On the show today we have Opportunity Fund Investing with Joe Ollis of Smart Cap Group!
Notes from the show
The Vantastic Life is…
– in Memphis TN
Show notes for Opportunity Fund Investing with Joe Ollis
Joe Bauer: Welcome to the Nuts and Bolts of Real Estate Investing podcast. My name is Joe Bauer, and I’m here with my cohost, Julie Clark. Julie, how are you doing today?
Julie Clark: I’m doing all good, Joe, just hanging out, getting ready to bust out this podcast, and then go visit with a group of our investor friends for our biweekly round table. It’s going super good so far. I am actually, funny enough … I’m outside. I’m by Greenlake right now, outside Tangletown Brewery. Going forward, I’m getting so used to doing this in these crazy locations, that it’d be awesome just to be able to crack a beer here in the middle of my podcast at the brewery and relax a little bit, but yeah, it’s going good. Where are you at?
Joe Bauer: I’m in Memphis, Tennessee, actually.
Julie Clark: Ooh, Memphis, Tennessee, so much real estate out of Memphis, Tennessee. You actually don’t hear that much about investing in Memphis anymore. Everybody’s talking about Texas and stuff these days. Remember Memphis Invest and all those guys? What’s his name? Kent Clothier and those guys that I’m sure are still around. I’m sure they’ve moved into other markets at this point, but I’ve not been to Memphis. What do you think, so far?
Joe Bauer: Right now, we’re just hunkering down, because it’s really cold here, but we did that to avoid the super freeze up North.
Julie Clark: Oh right, right.
Joe Bauer: Yes, it’s not bad. We haven’t done too much around here. Food’s good, good barbecue.
Julie Clark: Is there a national park in Memphis, or where’s your destination you guys are headed to?
Joe Bauer: We’re going up to slap the arch in St. Louis.
Julie Clark: Oh, right on.
Joe Bauer: That’s the next national park.
Julie Clark: That’s it? Is that actually a big national park, or is it in the middle of town and you slap it and move on?
Joe Bauer: You know? It’s just the arch, which is really weird. It seems like it should be a national monument rather than a park, but we’re going to go and see what it’s all about, but it is a national park.
Julie Clark: Right on, right on. Well, awesome. I’m trying to find a smooth transition into our guest today. Since I can’t do that, I’m just going to jump right into it. Today we are going to be talking about opportunity zones, because that is such a hot topic. If you guys are all listening in some of the community chats on our local Facebook communities, you’ve probably seen some talk and excitement going around with some of our ninja investors about opportunity zones as a new opportunity for deferring your capital gains and for massive tax benefits.
Julie Clark: Today we have Joe Ollis with us, who is the cofounder and COO of the SMARTCAP Group out of Redmond, Washington. Joe, what’s going on? We’ve got two Joes today.
Joe Ollis: Yeah, hey Julie, hey Joe.
Julie Clark: Hey, hey.
Joe Bauer: Hey.
Joe Ollis: It’s a pleasure to meet you guys.
Julie Clark: Yeah, I’m going to steal your joke from earlier. We know we like Joe Ollis already, a new friend, because he said it was like a Joe sandwich today, when we were talking about how I’ve got two Joes and a Julie; it’s like a Joe sandwich. We know he’s got a little bit of the funny in him, so he fits in well with our crowd, needless to say. Joe … which Joe am I talking to? That’s the question. It’ll be interesting today.
Joe Ollis: I know. I think we should create a restaurant. I mean if you think about it, J3 … It’s the perfect restaurant concept, yeah.
Julie Clark: Actually, I’d say like a fund.
Joe Ollis: It’s a pleasure to meet you guys.
Julie Clark: The J3 Fund, how about that? We’ll call it the J3.
Joe Ollis: Sounds good, yeah.
Julie Clark: A little bit about SMARTCAP … I’m just going to read some notes off of … Either I’ve pulled it off of Equire or your website or somewhere like that, but SMARTCAP is a direct commercial real estate investment company, focusing on value-add, retail, and office real estate investment deals, located in the Western United States. You guys … Joe Ollis if you want to fill in more about what your company is and what you guys are up to, give us a little background on the-
Joe Ollis: Sure, yeah, so SMARTCAP … We started in 2014 with my cofounder, Tim Shoultz, and I. We’re ex-tech geeks from Microsoft, who made that transition into commercial real estate because of passion.
Julie Clark: Nice.
Joe Ollis: We focus primarily on value-add commercial, so think of a retail office and industrial specifically. We started early on buying value, coming out of the recession and migrated. Currently, we’re under construction on industrial assets around the Puget Sound.
Julie Clark: Nice, nice. I’m going to back it up for a minute as a little overview of what the SMARTCAP Group is about, but I’m going let Joe Bauer kick off and back it up on a little rewind with the first question. We want to know more about you. Now we know a brief overview of what your company’s about, but Joe Bauer, hit him with the number one.
Joe Bauer: Yeah, so the first question that we always ask people is, Joe, we’d like to know what your background is. We want to know where you come from, how you group up, and how that got you to where you are today.
Joe Ollis: Good question. Well, man, I could probably talk about this all day, but I definitely took a very different route into commercial real estate than, I think, the average person. I grew up in a family that was definitely entrepreneurial. My dad was with TacoTime, which is a local franchise Mexican food restaurant, and my mom ran a candy store franchise, so I was one of the most popular kids in the neighborhood, because you can come to our house and eat tacos and candy any time of the day.
Julie Clark: Nice.
Joe Ollis: My grandfather owned a mobile home campground, and so I have very early memories of going with him and collecting garbage in a truck, when I was probably four or five years old, and then taking that to a giant dump and throwing it in the dump. For whatever reason, that memory sticks with me, but that was probably my first introduction to commercial real estate. That also, fast forward, is what kicked me back into commercial real estate after being in technology.
Joe Ollis: I went to school at the University of Oregon. I grew up in Eugene, Oregon, as well. I studied computer science and finance. I graduated in the go-go days of the 1990s and came up to work at Microsoft. I joined Microsoft at a time where you got to work on stage one products within mobile, so it was a great time to be there, had tons of fun, made great connections with people, but I ventured out of Microsoft and went to a company called INRIX, which was a big data analytics company. We were collecting GPS data points from cars and using that to build traffic models. That was really my first introduction to using data for things other than what they were typically supposed to be associated with.
Joe Ollis: I went back to Microsoft in 2010, to continue that journey, so to speak, in technology. At that time, my grandfather passed away, and actually my dad passed away in very short time periods, so I ended up inheriting those RV campgrounds. Originally, my intent was, hey, I’m a tech guy. I have no interest in trying to run this thing, and so I was going to sell it, but being that I’ve had a financial mind and always thought about stuff, I was like, I don’t just want to go out and sell this for a fire sale price, especially since this was right in the heart of the recession.
Joe Ollis: I started reading books and really trying to understand everything I possibly could about commercial real estate. As part of that, I decided to open the RV campground back up. It had been essentially closed and dilapidated for years. I hired a manager, hired a management team, and fast forward, got that thing fully occupied, actually pretty quickly.
Joe Ollis: From that experience I was hooked, and I went out and bought 40,000 square feet of warehouse. I chose a warehouse, because I felt like it was the easiest out of commercial real estate. I still believe that today, from the standpoint of it takes a typically low amount of capital to get that tenanted, and that the tenant turnover is pretty easy to handle, and it’s pretty easy to manage. That was my journey into commercial real estate.
