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Opportunity Zones: Beyond the Hype

This piece was originally published on WealthManagement.com.

Opportunity Zones are the subject of endless speculation and conference fodder, especially in commercial real estate investment circles. As most know, these zones allow investors to defer and reduce taxes on any gains from property or business equity from investments in Qualified Opportunity Zones. A recent Prequin survey found that to date, capital raised by private real estate has reached $946 billion, with $124 billion raised in 2018 alone.

Despite the hype, wealth advisors and financial professionals need to be diligent in how they research and evaluate Opportunity Zone investments before recommending them to clients.

I’ve found that as the excitement grows around an investment vehicle, and advisors and reps are inundated with endless marketing spin, it can be hard to see the forest for the trees. Capital gets raised too quickly and is funneled into projects that meet the tax benefit criteria, but do not meet other fundamental requirements for sound investing. Before recommending an Opportunity Zone investment to a client, it is critical that you have a firm understanding of the investment in question, and the OZ program itself.

Understanding Tax Structure

There are three main benefits offered by Opportunity Zone investments: temporary capital gains tax deferral, a step-up in basis, and permanent exclusion of taxable income from OZ capital gains. It is important to note that temporary capital gains tax deferral is only pertinent to capital gains that are reinvested into a Qualified Opportunity Fund. In addition, investors must recognize their deferred gain prior to the OZ disposal date or before December 31, 2026. As with any client counsel, it’s important to determine if an investment of this length is suitable for that individual. It’s also equally important that the client understand what this expiration date means and can adjust other investments to ensure they meet their capital needs for everyday life.

On this topic of liquidity and how it relates to an investment cycle, the second benefit is a step-up in the basis for any capital gains reinvested in an Opportunity Zone project or business. I am constantly troubled by the apparent lack of understanding surrounding these nuances. Keep in mind that the basis is increased by 10% only as long as the investment is held for five years. If the OZ investment is held for seven years, the basis goes up by an additional 5% for a total of 15% — no small sum when we’re talking large investment opportunities and real estate developments.

The third and final benefit is a permanent exclusion from taxable capital gains income from the sale of an investment in an OZ Fund, as long as the investment is held for 10 years. This is relatively straightforward, but still must be communicated effectively to clients who may not realize just how long their investment is illiquid.

Beware of Misrepresentation

In order to meet the criteria to become a “Qualified Opportunity Fund,” a corporation or partnership must invest 90% or more of their holdings in a Qualified Opportunity Zone. The investments that qualify include partnership interests in businesses that operate in a QOZ, stock ownership in a business that conducts most of their operations within a QOZ, or ownership of assets that sit within an Opportunity Zone, like machinery or real property. All of this must be articulated by an advisor directly to their client so they know what they’re options are and what’s suitable for them.

Opportunity Zones work best as long-term investments that benefit both the investor and the local community. What I’ve found to be effective is moving capital gains from other investment opportunities into the right OZ Fund or property development, not just jumping into the OZ sphere with no regard for traditional fundamentals and due diligence.

Because of the tax benefits offered by Opportunity Zones, the term has become a popular buzzword in financial and real estate circles. Advisors and their investors need to be cognizant of the developers and money managers out there using the hype around OZs to raise capital, and act accordingly. As always, be thorough in your due diligence to determine whether a money manager is putting lipstick on a pig or providing a sound investment opportunity.

As a financial advisor, it is ultimately up to you to determine which of your clients might benefit from Opportunity Zone investments, even if real estate tax-deferral or reduction is the goal. If your client needs liquidity, or if they need to realize gains before the five, seven, or 10-year holding periods, OZ investments might not be the best choice.

Ari Rastegar is the Founder and CEO of Rastegar Property, a vertically integrated real estate investment firm, and Light Tower, a newly launched educational resource for investors.

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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The Most Important Asset

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Note from Charles: My good friend Ari Rastegar wrote a really nice piece on getting the most out of your most valuable asset: yourself. It’s a good read, and something to get you energized for the week ahead. Hope you enjoy it!

–CLS


 

Success as an entrepreneur or business pro depends upon identifying and attending to your most important asset. Don’t even bother thumbing through your business plan or re-reading your company mission statement to figure out what it could be. It’s YOU!

A business proposal sinks without a sound mind; a flawless strategy will fail miserably without an energetic leader; and a team will fall apart without morale and motivation. Taking care of your mind, body, and soul, what I collectively refer to as yourmost important asset, is critical to the success of any person in the world of business.

