anything else. That’s it? That’s the problem. There’s a lot of confusion. Let’s say, for example,
can you sell midterm? I’ll give you an example. You can invest not
only in real estate, you can invest in business. You can open a retail store,
a restaurant, a chicken joint, whatever. So let’s say you’re in a
venture capital business. You invest in ten deals. One deal’s going
to be a home run. Two are marginal. And the rest are
mediocre, if not losers. So if you’re going
to invest, and you have to invest for 10
years in low income areas, the challenge is for
these venture capitalists, they’ll say, I’m out. You need to let me
have an opportunity to take my gains in year
three when I can get it. And I’m fine reinvesting
back in the zones, but I can’t be held
for 10 years to be doing these businesses and
incubators and that kind of thing. Or I’m going to lose. So they’ll be penalized
if they get out early? Well, sure, you’re going to
have a recapture of your– you don’t get the
benefits of your gains. You’ve got to hold it. You’ve got to hold
it for 10 years in order to get the true
benefit of everything. I mean, you can
always pay your taxes. But this is the point
is to avoid and get a discount on taxes and
get that pop in year 10. So we’re waiting for
regs to come out. Unfortunately, the
government was closed. Now, they’re going
to be open, so we’re waiting for the next
set of regulations to come out February 14th. There’s a long list
of just unknowns of what can be done to make
this program a little easier and a little more friendly. But that’s just one example. So we expect to be able to
take and sell our property or sell a business
after year three, as long as we reinvest
back into the zones. We don’t know–
probably six months is going to be the time frame. But as long as we can
keep the money there, then we’ll be
maximizing the benefits. Also, there’s an
opportunity to refinance. If you’re developing apartments,
like we are, to refinance, and you pull out some cash. And you can pay your taxes
then out of the refi. So we’re just waiting
for clarification. I’m on the Novogradac,
which is a big accounting firm for low income
housing tax credits. They’re setting forth
various opportunities to get clarity, as
well as, if people want to look up them. That’s Sean Parker
and the Napster guy. They were the original
authors with Booker and Scott of this legislation. And like I said, they
slipped it past the goalie. And it was, unfortunately,
not well written. Now, if you’re a cowboy,
and you’re in Beverly Hills, and you want to swap
buildings with your buddy, you want no regulations. The less clarity, the better. But if you’re an advisor or
the lawyers, the accountants, people like us, you need
clarity so people are comfortable to move forward. So that’s the irony. Do you see it being more
beneficial for these companies to be able to do it
every three years, be able to, if they take their
gains, flip the business, keep their money
burning and churning? And I’m talking about,
after all, we’re trying to rebuild
communities here. Do you think it’s more
beneficial for them to keep their money moving
like that every three years? Or is it more beneficial to have
them a long term investment, 10 years and that’s it, sorry,
you want to invest here, you’ve got to have
a 10 year minimum? Well, I think, honestly
for businesses, I understand that
that’s important because it’s hard and much
riskier than real estate. So you have to bifurcate
the investment. But we’re so far along
on having no regs that the odds on
getting clarity, at least bifurcation between
investments, is next to nil. So it’s kind of an
irrelevant thing. But I agree with you. I think in real estate
you’re better off long term. But in businesses, because this
is such a vague legislation, so the answer is
always it depends. Right? My kids get mad at
me when I always say the answer it depends. It depends, right. Right. Well, you know, I’ve
interviewed so many politicians over the years so I get
it depends answer a lot. But it does. It does in this situation. When you talk about, this
audience, we’re big fans of buy and hold real estate. That’s the focus
of this channel. That’s the focus of
everything we talk about. We’re not flippers. We’re not wholesalers. We’re mostly buy
and hold investors to hold these for the
rest of our lives. And most of the things that
we focus on our residential. So give me an example in
the residential real estate world of an opportunity
zone investment that would make sense. I go in. I see that I’m able to add
value to this burned down couple of properties in
this opportunity zone. And I do what with them? Hold them for 10 years? Or how does this benefit
me as an opportunity zone investor for buy and hold? Well, let’s take New Orleans. My daughter’s at Tulane. So I have a keen
eye on that market. And there’s so much