Joe Ollis: Tim Shoultz, my cofounder, had a very similar journey, except for instead of buying warehouse, he was buying retail assets as a method of diversifying his exposure to tech stock. He’d been at Microsoft for 15 years, just like I had been. We ended up meeting at the Seattle Angel Conference, which is an early stage Angel Investment community in Seattle that helps guide early stage startups.
Joe Ollis: I remember when we met, it was the first day at a round table. I think Tim went first in the introductions, and he was like, “Hey, I’m Tim Shoultz. I work at Microsoft, and I love commercial real estate.” Things are going off in my head. Of course, it gets around to me, and I’m like, “I’m Joe, and I love commercial real estate, and I work at Microsoft.”
Julie Clark: Oh, bromance.
Joe Ollis: At that point-
Julie Clark: Bromance blossomed.
Joe Ollis: Yeah, it was. Yeah, it was. It was, totally. When we’re supposed to be here talking about all these new tech companies, all Tim and I would do is talk about commercial real estate. We decided very quickly that we’re like, “Hey, if you took your skillset, and I took my skillset, and we worked together with our network of Microsoft people, we could probably go do some pretty cool stuff.”
Joe Ollis: In 2014, we raised 10 million and ended up purchasing four properties together. This was all while we were still full-time tech geeks at the time. We were doing the two job business. I know a lot of your listeners are probably doing a similar thing today, where they have a full-time job, and then they’re trying to create passive income on the side.
Joe Ollis: Man, that year was brutal. We worked nonstop, and it was like having two jobs, but it paid off. At the end of that year, we had successfully acquired two retail assets and two office buildings, all within a value-add model. We had built our business and launched SMARTCAP together. Fast forward, today we’ve acquired and transacted over 150 million. We’ve raised about 70 million, and our journey keeps going. We love it. I mean, I feel so lucky with that. I’ve had the fortune to basically come into commercial real estate and find something I love and get to do every day.
Julie Clark: Let me ask you a question along those lines. That is an awesome backstory. Do you feel that … What was something in there that maybe gave you an advantage? Obviously, two smart guys that understand technology and passion for real estate … Do you think that your opportunity to tap into the Microsoft fundraising capabilities set you off faster than, maybe, you would’ve been if you didn’t have that crowd to plug into? Because that’s … It seems like there’s hard parts along the way. There’s learning about commercial real estate, which is a whole different animal by itself, and financing it and everything like that, deals. Raising the money … I mean, wow, what a great opportunity to tap into that. Now with your new opportunity, with the opportunity zones also, just an easy crowd to tap into, I’m jealous. I think we’re all jealous, right?
Joe Ollis: Yeah, well, I think … I guess, I feel like there was … I think the common statement is good luck comes to those people who work really hard, right? Create your luck. I do think we had a lot of luck that came to us, because we were already really working hard and making a name for ourselves within Microsoft. Some of our earliest investors are the executives that we worked for. Some of our investors and people who advise us are first level Microsoft guys, like are leading Microsoft, as well. That was certainly a huge kickstart for us, to go just sort of, I think, faster than a lot of groups could at that time period.
Julie Clark: Did it also make you a lot more nervous-
Joe Ollis: I think-
Julie Clark: Those first couple years, like, oh my God, we’d better not screw it up, or did you guys feel that … You know what I mean? You’re investing some money for some very important people. How nervous were you those first few years, or did you feel like, we know these are good deals, and that wasn’t it; it was more just hard work?
Joe Ollis: Man, we are always nervous. I don’t know, at any time, that we aren’t nervous about what we’re buying and what we’re doing. One of the mottoes that we have at SMARTCAP is being transparent. That is so important to us, from a standpoint of explaining to investors our strategy, why we’re doing that, what the risks are, what the downside is. That risk and that downside is at the forefront of our minds all the time.
Joe Ollis: We know investors are our lifeblood, and we call them that. Without investors’ money and without treating them well, SMARTCAP will not grow. It’s one of those things where I’ll take a phone call from an investor anytime they call me. That’s just one of those things I committed to, in growing this business. I think a lot of groups, as you start to expand … Keeping and maintaining that personal relationship, as well as having a principle, being able to be accessible to investors is super important.
Julie Clark: Yep, no doubt. How do you guys … Is anybody in your organization a broker, or how do you guys source your deals at this point?
Joe Ollis: We do not have a broker on staff. We have an acquisitions team. Tim runs that. We have three people on the team handling acquisitions. I tell you, it’s really transitioned since we started. If you were to think about … We had another lucky tailwind when we started, which is we were in the recession, and it was a buyer’s market. I mean, I remember running a CoStar report once in 2014, and there was 450 things for sale.
Joe Ollis: Early on, we realized, hey, our advantage is going to be able to quickly go through all of these on-market properties and find the diamond in the rough. That was our strategy. We spent a lot of time building tools, our own underwriting tools, to essentially go through these things and figure out which ones had the best risk-reward ratio, and that’s what we bought. Fast forward, then everything started to change in 2016; 2017 it got geometrically more difficult to buy things, and in 2018, it was insanity up here in Seattle trying to find decent value-add opportunities. It’s shifted quite a bit. I have a couple of hypotheses about why it’s shifted, but it’s shifted quite a bit to us buying some things that are on-market, which are brought to us by our extensive broker relationships, but we’re also seeing a lot of off-market deals. I’d say it’s about 50/50 right now.
Julie Clark: Nice, and the off-market deals are being brought to you by what, by brokers off-market? In our world, we call wholesalers, just people that aren’t even brokers, that are good at finding motivated sellers and opportunities, and maybe getting those in our contract. Have you guys ever accepted an assignment of a deal? Maybe that happens less in commercial real estate, but I know it does happen.
Joe Ollis: Yeah, we haven’t run across that personally. We typically work within the broker network. Because we already have a pretty big presence up here in office and industrial, we’re tied into the leasing brokers, which, believe it or not, are pretty well connected to the owners of existing spaces. That’s how we acquired one of our assets was the leasing broker, who was leasing a property we owned, was aware of a family situation of another seller, and we were able to buy a neighboring asset essentially the day it hit the market. That is a leg up.
Joe Ollis: One of our mentors is a guy … It’s a company called Goodman Real Estate. The President of that is Kelli Jo Norris. She’s an incredible woman. Honestly, we learn from her every time we go to talk to her. One thing she told us really early on-
Julie Clark: Well, guess what?
Joe Ollis: Yeah?
Julie Clark: I worked at Goodman Real Estate, and I know Kelli Norris. I worked for Goodman for 16 years myself.
Joe Ollis: Oh, my goodness.
Julie Clark: That is my backstory, but that’s a whole other topic for a whole other day.
Joe Ollis: Craziness.
Julie Clark: Go and have … We can grab a coffee over, but yes, I am intimately familiar with that organization, because that’s where I got my start.
Joe Ollis: That’s amazing!
Julie Clark: I still [crosstalk 00:19:26] with them today, yeah, mm-hmm (affirmative), yeah.
Joe Ollis: Yeah, well, you’re going to like … I think we’re going to have a lot in common. It’s pretty funny. When we dive into our story of some of the assets we’ve gotten. We bought a building from Goodman. That’s how we met them.
