2018 NAWRB Conference Live Updates: Investing In Opportunity Act


Desirée Patno is the CEO and President of Women in the Housing and Real Estate Ecosystem (NAWRB) and Desirée Patno Enterprises, Inc. (DPE). With almost three decades specializing in the Housing and Real Estate Ecosystem, she leads her executive team’s expertise of championing women’s economic growth and independence.

While implementing the Investing in Opportunity Act can be complicated, all of the speakers on our panel were enthusiastic about the transforming change this tax incentive could bring to communities most in need. 

Our panelists come from industries and have backgrounds that stand to benefit from working with the Act, mostly by helping their clients figure out how best to use this particular tax incentive and by matching them with the right projects.

Sheri Orlowitz, Founding Partner of Artemis Holdings, LLC, moderated the panel, starting things off by declaring the Investing in Opportunity Act is “the largest tax incentive in my time, it combines doing well by doing good.” She went on to say the underpinnings of The Investing in Opportunity Act are to create social impact by generating significant tax savings with an additional goal to incentivize individuals who have large capital gains because the ability to defer taxes is a big incentive.

Rounding out the panel were Quinn Palomino, Principal of Virtua Partners, Michael I. Sanders a lead partner in the Washington, D.C. Office of Blank Rome specializing in tax law, Beth Mullen, CPA, and National Director of Affordable Housing Industry as well as a Partner at CohnReznick and finally, Karen Przypyszny, Managing Director, Special Initiatives of the National Equity Fund, Inc.

Structure of Tax Incentives

Sheri gave a basic overview of the Investing in Opportunity Act illuminating the fact that trillions of dollars of unrealized capital gains are sitting on the sidelines from stocks, mutual funds, and from the sale of businesses and assets. 

Under the Investing in Opportunity Act, taxes on these capital gains can be deferred if they are reinvested within six months and for up to five or seven years, however, most of our panelists believed that investing for up to ten years provides the best outcome for both the communities for which the tax incentives are intended and the investors. After that ten year mark, the investment is tax-free and there is no cap on appreciation. Sheri believes real estate will be an anchor of the Act. 

Real Estate and the Investing in Opportunity Act

At Virtua Partners, Quinn Palomino works with high-net-worth and ultra-high-net-worth individuals as well as institutions. Among the fields they work within are real estate including multifamily, mixed-use, retail, single-family and residential as well as hotel management. They also have a raising of capital and a structured financing arm.

She said one of the biggest issues that the Investing in Opportunity Act can help alleviate is the housing affordability crisis, most notable in cities like San Francisco.

The creators of the Act including Senators Cory Booker and Tim Scott came together to answer the question: How do we bring together all this capital gain and help investors know what to invest in?

With 6.1 trillion in capital gains sitting on the sidelines, How do you incentivize investors to put their money into areas that need it most?

Karen Przypyszny, in her work with the National Equity Fund, assists financial institutions investing in cities in need of affordable housing. She works in both the nonprofit and for-profit sector. The opportunity zones, the communities that will be affected by the act, must have an AMI of 80% or lower, she stated. 

Her company looks at current investors like banks and insurance companies and high-net worth clients who have capital gains (fewer banks do) to get them excited about this type of investment. Over at Blank Rome, Michael Sanders provides technical advice; guiding clients in forming new funds. He emphasizes providing help with technical issues is important because the legislation is highly complex, it was done quickly and there are holes in it. However, one must not let that stop you because if you wait on the government for new regulation, the competition will pass you by. “Get out there, do the best you can, and build in provisions that give you flexibility,” he says.

However, there are two types of funds to be aware of:  

  1. Self-control funds for high-net worth individuals
  2. Syndicated funds that deal  with typical security issues

Beth Mullen says 40-45% of Cohn Reznick’s practice is real estate focused. “We’ve been doing affordable housing since the sixties,” she underlined, going on to say that her firm was one of the leaders when the low-income housing tax credit came into play in the eighties. They are focused on a broader community development approach and are excited about the opportunity the Investing in Opportunity Act affords.

She went on to say there is a substantial supply of capital gains to be reinvested. This program allows us to determine its fate, future and success. And the challenge will be to match people to deals. Giving a  compelling example of Act in action, she told of a partner who called her about a client that sold his company and was left with 84 million in capital gains to invest. As he’s a real estate professional, he’ll be able to invest that money in assets helping communities; those assets will appreciate and the appreciation will never be taxed. Every single day, she talks to clients who never thought of investing in low-income communities about the Act and its benefits. 

The Investing in Opportunity Act: Not Only for Ultra-High Net Investors

One topic addressed by the panel was the idea that you need to have capital gains of millions in order to take advantage of the credit. That’s not necessarily true. It’s about investors who might only have $50,000 to fund to invest. Also, there are foundations willing to invest their money in a project that might only deliver a one percent return, if they know their ultimate mission of helping others is successful.

Ms. Quinn outlines there are requirements needed to be met. Under the Act, state governors were allowed to identify certain census tracts that need to meet certain criteria. So, the challenge comes in approaching people with capital gains who come from an investor mindset: constantly looking at risk and willing to accept a lower return if there is cash-flow in the project.