politics involved with these dilapidated
homes from Katrina that are still
just sitting there. And they’re on the books. In fact, that reminds me. I’m going to have to ask. There’s a new coalition
in DC from, hopefully, HUD will get some traction
in pushing on opportunities. But that’s a side note. So you buy these houses. And there’s a 100% capex rule. So if you buy a house,
let’s say, for 50 grand. And you can justify that 10
grand is the value of the land. You can pull that out. So now, 40 grand. You must spend 40 grand
on that property in order to get the benefits of
this OZone legislation. So it’s quite a great
program to go in. And then I think it’s
a very important thing to create affordable housing. You know, you take
the HUD voucher. And you hold it long term. I think it’s a
wonderful business. It could be done
across the country. Could be done in Detroit
and parts of the Lower East Side of Chicago. It’s a phenomenal
set of legislation. But you’re limited by the amount
of capex you have to spend. So it’s harder for
a value add person. Let’s say if you bought that
same house for 50 grand, and you justified 40 grand. And you can only spend 10 grand. That’s not going to work. So that’s a little bit of an
issue with this legislation. So it’s going to be major rehab. Major, major capex
spent in order to justify this OZone
legislation, which, ironically, could end up gentrifying areas. For example, I’m in
the apartment business. We’re in the low income
housing tax credit business. We go in and we take
an old apartment building that’s, let’s say,
a $5 million building in LA. That’s 25 units. We can justify $1
million of land value. So $4 million. What are we going to do
for $4 million on 25 units? You’re going to knock it down. So the very essence of
trying to preserve this is going to push people out. So the more capex you spend, the
more in construction, the more the rents are going to go up. So that’s going
to be a challenge. Right. So we have to work with
local jurisdictions. We have to work with the
government in terms of property tax abatement as a
potential to keep these and deem them affordable. Otherwise, there’s no incentive. And you’re just going to
have those $3,000 rents versus $1,200 rents
that are affordable. Right. When you look at a high
level for someone saying, OK, I have this investment
in here for 10 years, I’m going to have to pay taxes
after this 10 years on this. Well, let’s clarify. What are you paying
taxes on after 10 years? You’re not. Right. You’ve paid in 2026. Your tax is on the down
leg on that Apple stock or whatever it was. Right. Now, you hold this for 10 years. There’s the incentive. And so after that 10
years, I cash out of this. I’m not having to pay–
it’s like a 1031 exchange? Yes, on steroids. Right. Well, how can you combine this? My brain is– I’m running with all
sorts of different– how can you combine this with
other investment strategies, whether it’s a self-directed IRA
or you know, a 1031 exchange? There’s a potential for you to
even– could you 1031 exchange into an opportunity zone? Sure. But you could do
that on anything. There’s no incentive
to go to this. This is for the guy who sold
his business or the family– you look like my age ish. Let’s say we’re in our 50s,
right, not to, you know– Well, maybe it’s the beard. I just turned 42. Oh, sorry. Sorry about that. Anyway, so I’m in my 50s. Time to shave. I’m not planning to
die anytime soon. Right. Short of me dying and
having a step up in basis, right, this is the
next best thing. Because– Right. –generations can kind
of wash out the taxes. And then you’re done. So we can take those gains
on that Facebook stock. Whatever you feel
about Facebook. It’s run up pretty good. I paid at $26. And I sold my stocks because
I just think it’s had its run. I’m not an expert. I don’t even claim to be. But the point is you
pull your gain out. Now you’ve washed it. And you pay your taxes after
your short-term till 2026. You get that free interest
loan from the government. And then following
that, after 10 years, you don’t have to pay anymore. Nice. Nice. So how can people
find out more about where these zones are located? You mentioned a
couple of websites. Is that where people can, if
they want to invest in these spots? There’s Novogradac. Policy Link has a– you can just put
in your address, and it will tell you exactly
if it’s in the purple. So it’s
policylink/opportunityzones. Or you can come to our website. We’re Alliant Strategic. A-L-L- I-A- N- T.
And we have an interactive map there. We’re forming our fund. A lot of people
are forming funds. But we still need to
have the regs finalized. And hopefully, that’ll
happen on the 15th. But this government shutdown has
really slowed everything down. So we need a lot
of clarity still. Right. I was going to ask you,
as we wrap this up, where do you see this going? Do you see clarity coming