Julie Clark: Which one?
Joe Ollis: The South Seattle Business Park-
Julie Clark: Okay, yep.
Joe Ollis: Which is where Pinnacle was located, I think, for a short period of time.
Julie Clark: Yep, I recall that.
Joe Ollis: Kelli Jo told us once, with brokers, John Goodman gets, and Goodman Real Estate gets, first look at nearly any deal in the Seattle market. It’s because he’s built a reputation of writing big, fat checks to brokers and understanding that they are essentially the grease that keeps the industry moving. It’s funny. You think about, in residential real estate, all these tools and all these methods of consumers being able to buy houses, like Zillow and Redfin, and all that data, and how they’re going after that home real estate agent. I think it’s the exact opposite.
Joe Ollis: I really look at the brokers that are in commercial right now. Man, they own the market. At SMARTCAP, we understand that. We really, really get that. That’s where that marriage of having a technology background and understanding the power of big data and how to utilize that to make decisions gets married to the idea of like the commercial real estate really is owned by these brokers right now, and operating within that context.
Julie Clark: I totally agree with you. I think that it’s a totally … Yeah, it’s the opposite of residential real estate. That’s for sure, as far as brokers are heavily involved versus in residential real estate. People don’t want brokers involved, where brokers are welcomed in commercial real estate. That’s for sure, because they control everything you want to correct.
Joe Ollis: Right.
Julie Clark: Let me ask you. Let me back it up, because we’re going to have a side coffee about the whole Goodman Real Estate connection there, because that is some crazy bones. I go way back there. I used to work for Goodman, when it was just me and him and his secretary back in the day. That’s when I started.
Joe Ollis: Oh, my gosh, wow! Craziness.
Julie Clark: Yep, yes, it’s super crazy. I’m actually still partners with them myself on-
Joe Ollis: Okay.
Julie Clark: I have one building that’s … I used to own a bunch of buildings with them, but let me back it up. When you guys are underwriting your deals, did you guys build some custom technology tool or something like that, almost, I’ll call it, for lack of a better word, a dealbot or something like that, that allows you to analyze the data on every deal super quick? Do you have something that you run it through? I just thought, being tech guys-
Joe Ollis: We do. Yeah, I mean we couldn’t help ourselves. We would’ve … We had to make a decision really early on. I remember, Tim and I actually looking each other in the eyes and being like, “We are not going to be a tech company.” We had to constantly remind ourselves of that. There was a couple hard decisions. One of those … We spent a lot of time building our underwriting tools. We still, today, spend a lot of time tweaking those and playing with models and understanding new ways of utilizing it, but it’s not like … Commercial real estate, and real estate in general, is not a very complex algorithm, right? Where you think about, the big tech guys now are worried about AI and all these things. Commercial real estate isn’t that.
Joe Ollis: It’s a function of net operating income and risk is what we really care about, and controlling that and understanding that is what we try to do. We built a tool really quickly that, I think, the advantage to us was it allows us to run scenarios super fast, and then, in a market where speed of decision-making and being willing to go hard on earnest money gives you a big advantage. The brokerage community understands that, so when we come in with an offer, we want that offer to stick. The only way for us to have that ability is to really understand and dive through a property before our offer is written. That forced us to have a very quick tool. When we started, the big tool that people were using that was on the market at the time, was ARGUS, and ARGUS-
Julie Clark: I was just about to say that, because I remember, when I was at Goodman, and we actually rolled out ARGUS within our commercial real estate team, and that was … I don’t know. Boy, that was a long time ago. I was going to ask you, is anybody still using ARGUS today? It sounds like guys like you are building your own ARGUS.
Joe Ollis: Yeah, that’s essentially what it is. I found, early on, the actual specification for how ARGUS does all their calculations. I don’t know how I found this or what, but it was a tech spec on what ARGUS was. We deep-dived into that and found the pieces that were like, oh, that’s a really cool way. It’s like a modeling, essentially, of forward-looking assumptions.
Joe Ollis: We built our own tool, based off very similar assumptions that can be made within ARGUS. I think, really, where we differ from the tools that are out there right now is it is super quick and easy for us to plug in a pretty complex project and cut it up and run different types of scenarios and see what happens in different types of risk environments; whereas, in ARGUS, that almost takes a full-time expert to use, and-
Julie Clark: I think we had a full-time person on the ARGUS, in fact, at Goodman back in the day, now that you mention that. That’s all they did was run ARGUS models.
Joe Ollis: Yeah, yeah, and so like … It’s funny, because we didn’t write a crazy tool. Our tool is actually a series of functions of spreadsheets, at this point. We tried to go the crazy way and build this standalone tool, and we realized we were just over-engineering things, and that was back to that … We aren’t a tech company. We’re a real estate company.
Joe Ollis: It’s highly efficient. We use it every day. We have two people on our team. They continue to help innovate on it and make it better. The two acquisitions employees, in addition to Tim, one was a private banker at US Bank, and one was another Microsoft guy. We’ve kept a very different group of individuals, so to speak, that they don’t have full real estate backgrounds, but have come into real estate with a passion, and with a skillset that is easily transferrable. That’s how we have grown our company, is hiring super smart people, using the same tech approach to that. We utilize a lot of the same early day Microsoft methodology, in terms of employee reviews and goal settings, and that intensity that you used to have in the tech culture.
Joe Ollis: Our company … We are a little bit different than, I think, a lot of the other commercial real estate companies. We also reward our employees really well. They’re part of the deals. They’re part of the wins and the losses. I think that that’s an important culture we’ve created because of that.
Julie Clark: Nice. Well, let’s jump into the topic that we’re focusing on today, which is opportunity zones. I’m just going to read something real quick, since I’m not the expert. That’s why we have Joe on today. This is from an article that you guys were interviewed in, in GeekWire. I’m just going to give a brief overview of what it says about opportunity zones.
Julie Clark: Opportunity zones is … The new tax code has designated economically distressed neighborhoods across the country as opportunity zones, where investors can set up funds to finance projects, in the hopes of financially boosting areas in need. Then, of course, this GeekWire article says the hook, the investors who sell other assets and put the payouts into opportunity zone funds can defer their capital gains tax on those sales. If they hold the opportunity zone assets for long enough, they can avoid paying capital gains tax on the appreciated value altogether, which is probably the reason everybody’s so focused on this right now. Tell us about if that’s a good definition, or if there’s anything you want to add to that, or why you guys are so excited in kicking off an opportunity zone fund at this time.
Joe Ollis: Yeah, sure, so this is … I’m really glad we’re talking about this. I think that when investors start to think about opportunity zones and what is being accomplished with these new tax rules, I believe we’re only peeling back the onion a little bit, even in today’s conversation, which we’re going to get pretty detailed on. I’d want to start that framework with investors should have the mindset that this just isn’t for real estate, that this is a game-changing financial tool that’s going to be forward looking, becoming part of their tool set for financial management.
Joe Ollis: Early on, when we started researching opportunity zones, we were talking with the groups of like the head of wealth management for [UBS 00:29:50], and they get it. This isn’t just about economic incentive into under-serviced areas. This is a new way of wealth management, of being able to plan your taxes and being able to change the way you invest. It’s a huge deal, a systems change, not just a commercial real estate, but almost the financial service industry.