The ultimate end then becomes to encourage long-term investment with an incentive strong enough for these types of investors.

That’s where the deferred tax incentive really kicks in as an incentive, especially after the ten-year mark. So much so that when Quinn’s team took a good look at the Investing in Opportunity Act they almost couldn’t believe it.

“I think it’s incredibly creative,” she said. “I believe it will address the problem we have between the middle class and working poor [it’s] an incredible initiative to build those communities.”

Michael then highlighted out a few “hot buttons” key to understanding the Act.

The cash proceeds equal to the gain must be invested.

  • The original properties sold need not be located in a designated census tract.
  • There are a lot of technical aspects, hurdles and intricacies to overcome.
  • If you take the dollars and invest in a fund which otherwise would go to the IRS, those dollars can earn money for the investor.
  • Private foundations [501 (3) (c)  exempt should focus on this program and working with for-profits or forming for profits to make use of this.
  • Despite technical issues, don’t wait for the competition to swoop in.

This is a Different Type of Investment; Not Buy and Stash

An example was brought up by one of the panelists, where a potential investor talked about an apartment building bought for 5 million and they asked: “Can’t I just renovate it, does that count?”

The answer is that the approach needs to be conservative if 5 million is invested, then 5 million should be spent on renovating the property. As you don’t want people to buy land and stash funds away. The whole purpose of the Act is to improve the community. Hotels, for example, could be a great potential investment. They could provide jobs, meeting places, and train people from entry level positions to hotel management.

In order to properly maximize effectiveness, the Act needs all parties to work together: cities, lenders and investors. And projects need to be creative.

“Sean Parker [of Facebook] said it so well,”  Quinn said. “Just our foundations alone are not enough to move the needle on problems, we need private investors and  tax incentives are the best way.”

Best Ways for Communities to Take Advantage of the Investing in Opportunity Act

On the community side, the idea that localities need to be thinking about how they can use opportunity zones was addressed. A lot of foundations are discussing what the communities they serve need most and are trying to pair up with cities and states.

To illustrate this point, Sheri put up a slide showing opportunity zones all over the country.

Michael noted that university areas can be potentially attractive for zones and competition will arise among states to attract the dollars in regards to charities and foundations. He re-emphasized companies working either jointly with foundations or creating a non-profit subsidiary which can form funds that can then take advantage of the tax program thereby generating charitable projects focusing in a particular area.

The remark was made that Congress has a stake in this program; they want to see it succeed. So, there is pressure on the Treasury and IRS to be lenient and answer questions quickly. They don’t want to see it fail.

Because of their desire to not see these investments fail, Michael said he is not afraid to ask the government directly for guidance on technical issues for his clients.

As the panel came to a close, some additional points were made and questions were taken from the audience. Some key points made were: 

  • Certain states can be more difficult to work with than others as they may have their own restrictions; for example, Ms. Quinn found that the Sun Belt, Texas and the southwest and southeast are easier areas for opportunity zone investment.  
  • Time is of the essence. There is a demand for projects ready to go, those that are shovel read to take full advantage.
  • Middle-income investment can’t be overlooked.
  • Educating the local community is important as well as forming partnerships between all agencies and people.

The panelists then went to the audience for questions. One woman had questions about helping her clients learn how to invest using the Act and the panelists helped her figure out what would be best for her clients and discussed potential options with her. However, as the conversation became more in-depth, Michael said due to the complicated nature of implementing the Act, it’s best to work together off-panel. 

“Many questions remain to be answered,”  he says. Questions such as you have 180 days post-2017 to invest in a fund, but how long does the fund have to place the money into appropriate investments? He thinks a year, but what then happens if its a project that will take three years to develop?

Finally, the panel offered closing remarks and keywords of advice:

Quinn Palomino underlined the flexibility of the Investing in Opportunity Act. Capital gains investment can come not only from real estate but artwork, the sale of a business, or even stocks. It is important to get a sense of where your client’s interests lie since they will be investing over a longer period of time. In addition, as the investments will be checked regularly by the federal government, you need to make sure your investors or funding entities have experience and a pipeline.

Since you are investing in something in which you will not have to pay taxes on its appreciation value, specifically in the real estate industry, there is an incredible opportunity to impact communities and the more you the knowledge you build, the more you can work synergistically to make real improvements.

Sheri Orlowitz pointed out that some states might still levy their own capital gains taxes.  

In response to an audience member’s question about getting investors for nonprofits in HUD zones, and the inability of people to buy the homes that are available, Beth again emphasized Investing in Opportunity Act works best when holding for a ten-year investment, so perhaps a rent-to-own program would work best in that situation. She compares working with the Act, because of how new it is as “building a plane while learning to fly it at the same time.”

Sheri spoke directly to brokers highlighting the opportunity to work one on one with investors while Michael’s advice was simple: don’t hesitate to ask questions. Karen wrapped things up by promoting education by listening to webinars, watching power points and reading materials from leaders in the field who are familiar with the Act.

The bottom line: It’s all about opportunity.

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