This is serious stuff. You can’t eat poorly, avoid exercise, and deprive yourself of emotional fitness and expect to achieve and sustain long-term success. Maybe some people can do it for the short term, but within time, they crash and burn. Why is it so difficult to eat a balanced diet, exercise, and feed your soul with thoughts of gratitude? Is it that we think we don’t have enough time, or perhaps we think it’s too complex? I’m here to tell you that it’s not. With a plan and purpose, you can see dramatic results. Instead of thinking of a lifestyle change as difficult or painful, think of it as training for life. When you trust in the fact that life is happening for you, not to you, it’s much easier.

The Magic of Threes.

Health and wellness is a three-legged stool. It’s attending to your body, mind, and soul for balance. Without one, you limp. Without two, you tip over. Try going all day without food, you’re not exactly pleasant to be around, right? Go weeks without exercise and then take the stairs to an important meeting. How long will it take for you to breathe normally again once you reach the top? Need a good night’s rest? Try thinking about your blessings for a few minutes before bedtime and see how you feel in the morning versus the day before.

Our lives are enhanced when you contextualize health and wellness within the metaphor of a three-legged stool. To illustrate, here’s a general list of what I do every day in the quest to take care of my most important asset: ME.

The Body.

I start every day the same: I down a large glass of water infused with lemon. This alkalizes my body and gets it hydrated and ready for action. I ascribe primarily to a diet where about 70 percent of what I eat is plant-based, non-processed food. Thirty percent of my diet focuses on high-quality protein, and I eat organic, local, grass-fed, and grass finished as much as possible.

I’m a boxer and I’m a yoga man. I don’t love weight training but I do believe in flexibility and agility. With boxing and yoga, I can be quick on my feet; explosive one moment and then calm the next.

I think you should shock your nervous system. This is why I engage in cryotherapy three to four times a week. By subjecting my body to three minutes of temperature that hits -240 degrees, I can heal my body and brain at an exponential level. Yes it hurts when I’m in the tank, but when I’m done, I feel like a king. 

The Mind.

Every morning, I engage in transcendental meditation, which is a practice of effortlessly being, not doing. I learned about the importance of meditation from Ray Dalio, who is arguably the greatest hedge fund manager, ever.

I also practice priming, a 10-minute exercise of emotional conditioning that puts me in an optimal psychological state of confidence and gratitude, and allows me to laser focus on my goals. This is a daily discipline I learned from one of my mentors, Tony Robbins. During priming, you breathe profoundly and put yourself into a state of gratitude and thoughtfulness. I think about my blessings and visualize my short- and long-term goals as already achieved.

The Soul.

I’m a faith-oriented man of God and believe in the divinity and unity of all major religions. My whole life is centered on God. I have a chapel in my office, which is a dedicated area for us to meditate and pray. As a company, we begin each day with prayer and end each day with thankfulness for all our blessings received. By showing gratitude, we are not focusing on self but instead are acknowledging our blessings and privilege to serve our clients.

However, There IS Balance.

My mind and body are a gift from God and it is my job to protect, care for, and honor them. It‘s also important to know that I practice moderation in all things, including moderation, and to me this means balance.

I follow this routine most of the time, because it’s important to let loose, relax on your diet, and goof off. I make sure to include those moments. I watch shows on Netflix, I’m addicted to ice cream, potato and egg breakfast tacos are my vice, and I’d eat French fries every second of the day if possible. I’ve even been known to gorge Sour Patch Kids.

I simply believe that you have to be moderately immoderate. If you do everything perfectly, if you follow every single rule, you take the joys out of life. From a physiological perspective, if you make your body so efficient, you’ll kill your immune system. You have to toss your routine a wrench every now and then. Just not every day.

I attribute my success to the fact that I don’t believe in diet. I believe in nutrition. I don’t believe in exercise. I believe in training for life.

I run a multi-million dollar private investment firm. I have a family, I have friends, and I have my health. Most importantly, my fortune comes from hard work, training, and the belief that my most valuable asset is myself. Follow my line of thought, and I’ll bet you’ll achieve greatness too.

Ari Rastegar is the founder and CEO of Rastegar Capital. With more than a decade of experience as an entrepreneur and real estate professional, he founded Rastegar Capital to provide access, transparency, and service to investors interested in commercial real estate investments located within the United States.

Photo credit: StockMonkeys.com

Disclaimer: This material is provided for informational purposes only, as of the date hereof, and is subject to change without notice. This material may not be suitable for all investors and is not intended to be an offer, or the solicitation of any offer, to buy or sell any securities nor is it intended to be investment advice. You should speak to a financial advisor before attempting to implement any of the strategies discussed in this material. There is risk in any investment in traded securities, and all investment strategies discussed in this material have the possibility of loss. Past performance is no guarantee of future results. The author of the material or a related party will often have an interest in the securities discussed. Please see Full Disclaimer for a full disclaimer.

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