Julie Clark: I’m sorry. Also, in talking [crosstalk 00:30:18] … Right. I want to clear that up, because I think that we’ve all only talked about it in the context of commercial real estate or real estate investing, but it’s also for where investors can bankroll a business, using funds from the sale of other assets, as well, not just real estate, but starting a company in these certain designated neighborhoods and so forth. Is that accurate?
Joe Ollis: That is completely accurate. If you think about that, if you think about the Jeff Bezos and the Bill Gates of the world, who are sitting on billions of dollars of capital gain, they, all of a sudden, can go and kick off a new company in one of these zones and invest for 10 years. I mean, it’s unlimited how much capital gain they can go plug into these things, because [crosstalk 00:31:14]
Julie Clark: [crosstalk 00:31:14] capital gain, right? They’re sitting on all their stock options, unrealized capital gains, that now are underutilized, and now can be redistributed into something that not only improves communities, but also allows them to actually use that money than just sit on it. Is that what we’re saying in a nutshell?
Joe Ollis: Yes, yeah, that’s exactly right. I think a lot of focus right now is on commercial real estate and on real estate, apartment buildings and things like that. A part of that is being driven, because that’s the easiest way of applying the tax rule today. There’s a lot of gray areas that the Treasury and the IRS has not released guidance on, but the guidance that has been released is most easily implemented using commercial real estate or real estate. That’s why a lot of attention is being drawn to offerings like ours.
Joe Ollis: We were one of the very first opportunity zones to be launched as a fund in the Seattle market, so we got a ton of press on that. Honestly, it was kind of like we were surprised, because we thought everybody else was thinking along the same way, and there was enough regulation that had been released that it was pretty clear how to utilize the guidelines, but I guess we were pretty novel in getting this thing out first and building a strategic plan around it. Back-
Julie Clark: Yeah, let’s talk about that for a second. How does that work? Do you have to identify a property or something within an opportunity zone or have a business ready to launch within the opportunity zone, if we just use it in those two contexts? Because there’s timing guidelines and stuff like that on how soon the funds have to be placed, once they’ve been dropped into the opportunity fund and so forth, so how does it all work? Can you give us the basic story on that?
Joe Ollis: Yeah, yeah, so let me give the basic mechanisms for opportunity zones. Then, I want to back up and tell a little bit about how we fell into it, because I think that’s pretty unique. The basic rules of it are an investor has 180 days, after realizing a capital gain at an individual level, to place those funds, those capital gains, into a qualified opportunity zone fund. There’s one tiny rule change in addition to that.
Joe Ollis: If you were to sell stock, if you were a Microsoft employee or a company employee and you sold stock, you have individually 180 days to take that capital gain and place it into an opportunity zone fund. If, on the other hand, you’re part of an LLC … Say you had invested in a syndication of a commercial real estate property. I’m using that example, because this is what we do. That LLC sells and creates a capital gain. The LLC, as the entity, has until the end of their tax year, December 31st, to invest into a qualified opportunity zone. If they choose not to, then that tax burden of that capital gain falls to the individual. Now the individual has 180 days.
Joe Ollis: If you were a part of an LLC in 2018 that sold and created a capital gain. You have 180 days from the end of that, when the LLC closed down, or at the end of the year. That’s a caveat I think a lot of people weren’t aware of.
Julie Clark: [crosstalk 00:34:58] clarify that. Let me clarify that again. If you had a property that you owned in an LLC, let’s say an investment, and you sold that in, we’ll say, February of 2019. We’ll use this year. You have until the end of the year to … You have more than the 180 days. You have until the end of the year to place that into a fund. Is that right?
Joe Ollis: It is. It depends on two things. The mechanism is when the LLC shuts down, because then the tax burden falls to the investor, or at the end of the year for that LLC is when the tax [flows through 00:35:42].
Julie Clark: Okay, so whichever is longer or shorter? I guess, if that makes any sense.
Joe Ollis: Yeah, yeah, so it’s 180 days after the dissolution of the LLC, because that’s when, potentially, the tax flows through to the investor.
Julie Clark: Right. Sometimes, though, you get something sold, and you don’t dissolve the LLC right away, because there’s reasons.
Joe Ollis: That’s right.
Julie Clark: You could actually sell something in March of 2019, but you might not dissolve that LLC until the following year, for some reason, right?
Joe Ollis: Yeah, so that … This additional time period, I think, is what’s really helping investors currently. We had a lot of investors last year that were part of earlier syndications that we sold and captured capital gains. Those investors have, despite us selling those assets way long before six months ago, had the ability to roll their 2018 capital gains into our existing fund. That was … We’ve utilized that particular rule for our existing investors.
Julie Clark: Even, yeah, that makes sense. You don’t necessarily need a property. They just need … The fund is available as a bucket that they can place it in, which is obviously, probably, more favorable to them than doing a 1031 exchange, which has the timeframes really tight, right?
Joe Ollis: That’s right. That’s right. I think there’s going to be this shift. When you think about 1031 exchange, what you’re really doing is you’re kicking the capital gain can down the road. You’re essentially saying, hey, I’m going to take 100% of this gain, and I’m going to wrap it into a new property. Then someday, if I sell that thing, my tax is going to come due, and so at that point you’ve compounded the amount of tax you owe. You’re going to kick that down the road into another 1031.
Joe Ollis: I’m going to make the hypothesis now that 1031s are going to be coming more generational wealth type plays, where somebody is going to kick the can down the road, literally, until they die. Then they stop. Then the inheritance tax and the rule changes around that … There’s a step up of basis at that point, when they die. Essentially, they’re like, hey, generationally, I want to hand this down to the next generation. I’m going to 1031 exchange this money and never pay taxes on it.
Joe Ollis: That same mechanism with opportunity zones is essentially being allowed, except for you don’t have to hold that property forever. You can hold it for 10 years and get that growth of your investment tax free. Once that happens … Actually, we should talk a little bit more about the mechanisms of what’s happening with opportunity zones, because the incentive is more complex than that.
Joe Ollis: We talked about capturing the capital gain, and that capital gain can be invested into a qualified opportunity zone. We call it a fund, but really what the investor is investing in is a partnership or a business, an LLC, that’s structured to then invest into qualified opportunity zone businesses. We have a fund. That fund then has to go and buy qualified businesses, in order to qualify itself as an opportunity zone investment.
Joe Ollis: Once the money’s in that, the investor, who’s invested their capital gains, is deferring the payment of their capital gain tax. They’re able to defer that if the investment’s held for five years. They have a step-up that allows them to only pay, then, 90% of their original capital gain tax due. After seven years, if they hold, that’s further reduced by another 5%, but there’s a very important time period at this point within the tax code that says your original capital gain tax that you created at the sale of your investment, so if you sold stock today, that original capital gain tax due, has to be paid on December 31st [missing audio 00:40:42].
Julie Clark: 2020?
Joe Ollis: In 2026, yeah, 2026. What that means, though, is if you invest early now, we have the capability of deferring until 2026, and you’re receiving a 15% discount on the capital gain tax that you’re owing. That’s a pretty good incentive by itself, but forward, and I think we talked about this earlier, if you hold for 10 years, after 10 years, if you sell, any growth of that investment you placed in it becomes essentially tax free. That’s a-
Julie Clark: That’s crazy bones.
Joe Ollis: That’s the powerful incentive.