to this legislation? Yes, just way too slow. And any deal that was going to
happen, and people got lucky, kind of like stepping in
it, they’re building it. And they’re doing it. But any formal formation
of funds, et cetera, are still waiting on final regs. But the good news is
we hear that they’re going to try to extend that
2026 deadline because, look, this has been over a year the
legislation’s been passed. And not too many
deals have happened. And not too many
funds have happened. I just spoke to
another fund manager. We’re kind of all
comparing notes. And they’re just gearing up
and getting their PPM together as well. So nobody’s behind. And I think the
greatest deals will happen in the next two years
as these things materialize. But I think it’s going to
be a great opportunity. We just got to be conscious
that we don’t push out the very people we’re trying
to help in these lower income communities. That’s the most important thing. Right. Right. We don’t want these all to
be like a downtown Miami with these luxury high rise
condos going in as a result. I agree with you. Blue sky this for me as
we wrap this up, Eddie. If you had to give me,
but let’s just take, you talk about New Orleans, a
section of New Orleans that’s just been hammered. Right? I don’t know if it’s the Lower
Ninth Ward or some other spot you would want to zero in on. New Orleans East, yeah. If you pictured that zone
after what we had hoped would happen and transform these
neighborhoods happened, right? If you could dream about
your perfect scenario for these neighborhoods,
what would one of these neighborhoods
look like transformed if people took advantage
of these opportunity zones to transform them? Well, New Orleans East, that’s
near and dear to my heart. I have a building there now. And you know, it really got most
of the flooding from Katrina. And there’s a lot of
burned out buildings. There’s entire shopping
centers that are vacant. Ideally, if people
can bring money in. But there are pockets of the
way that New Orleans East got. In fact, the property I own
is not in an opportunity zone. But two blocks away it is. So there’s a lot of
politics, unfortunately, to how these zones were created. So you know, you’re going
to have a hodgepodge. But ideally, if all
goes well, tons of money will pour in and pour over. And hopefully, people can
take these neighborhoods, rehab them. And keep in mind that
it’s really important to have that ability
for these low income areas and these low income
people to not be pushed out. So we need
supplemental vouchers. We need government
agency financing. We need property tax abatement. We need a lot of incentives
to get rid of the barriers to start building. And we need to shake up a lot of
that is just in the New Orleans infrastructure in the city. They own these properties. And they can’t shake them
loose because they’ve got lawsuits pending. We need to clean up a lot
of the barriers to entry. And we’ll see thriving
communities again. The first Walmart opened in
New Orleans East 10 years after Katrina. How pathetic is that? So hopefully, we can get this
opportunity zone legislation and get some money pouring
into these locations. And it’s not just going
to go to Long Island City where it’s across
the East River. And Amazon’s going to benefit. We hope that it will be more
democratized across the country and everybody will benefit. And I believe it
will because there are a lot of different
players getting into the game and people that
are conscious in our business, in the low income
housing business, that care about people. And giving them that clean,
safe, affordable place to live. Proper stewards of investment,
I think, can change the world. And we’re doing it one
apartment at a time. Wonderful. My guest today has
been Eddie Lorin. He’s the founder of
Strategic Realty Holdings. Eddie, great to have
you on the show. Thanks for talking opportunity
zones with us today. We appreciate your expertise. It’s a pleasure to be here. Sorry if I offended you. Hey, that’s what
we do on this show. We offend a lot of people. Eddie, great to see you today. And hopefully, we’ll have you
back after this legislation gets cleaned up a little bit. We can hear about
some of progress– That would be fun. –on some of your projects
in the next year or so. Eddie, thanks again. We appreciate it. All right. And thanks to all of you for
downloading and subscribing and make us one
of the top podcast on iTunes and, of course,
here on our YouTube channel. We really appreciate it. Please share this
with somebody that you think would benefit
from building financial intelligence. Until then, go out there,
become a real estate investor. And believe it’s the number
one way to build wealth. It’s also an incredible way
to help rebuild communities, as Eddie and I were
just talking about. We’ll see you next
time everyone.

