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How Can HNW Investors Benefit from the Opportunity Zone Program? North Coast Partners’ Matt Temkin Explains

The firm’s Detroit Opportunity Fund is starting with a $500 million pipeline of multifamily deals in low-income pockets of the Motor City.

Matt Temkin is helping spread the wealth by taking advantage of a new opportunity in real estate investing.

In June, Temkin’s real estate investment firm, Detroit-based North Coast Partners LLC, set up an opportunity fund that enables family offices and high-net-worth investors to co-own apartment buildings in Detroit and reap unique tax benefits at the same time. The firm’s Detroit Opportunity Fund is starting with a $500 million pipeline of multifamily deals in low-income pockets of the Motor City; each of two subsequent funds would cover roughly $500 million in multifamily deals.

At some point, North Coast Partners would like to establish opportunity funds to invest in multifamily properties in cities outside Detroit, says Temkin, a managing member of the firm.

Governors in every U.S. state and territory, along with the mayor of Washington, D.C., have designated more than 8,700 Opportunity Zones, the bulk of which are in low-income census tracts, according to Enterprise Community Partners Inc., a non-profit housing group. All of these zones have been certified by the U.S. Treasury Department.

The Tax Cuts and Jobs Act of 2017 established the Opportunity Zone program “to spur investment in distressed communities throughout the country,” according to the Treasury Department, and to deliver tax breaks for those investments.

Temkin explains that family offices, HNW investors and companies can roll unrealized capital gains from asset sales of any type into an opportunity fund, then can receive tax benefits on the rolled-in gains. On top of that, gains generated by an investment in an opportunity fund are tax-free.

Cornell University explains the tax advantages of opportunity funds:

  • Any capital gains reinvested in an opportunity fund will receive a temporary tax deferral. This deferral will take place either on the date when the investment in the opportunity zone is sold or on Dec. 31, 2026, whichever comes first.
  • If an investment is held for at least five years, the basis of the original investment goes up by 10 percent. If it’s held for at least seven years, an extra 5 percent is tacked on, meaning as much as 15 percent of the original gain would avoid taxation.
  • If an investment in an opportunity fund is held for at least 10 years, the investor will exempt from taxation of capital gains produced by the investment.

In effect, the Opportunity Zone program has created a new asset class, says Temkin, a Michigan native who now lives and works in New York City.

“It changes the capital stack a little bit, and it gives a framework for this kind of investment,” he says.

In a Q&A with NREI, Temkin discusses the nuts and bolts of investing in opportunity funds, which some experts describe as a potential $6.1 trillion market, based on the existing pool of unrealized capital gains.

This Q&A has been edited for length, style and clarity.

NREI: How do opportunity funds work?

Matt Temkin: The funds themselves have to invest in qualified Opportunity Zones. In the zones, they can invest in real estate, they can invest in businesses, they can invest in infrastructure projects. It’s designed to be very inclusive of the kinds of investment that can be made in the Opportunity Zones. The funds are geographically restricted, but the types of investments that you can do are not very restricted. They’re much more inclusive than exclusive. The only things that are excluded are “sin” businesses like bars and horse tracks and tanning salons.

NREI: How can family offices and HNW investors benefit from opportunity funds?

Matt Temkin: With family offices and high-net-worth investors, at least in my experience, tax planning is a big chunk of what they do. The tax-advantaged treatment of the fund gains is estimated to add 50 percent to the value of the investment. Depending on a variety of factors, it can be anywhere between 30 percent and 60 percent, but a lot of people are settling on 50 percent as the difference between having a tax-free equity investment and a taxable equity investment.

NREI: Where do things stand with regulation of opportunity funds?

Matt Temkin: The regs aren’t done. We’re expecting more guidance from the IRS in the fall. One of the things we need to find out is how the IRS will treat debt held by an opportunity fund. The consensus is that the debt treatment should operate just like any regular real estate deal would operate, but everyone wants to make sure of that.

NREI: Why would someone want to invest in multifamily housing in an Opportunity Zone?

Matt Temkin: Investing in multifamily housing in Opportunity Zones is not only a good thing to do for the future of the country, but can generate superior returns.

There’s a feel-good component to the Opportunity Zone program—you’re bringing capital to areas that haven’t had that capital flow for a long time. Certain communities in the wake of the recession have done really well, and other communities have not at all. The new program is designed to address that. This is an elegant way to bring investment to areas that need it and at the same time provide a framework for tax-advantaged investments.

NREI: What is the vision for your Detroit Opportunity Fund?

Matt Temkin: The real dream is to come up with an end product that is a good product for multifamily tenants. You could have a win-win where you end up with a nice product that is not too expensive, but that can generate good returns for investors. We’re targeting a mid-teens IRR.

TAGS: Real Estate
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