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Julie Clark: Let me ask you, though. For people that are … These are going to be my dumbbell questions now. If I invest in one of the investment terms, between the 5 and 10 years, so less than 10 years, that especially by the 7 to 10 year range there, I’ve got to pay my capital gains tax by 2026, but doesn’t timing become important then, if you have a bunch of investors? What if I need my money out to pay those taxes, but yet the investment that I’m in is going to go beyond 2026? Do you get what I’m saying? Does that make any sense?
Joe Ollis: Yeah, you’re capturing, actually, a pretty key component of this, where I think there’s a lot of excitement from investors, who can sell and capture a capital gain, and then use that money to go invest in a qualified opportunity zone fund. One of the first confusions we run into is, oh, I’m deferring my capital gain tax forever. We’re like, “No, no, no, you’re not. You have to pay it. The IRS is not just giving you a get out of jail free card. You’ve got to pay that in 2026, so you have to plan that.”
Joe Ollis: A lot of sponsors are taking an approach, so … When I say sponsor, SMARTCAP is a sponsor. We raise money to buy this stuff. A lot of sponsors are saying that, “Hey, use the cash flow generated from this investment to pay those taxes in the future.” I really think that’s a promise that might not be able to be made. SMARTCAP, the way we’re approaching it, is we’re educating our investors, and we’re saying, “You have to plan. You, the investor, have to plan where in 2026 you’re going to pay your original capital gain. We can’t promise the investment that you guys are going to make in our company and the assets that we’re going to be building and acquiring as part of opportunity zones will be able to pay cash flow to pay your tax bill in the future. When you sell, hold some money back that you’re able to pay your taxes in the future.” That’s something really important, I think, investors and your audience should be aware of and planning for, if they’re going to invest in opportunity zone funds.
Julie Clark: Right, because there is no … I mean, whatever you’re investing in, whatever the length of the term of your investment, it is what it is. You’re not going to be sitting there managing people’s tax 2026 … I’m sure there’ll be some thought given into that 2026 date on the investment decision, right?
Joe Ollis: Right.
Julie Clark: I mean, everybody’s … You’re aware of that being an important … but not letting it dictate whether or not you make the investment or not. Maybe it’s just a layer of strategy, right?
Joe Ollis: Yeah, that’s right. I think one of the other timing parts of this question, as well, is currently the Treasury and the way that the tax code is being interpreted is that that date is December 31, 2026, which would mean, if you invested and started your 10-year clock, your investment was in 2022, you’re not going to have seven years before your tax is due, thus you’re not going to get that discount. I think that’s a flaw in the way the law is written right now, but we’re interpreting that exactly as that date. This gets to an important point, I think, which is the rules and regulations around opportunity zones are not fully identified yet.
Julie Clark: Exactly.
Joe Ollis: There’s rules in play, and those rules in play dictate a very stringent set of criteria. SMARTCAP is working within that criteria. The way that the rules are written today and are being interpreted right now, we can easily qualify the money we’re raising for with the projects we have. The Treasury’s supposed to release, on around Valentine’s Day, further guidance, answering some of the key questions that are open currently. That December 31, 2026, being a hard date versus just the intent of a seven-year hold, is one of those things open for interpretation.
Julie Clark: What other questions are the common key questions that are a little fuzzy right now? Is there a couple more, other than that 2026 date?
Joe Ollis: Yeah, so there are quite a few what we call these gray area components. One of them that is a very common question is, can you refinance in the future to distribute cash back to investors from the opportunity zone investment? Right now, our interpretation of that, and the plan we’re building for our investment is that you cannot return cash to investors out of the qualified opportunity zone funds, because what that does is it impacts the investor’s capital balance, creating a taxable event, thus potentially killing that 10-year opportunity zone benefit. Some pushback-
Julie Clark: Right.
Joe Ollis: [crosstalk 00:48:21] questions around how does that operate? How is that really going to happen? The big one, though, is interpretation on what is dissolvable in the future? The next one is probably the most important to capture the opportunity zone tax [inaudible 00:48:43] after 10 years. The tax code currently states that you have to sell your interest in your qualified opportunity zone fund. That would essentially entail, for us to sell the building, you’d have to sell the fund, but how does that work, with regard to transfer of title. When you think about selling a building currently, you’re transferring title.
Julie Clark: Right.
Joe Ollis: Here the opportunity zone guidelines are saying you have to transfer the fund. We took an approach within SMARTCAP. There’s a lot of creative things happening with people raising money with the expectation that they’re going to sell buildings just like normal today and be able to keep the fund within this umbrella of the qualified opportunity zone fund. We took a separate approach. We’re like, hey, this is a gray area, so let’s make this as simple as possible. Let’s create one opportunity zone fund that owns one qualified opportunity zone business, which is, in fact, a single building that then can be sold as a qualified opportunity zone business that owns a single building in the future, and we’ll figure out a creative way of transferring title at that point, or if the Treasury comes out and goes, okay, wait. We were wrong. This is too complicated. The real way to do it is X-Y-Z, then we can do that, but we didn’t want to create another layer of complexity.
Julie Clark: Basically, [crosstalk 00:50:23] … right. A lot to think about, that’s for sure.
Joe Ollis: Sorry, Julie? Yeah.
Julie Clark: I said, a lot to think about, that’s for sure.
Joe Ollis: That is. Part of the reason we were comfortable, I think … We received a lot of questions from our investors of, “Hey, we know there’s a lot of gray area, so how can you be comfortable in this?” The way we looked at it is we took the straight, over tackle approach, not to drive into a sports analogy.
Joe Ollis: We made this as simple as possible, almost brain-dead, in terms of the rules and regulations around the opportunity zone. We’re going to qualify the money we raised right away, with the way that we’re doing a ground-up construction, so that risk is off the table. We’re going to hold for over 10 years, so that risk is off the table. We’re raising the money now, so we’re within the seven-year timeframe, so that date thing is off the table. We know there’s so much money and so many people following into this opportunity zone business, that that question about the sale in 10 years is either going to be solved by the Treasury, or it’s going to be such a common situation that it’s going to be solved by all the smart people that are raising money and doing projects in these zones. That’s how we grew comfortable enough to launch our fund and be one of the first ones out there doing this.
Julie Clark: Awesome. I’m excited to see what happens. I’m sure there’s going to be lots of changes that come forward, it seems like, while it gets all solved, but if the intent is there about what this is all about in the first place … Now that the idea is out there, too, I figure it’s never going to go away. It’s always going to get perfected as time goes on here.
Julie Clark: You guys are focused … I mean, also just going back to the fundamentals of is it a good deal or is it not a good deal, and it’s a bonus that it’s in an opportunity zone, and let’s set it up to meet all the guidelines, like you just said, and all the requirements and the holding period and stuff like that, but aside from that, putting that all aside, I’m sure you’re also just looking at it as is it a good deal or not, right? I would imagine, right? Your current project-
Joe Ollis: Yeah, that’s … yeah.
Julie Clark: Is what? Tell us what your current project is.
Joe Ollis: Yeah, sure, so you’re exactly right. When we started marketing for this, our tagline was not all opportunity zones are created equally, and that’s totally true. There’s opportunity zones that are like … Downtown Portland, Oregon, is an opportunity zone, for example, and parts of Seattle are. South Seattle is. Then there’s also … Forks, Washington, is an opportunity zone. I don’t know. I don’t want to be a commercial real estate developer out in Forks, but maybe somebody does.