20 thoughts on “How to Invest in Opportunity Zones

  • Before my daughter bought her house, she was living in one of the worst apartments I've seen in a while. It was infested with bugs, mice and even some rats, the electrical didn't work right, the plumbing didn't work right and the carpet probably had not been replaced (or even cleaned) since the early 1980's–seriously. It was horrible and she started having bouts of depression, I'm certain that the living conditions were a big part of it (especially seeing how happy she is now with her house and how much pride she takes in it). Slumlords are really the worst, they perpetuate depression, crime, drug addiction, abuse…maybe they don't see it that way, but when you come home and the bugs scatter when you turn on a light, that's not a home. That's not a safe place to relax. It's not an escape from the outside world. And yes, sometimes tenants will destroy a place, but that doesn't mean you just leave it for the next tenant to live in. Yes, I want to make money, but I'm not going to put someone's health and mentality at risk to do it. I purposefully look for dilapidated properties in order to restore them into something that is comfortable to live in. It gives people a safe, comfortable place to live, and increases the values of the properties around it. Re-habing old buildings is fantastic, and they will pay off in the long run. You don't have to price them way out of the market, you can do low to mid-range income and have good tenants that are more than happy to live there. Anyhow, excellent video! 🙂

  • I really appreciate the diversity of topics you bring to your channel. It really helps share insight into other opportunities available in real estate. Btw, how quickly did you shave your beard? Lol

  • Great Topic once again! I've been meaning to dig a little deeper into this topic for a while now. Really interesting opportunity that's being presented at the moment.

  • Hey Eddie, how do you feel about the thousands of illegals that pour into your state with full support of your government? You don't think this effects the housing crisis there?

  • Here is a tip…Huge Opportunity Zone…East Cleveland, Ohio while University Hospitals and The Cleveland Clinic start buying up property for expansion…housing will also be needed in East Cleveland, Ohio…

  • Can you only fund an opportunity zone fund with capital gains or can you fund it directly with cash on hand?

  • We have a 135 acre Opportunity Zone land deal in Denver, Colorado. It is a great real estate deal even without the added benefits of QOZ'S. We also have an Opportunity Zone Fund that has the ability to invest in any OZ's in the country. You really want your capital gains invested by the end of 2019 in order to take advantage of the tax benefits that this plan has to offer! Message me or add me on IG: grahamcrackazzz if you are interested or have more questions.

  • Like GOT “ Winter is Coming” I think “ Gentrification” is coming. Unless I missed something I say buy and hold or build/renovate and collect the high rents. It seems like unless you’re a big big player all you can do as a small potatoes investor like us is make your money off the new folks moving in the neighborhood. Did I miss otherwise?

  • Here’s a tip for small potatoes investor like me and what I think is the majority of the audience here, buy properties at the border of promising opportunity zones! If the zone is promising and developing, rehabbing a property right at the border of the zone might be easier and cheaper to grab. Once the area is development it’s only gonna grow. Just my opinion.

  • If I already had properties in Opportunity Zones before this piece of legislation was passed, can I still reap the benefits of this tax cut? Or does it only apply to those properties purchased after the Act was passed?

  • Quit viewing at 2:30, because NEITHER of these guys had said anything useful. They didn't even give a definition or background of opportunity zones.

  • Thank you so much for this video. Great information on opportunity zones. You asked excellent questions that I had myself and got them answered here.

Leave a Reply

Your email address will not be published. Required fields are marked *