Joe Ollis: With our project, we’ve actually fallen into a strategy and started building industrial assets in the North Seattle market before it was ever identified as an opportunity zone. We saw some pretty cool tailwinds happening with regard to the growth in Snohomish County, from a population and a job growth perspective, being married with the fact that industrial and manufacturing tenants were getting displaced, due to higher and better use of their existing facilities in South Seattle and Woodinville and Redmond, and then the high cost of rent in those areas.
Joe Ollis: We started to see this what would be called the industrial migration out of the core Seattle market. There was just way too much demand and not enough supply. Early in 2017, we started to build plans to do ground-up construction of a spec, flex-use warehouse in the north end of Seattle. We were kind of the frontiersmen going out there. We took a big bet, but we believed in our strategy, and we convinced a couple lenders that we knew what we were doing and started construction on a 95,000 square foot warehouse. Lo and behold, we’re about three quarters of the way complete with that construction, but we’re 85% pre-leased. We have signed leases with 85% of that square footage. Every single one of those new tenants coming in is migrating from its Seattle location.
Joe Ollis: It’s pretty cool, because we have a brewery that’s moving up. We have tool manufacturing. Then we have a group that’s actually moving down from British Columbia, trying to bisect or bypass part of that tariff and tax implications by doing final assembly in the United States.
Julie Clark: Right.
Joe Ollis: We saw this huge demand coming, and as part of the opportunity zone guidelines, we decided to double down on that, and so we acquired another 12 acres of land immediately adjacent to where we’re building currently, and are raising funds to construct up to 230,000 square feet of additional flex-use warehouse space. The beauty of the plan, where the opportunity zone helps, is we’re going to raise … In our case, we’re raising 10 million, which allows us to stage the development and delivery of the square footage, because the worst thing we could do right now is over-deliver to a marketplace that is so pretty small in the grand scheme of things.
Joe Ollis: It’s emerging. We know it’s emerging, but how quickly can new square footage be absorbed? That’s the risk. What we’re going to do is we’ve raised the full funds, which we’re going to qualify quickly, because we’re going to spend that in the construction of our first building, and only use the leverage of between 20% and 30%, so there’s some leverage there, but not a lot.
Joe Ollis: Now, as we see success in this first project, and it gets stabilized, we’re going to add additional debt to it, which we’re then going to utilize to construct the second 100,000 square feet in a separate building, still within the opportunity zone, still the same opportunity zone business. Now you’re sitting on a better use of money. Essentially, you’re going to add leverage as things continue to improve in this market, but you’re qualifying the full amount of funds on day one, and you’re acquiring all the land to support that growth at the same time.
Julie Clark: Let me ask you a question [crosstalk 00:57:41]-
Joe Ollis: We’re pretty excited about that. Yes-
Julie Clark: As you were talking about that, and it’s super awesome, I’m thinking about how long it takes to get permits and construction and all these things. I’m thinking about investors and techs, tech people versus real estate investors and returns and so forth. I mean, from a tech perspective, it all sounds great. I’m just thinking about how long all this takes to get permits, right? I don’t know how long it takes in Arlington to get permits, but is the alternative … I’m off track here, but this is what’s coming to my mind, that these tech investors … When they have their funds sitting in their stocks, it’s just sitting there, and it’s bouncing around, ideally going up, but it’s not materialized. It’s just paper, right?
Joe Ollis: Yeah.
Julie Clark: There’s [crosstalk 00:58:36] loss to them, necessarily, to diversify in something. You’re essentially parking your money in a deal, right?
Joe Ollis: Yeah.
Julie Clark: Without … Investors like to get their returns or their cash flow distributions and stuff like that, but we’re talking about … Are we talking about not being able to do that with an opportunity zone, right? Is there not any such thing as a cash flow distribution with an opportunity fund? It is more of a long-term play for later for your … At that time you cross the 10-year mark, where you have your appreciation upside, and how does that work? Does that make sense to you?
Joe Ollis: Yeah, that’s a great question. It is, in our case, and with any opportunity zone fund. It can produce cash flow, and that cash flow can be distributed as ordinary income. Once we build a building, and of course, while we’re under construction, it does take time to get permits. It takes time to do the construction. It takes time to lease and start collecting rent. We estimate that’s about one to two years, based off of the experience we’ve had with our first construction in this marketplace. We’re utilizing what’s called the safe harbor election, which allows for 31 months.
Joe Ollis: We’re essentially within the opportunity zone guidelines. We’re developing a business plan that allows us 31 months to place all the capital that we’re raising to qualify for the opportunity zone. That’s the timing perspective, and that’s an important point. Let’s come back to that, if you want to.
Joe Ollis: Your question pertaining to cash flow along the way … A business can create cash flow. What’s really being counted is the investors’ capital gains that are produced and the sale, the disposition or capital event, on an asset, triggering those potential issues with taxes. Along the way, a business is producing income. Because of the structure of the fund being an LLC or a partnership, that is passing through to the investor, so they’re receiving income. The same cool thing you can do with depreciation can offset that income.
Joe Ollis: That’s actually one of the beauties of this whole opportunity zone thing, as well, is if you can create an asset, have that asset then start to kick off cash flow, but offset that cash flow as depreciation, let me ask you, Julie. What happens to that depreciation when you sell a building? It gets recaptured.
Julie Clark: You have to recapture it.
Joe Ollis: How is it recaptured? The tax code looks at that as capital gain.
Julie Clark: Oh.
Joe Ollis: There is a possibility, and I’m not going to say that this is a for sure thing, because this is one of those gray areas, but there is a possibility that you can produce a cash flowing asset, use accelerated depreciation to offset that income, and then recapture that as capital gain when you sell, and not pay any taxes on it.
Julie Clark: Right.
Joe Ollis: I’m sorry if I sound excited, but man, that is a holy grail.
Julie Clark: Yeah, I’m following you. I am following what you’re saying. We’re talking about the different types and levels of capital gains tax that you have to pay, guys. You pay on your … Over and above whatever your appreciation proceeds are, but you also have to pay capital gains tax on recapturing, and at that rate of 25% right now, for your depreciation recapture when you sell, on top of your appreciation gains.
Joe Ollis: That’s right.
Julie Clark: You just were saying that might drop into the bucket, as well, right?
Joe Ollis: That is right. That is right.
Julie Clark: I don’t think anybody’s actually pointed that out yet. You’re the first guy I’ve … person I’ve heard say that, so secret/not secret, but high-five on that one. That would be … That’s a gray area, I assume, at the moment.
Joe Ollis: It is a gray area, and that’s one of those things that, when we talk to our investors, we explain that possibility, but really importantly, like that might not happen.
Julie Clark: That’s a bonus.
Joe Ollis: That drives back to your first point of this has got to be a great investment. There’s a gold rush of people out there being like, “Hey, this is opportunity zone thing, super sexy, super exciting. I’m going to go never pay taxes again.” It is a gold rush. I’m telling you, man. Morgan Stanley’s out there raising billions. Goldman Sachs has something out there raising billions. I think the rumor mill is there’s going to be $200 billion raised in opportunity zones in 2019. That’s freaking crazy-
Julie Clark: That is crazy.
Joe Ollis: Because there is not $200 billion worth of good real estate deals out there right now.
Julie Clark: Right, so that brings us to a point. Here’s another thing that could happen. Here’s a little forecast thing. The fact that that’s going on … Let’s say the rules get nailed down, the gray areas get minimized, and everybody knows what’s up a little bit more. That’ll probably happen sooner rather than later, because everybody’s pushing on the gas so hard. Do you think that it’s going to possibly skew the real estate market, as far as sales go, because people are going to be, or investors are going to be, willing to pay more for a property? If you look at the whole picture, with the taxes included, it allows you maybe to pay more for a property, because you’re considering the [inaudible 01:04:45] implications in your entire underwriting, right?
Joe Ollis: Yep.
Julie Clark: All of a sudden, you’re going to have to do comps of only properties within opportunity zones, only if they’re also in opportunity zones, which I guess makes sense, because it’s in the same area, but it seems like there could be a confusion that happens in valuations. Was it an opportunity zone purchase or investment, or was it not, right? Because people can still purchase property within opportunity zones, that aren’t using an opportunity zone fund or vehicle to purchase it.
Joe Ollis: Yeah.
Julie Clark: Does that make any sense?
Joe Ollis: It does. I think that is the million dollar question here. What we’re seeing currently is there is not being repricing because of opportunity zones, right now.
Julie Clark: Not yet, right.
Joe Ollis: I still think we’re pretty early. I really think if you were to boil that question down, like … The amount of capital sloshing around in the marketplace right now is astounding. It’s such a change from the 2007-2008, and I even think just in the general market currently people are more nervous now, but there’s still just a ton of capital in the marketplace trying to be placed. You see that with how much is going into 1031 exchanges in 2017 and 2018, triple-net, single-tenant properties. The cap rates being driven down on those was crazy, right? That, to me, was an example of too much capital in the marketplace.
Joe Ollis: Opportunity zones … I think we’re still just understanding it, to the point where I don’t think anybody really can answer if that’s going to directly impact the prices of these properties yet, or if, arguably, it should, right? I mean, maybe because of these tax benefits, you can overpay for property, and that just generally is going to increase the value of these, because of the marketplace, and that should be accepted, because it’s a great investment. I also think that you have to be really careful.
Julie Clark: [inaudible 01:07:09] Can somebody invest in an opportunity fund that doesn’t have to be from a sale of money going, transferring, in there, or can you just invest because you want to ride the appreciation wave on whatever that asset is and have some tax benefits at a later date, after the 10-year mark?
Joe Ollis: You can invest non-capital gains into an opportunity zone investment. However, you are not going to get the tax benefit. To receive any of the tax benefit, it has to originally be capital gains. That’s a very critical point.
Julie Clark: For people that are [crosstalk 01:07:55] a 1031 right now, that are sitting in a 1031, they haven’t been able to find anything, can they invest out of that 1031 that’s just sitting there looking for an investment into an opportunity fund right now? Did something [crosstalk 01:08:11]-
Joe Ollis: If they have capital gains that they’re trying to offset, yes, yeah, if they’re within 180 days currently of when they sold the property. If those funds are in a 1031 vehicle or sitting in their bank account, they could invest into a qualified opportunity zone fund. Now, I would really like … I think the 1031 complexity of sitting in a 1031 vehicle, I haven’t see that be done yet, so I’d caution somebody in that position to work with their CPA.
Julie Clark: Right.
Joe Ollis: The intent is any capital gains can be invested. I think what’s also important about this, though, is there’s a lot of people who are confused about how to qualify as an opportunity zone fund investment. Within real estate, the key thing, and I’m sure a lot of people have heard this, is the substantial improvement.
Julie Clark: Right.
Joe Ollis: That makes it hard to really understand what assets will work and what assets won’t work for an opportunity zone investment. Boil it back. We talk about these-
Julie Clark: Give us your [crosstalk 01:09:18] that.
Joe Ollis: Sure, sure. If you think about opportunity zones, there’s specific zones that were identified by each state’s economic council and government. They’re trying to encourage investment in these areas. The qualification is you have to invest in these areas. I’m going to pick on South Seattle, because that personally is my very favorite opportunity zone. That opportunity zone is south of the stadiums, west of Interstate 5, for local people, down to basically where Georgetown is, that area. It’s a horizontal box, and it’s all primarily industrial right now. That’s why I’m focused on it.
Joe Ollis: You have to invest in that zone, so your capital has to go into that zone to qualify, but with the assets that you’re purchasing, if you’re a real estate person, you have to substantially improve that asset to qualify. If you peel that back and say, how do you substantially improve something, what it is, is you have to double the basis of the existing improvements on the property. That’s the important part, the existing improvements on the property. If you’re buying a building today, and that building’s on a-
Julie Clark: How are the existing improvements qualified, like tax assessed existing improvement number or what?
Joe Ollis: Yes, so that is again one of those gray areas that’s a little tricky. I’ll tell you the safe way of handling it. That’s how we’re operating, and how most of the funds we’ve talked to are operating. If you look at the tax assessment in South Seattle of a building, the land value might be $10 million, and then improvements of an existing industrial building might be $2 million.
Joe Ollis: Let’s actually make this an easier one. Say the land is $8 million, and the improvements are $2 million, so a valuation of $10 million. To substantially improve that asset, if you were to buy it for $10 million, would be double the basis of the improvements, which is that $2 million, so you’d have to put another $2 million in improvements to qualify your opportunity zone.
Joe Ollis: Say you buy that land and that building for $20 million, arguably we would use a prorated valuation of what improvements are on that property. In our case, if you were to buy for $20 million, you’d say the improvements are 20% of it, so it should be $4 million, so you have to put $4 million into improvements to qualify.
Julie Clark: Oh, right.
Joe Ollis: You can see why industrial is a pretty sexy way to use this, because a lot of times, when you look at these industrial assets in some of these areas, like South Seattle, you’ll see valuations where the land value is 95% of the total taxable value, so it’s pretty easy to qualify by improving those separate properties. Contrast that, though, to you can’t buy an existing multifamily complex, where the land value might be two million, and the improvements might be six or eight million, because it would be very difficult to put another $8 million into an apartment complex. You really are talking about, in most cases, a tear down and rebuild or a very substantial renovation.
Julie Clark: Right, makes sense. I see why you’re going after those industrial properties, definitely.
Joe Ollis: Yeah.
Julie Clark: It’s all fascinating to me. It’s all … I think of the word … When I was looking and studying all this stuff about the opportunity … Does this make any sense? Let me run it by you. They’re like, I’ll call it double dip, right? Is there any … Does that make sense?
Joe Ollis: Sure.
Julie Clark: You’re, let’s say, a startup, or you’re a company, since we’re talking about you can invest in a business or real estate, right?
Joe Ollis: Yep.
Julie Clark: You could buy your own property. I mean, you could buy a piece of property to house your company, and you benefit in two ways, or not? Does that make any sense?
Joe Ollis: You’re exactly right, yeah. I think you’re catching something that I don’t think a lot of people have thought through yet, and-
Julie Clark: Do you think Amazon thought through that?
Joe Ollis: I do. When they chose an opportunity zone to go and put their second headquarters in-
Julie Clark: Right.
Joe Ollis: Both Tim and I looked at each other like, oh my God, Jeff Bezos is the best tax dodger in the history of the world, right?
Julie Clark: Yes.
Joe Ollis: Not only is he-
Julie Clark: Now it all makes sense, doesn’t it?
Joe Ollis: Getting a huge incentive from the cities, but now he’s going to be able to go and substantially improve all this property in an opportunity zone to take advantage of the tax rules for his real estate, and then on top of that, if he does create additional companies or raise funds, hypothetically he could structure a way to build opportunity zone businesses in these buildings, as well. It’s a trifecta of coolness that they got to take advantage of, but I think they’re right.
Julie Clark: How does that work with a business plan? What’s the tax benefit to a business with capital gains, right? I mean, does that … I’m not sure I’m following that 100%, right? They have their … How does the tax … what … Maybe, what’s the benefit to a business, who starts a business, within an opportunity zone? Do you know?
Joe Ollis: It is the same benefit. If you were to create a business, so let’s just use South Seattle and industrial again. We’re creating an asset in South Seattle that’s going to be an industrial building that will support manufacturing. There is a widget manufacturer that’s going to go and occupy space in our industrial building. Lo and behold, they’re in a growth period, and they’re going to go and raise funds as a qualified opportunity zone business. If they raise funds in that, and capital gains are invested into it, those capital gains receive the same benefit-
Julie Clark: Got it.
Joe Ollis: As the investors who are invested in the industrial building that we’re constructing.
Julie Clark: Got it.
Joe Ollis: To me, that’s the part that I think is not being broadly discussed and advertised yet, because that’s where the most gray area and rules and regulations still need to be clarified. If you draw back full circle to what I said earlier, right now commercial real estate is the easiest way to implement these rules and regulations to qualify as an opportunity zone business. The real intent of this and why this was drawn was to encourage economic growth, which to me is businesses and job creation. That’s what the opportunity zone is supposed to handle. That’s really where I think it’s going to go.
Joe Ollis: I mean, this rule, this tax code, doesn’t expire until sometime like 2048. If we think about it, we have 20-plus years, 30 years, to see this be implemented. I think it’s going to be profound in how people invest in businesses, and not just real estate.
Julie Clark: Yeah, you should-
Joe Ollis: It’s kind of funny. To deviate a little bit on this, when that GeekWire article came out on SMARTCAP, it was shared out to a lot of other groups, like I think The Stranger picked it up, which is the local newspaper here in Seattle. We were called out as, oh, gentrification; rich, white guys in real estate; all these bad things. We’re just looking at it like, oh my goodness. One, we took it a little personally, because we were like, hey, we’re actually the ones creating an … improving already existing uses for this industrial real estate and supporting areas to grow more jobs. I think the other thing that really does draw, that they’re really correct on, is gentrification. You think of a lot of these areas … Downtown Portland, Beacon Hill in Seattle, and Chinatown in Seattle are identified as opportunity zones.
Joe Ollis: There’s already a lot of excitement on builders going into there to construct more multifamily, for example, and to gentrify that area. I think the opportunity zone, the fact those are identified as opportunity zones, is just adding fuel to that fire. What would’ve probably taken three or four years to be done, and to have a slow, smart growth for these areas is just going to be accelerated. That, to me, is something that, I think, as Seattle, we really need to be careful about and to be smart about, as we encourage that growth but don’t do it too quickly.
Julie Clark: Oh, and the permitting process of all this stuff could kill … I mean, you’re shaving so many years off right there, as it is. I think that’s … If it’s going to even get crazier, the city needs to be able to handle the volume of stuff that’s also going to be coming their way as a result of this, and probably any … It’s going to be interesting to watch.
Joe Ollis: Yeah.
Julie Clark: Well, Joe, this has been super awesome. I’m going to … We could go on and on and on like this. It’ll be interesting. We’ll have to ask you to come back, maybe next year or later this year, once … and get a check-in. We’ll see, from where we started today, where things have shifted and changed, where gray areas have been cleaned up, and maybe you can be our guy to keep us all informed.
Julie Clark: I know there’s a lot of people that listen to our podcast, that are members of Seattle Investors Club that are also tech. They’re people coming out of tech, that are going to be interested in knowing what the alternatives are for their own portfolios. I highly encourage you guys, whether you’re in tech or whether you’re just a real estate investor that’s going to be selling some of your assets here, to check out and stay connected and follow what the SMARTCAP Growth Team is up to. How would people be notified if you were raising funds? Do you go in-house with your inner circle, existing investors first, or do you make that public on your website, for people to get notified of opportunities that they … What are your … How do you guys roll on that?
Joe Ollis: Sure, so we … Any investor can come right to our website, which is smartcapgroup.com. Right there, they can sign up, and they can see our existing offering, which is an opportunity zone offering. That’s a 506(c) offering, so we’re allowed to broadly talk about it, and accept accredited investors. We also have other offerings, that are within 506(b), so we can’t broadly discuss those. Those are ones that we, after a user signs up and we talk with them, can start to give details on. We’re also currently listed on CrowdStreet. We’ve had a longtime relationship with CrowdStreet. We really like what they’re doing. We really like the founders there. Our opportunity zone fund is up and available on that, currently, as well. That’s how investors can reach out.
Joe Ollis: I love meeting with investors. I love finding out about their story. We encourage investors to do a lot of diligence. Back to that transparency goal of ours, we provide a lot of details, including our underwriting on deals, to help educate investors and to help them see if what we offer fits into their portfolio.
Julie Clark: Awesome, awesome stuff, guys. My mind is … I’m listening to Joe speak, and at the same time, my mind is wandering already about all kinds of different things surrounding this topic. We will definitely have you back. Thank you so much for taking, what I’ll say is, a long time today. I don’t know if we’ve been on here an hour or what, feels like it, but super informative on a topic that everybody’s been wanting to do a deeper dive on.
Julie Clark: Congratulations to you and your team. Maybe we can grab a coffee sometimes and talk shop about some of the synergies and connections that we have between us, which is pretty funny. Funny how [crosstalk 01:23:20] small world.
Joe Ollis: Yeah.
Julie Clark: Thank you so much. Joe Bauer, where can they find the details? We’re also going to have a link to the IRS code on the opportunity zone rules as part of the show notes, in case you geeks out there want to read up on that yourself. Joe, Joe Bauer, hit us with the details on where they can find today’s podcast info.
Joe Bauer: Heck yeah, guys. You can find all the info at seattleinvestorsclub.com/65. That’s seattleinvestorsclub.com/65. Remember, we love it when you guys subscribe or give us a review on iTunes. You can do so at seattleinvestorsclub.com/itunes.
Julie Clark: Good stuff. All right, guys, I’m going to wrap it up here. I’m going to go jump into our weekly or biweekly round table, here at the Elysian Brewery, Tangletown, up by Greenlake. If you guys are in the hood on a … What day of the week is it? On a Thursday, we’re up here every Thursday, from 12:00 to 2:00. Come have lunch with us, small round table, small group, mastermind. It’s been amazing, the power of what a small group accomplishes, totally different environment than the large real estate meet-ups you guys are going to. I encourage you to come by and check it out, and see how it’s different. You might like it.
Julie Clark: Other than that, on Tuesdays, we are down at the Elliott Bay Brewhouse and Pub in Burien from 12:00 to 2:00 on Tuesdays. Again, come join us for lunch, hang out. I’ll see you guys all soon, over and out.
Joe Ollis: Cool. Talk to you guys later.