Attention: This is a machine-generated transcript. As such, there may be spelling, grammar, and accuracy errors throughout. Thank you for your understanding!

Roger Harris: Hello again everyone. It's time for another episode of the Federal Tax Update podcast. This is Roger Harris, and I know you're all happy to know that Annie is back after not being with us on our last episode. Annie. Welcome back. You were missed.

Annie Schwab: Good to be back. Although I saw that you and Amanda had a great podcast, so that went well.

Roger Harris: Yes. They're just never the same without you. So we're glad you're [00:00:30] back. Uh, we have a really interesting topic today and a, and a very, very, uh, trained and expert guest. But let me kind of set this up and then I'll ask Annie to introduce our guest. You know, we talk a lot about different tax strategies and a lot of tax stuff in this podcast. And, you know, a lot of times we talk about credits and strategies that aren't real, uh, that people promote and take advantage [00:01:00] of. Well, what we're going to talk about today is a strategy that it's not new. I mean, there's some tweaks to it like there is in everything, but it's maybe one that is not used as often as it could be or should be. And it not only is a great tax strategy, it also can be great for the community. And, um, so we're excited about having our guest. So Annie, why don't you introduce our guest to everyone?

Annie Schwab: Sure. Um, it's our pleasure today to have [00:01:30] Jonathan Tower with us. I'm going to give a brief intro, but his bio is very impressive. So my little spiel here, um, introducing him is probably not going to do him justice. But Jonathan is the founder and CEO of Arctaris Impact Investors, the nation's largest impact focused manager of Opportunity Zone funds. Since 2009, he has launched multiple funds investing in housing, operating companies and an infrastructure to revitalize Disinvested [00:02:00] communities. Arctaris has invested in nearly 3000 housing units, including L.A. county's largest permanent supportive housing development, and the conservation and conversion of the shuttered Baltimore Hotel into 303 affordable units. He's also led the reopening of Maine's Saddleback Mountain, which is now ranked the number one ski resort in the East and recognized expert on Opportunity Zone policy who began his [00:02:30] career as a Bloomberg journalist. He authored a 2026 white paper that helped shape the federal executive order on workforce housing. He previously worked in private equity at Fidelity Ventures and IBM, and he holds an MBA from Harvard Business School and a B.A. from Georgetown University. Jonathan, it's a pleasure to have you here today. Like I said, I'm not sure I gave your your bio enough justice here, so please feel free to add anything more about your your background, your [00:03:00] experience.

Jonathan Tower: Um, yeah, Annie, it's great to be here and I'm humbled by the introduction. Thank you. You did a better job than, than I would have. Uh, but, uh, yeah, it's, uh, it's great to be talking about this with, with, with you and with tax professionals here, because I think there are a lot of interesting questions right now about opportunity zones. How do we make sure that the Opportunity Zone program can benefit the communities it was designed to serve? How do we make sure that it's attractive for retail investors, [00:03:30] for institutional investors? Um, and what are the types of new strategies that Opportunity Zone investors are looking at? Given the January 1st, 2027 launch of the new Permanent Opportunity Zone program, owes 2.0 was created out of the one big beautiful Bill act and, uh, sought to make Opportunity Zones permanent, and governors this month are designating the new census tracts that will be in effect [00:04:00] for the next decade. And these are really the places in cities and states that will be seeing the most growth over the next decade. So I think it's a very timely talk for us to be having right now.

Roger Harris: Yeah, I think this is a perfect discussion. And before we get into some of the the details, because again, our audience, you know, may have some are going to have more knowledge of opportunity zones than others. But one thing that in talking to you and looking at your bio that, you know, a lot of people are in the business [00:04:30] of promoting tax strategies, but you seem equally as motivated by what good the money going to these communities is used for, and how it is to help make sure that affordable housing is available. You're not just someone trying to tell people how to save taxes. You really care about how that money is used and those things. So first of all, I want to I want to say that's an admirable and congratulate you for having that other side of the coin covered. [00:05:00] Where does that come from? I mean, how do because again, I've never dealt with someone who really cared about anything other than saving taxes.

Jonathan Tower: Well, thanks. It's a it's a great question. I, um, spent a lot of time during the great financial crisis working in underserved communities, trying to help make things better. I was looking at companies to invest in or buy at that time. And there, there, uh, there were a lot of challenges. And, um, you know what I found during those two years, the [00:05:30] GFC period was, uh, there are a lot of amazing companies. There are a lot of amazing real estate opportunities in underserved markets where investors can do good and do well. And doing good for me means creating quality living wage jobs, creating housing for the homeless or those who can't afford housing. It means in investing in a community's future. Doing well is more kind [00:06:00] of what investors would measure you on. You know, they want to see performance. They want to know that they get the tax attributes that they're hoping to get through an investment like this. Um, taken in isolation, I think most people in the private equity or real estate space would say simply, if you focus more on community benefits, you're going to reduce my returns, its social impact at, at the, at the sacrifice of returns. And [00:06:30] I can certainly tell you that can happen. I mean, if, if a landlord cuts his rents to be more accommodating to tenants, the returns are probably going to go down on that project.

Annie Schwab: Uh, economics. Right?

Jonathan Tower: Yeah. It is. And I mean, to be honest, our, interest is in investing at the intersection where that is not true, where, um, cutting rents can help up, open [00:07:00] up federal or local government programs or foundation partnerships or, you know, corporate master lease agreements or different things like that that we do. Cutting rents is actually designed to generate higher returns. So that that intersection, I'd say it's, it's rare, but it's, that's our representative transaction. Those are the types of things that we actually look for. If we were just investing in, you know, golf courses in the Sunbelt, I don't think there would be much [00:07:30] social impact mission. And I don't think we'd be partnering with federal or state governments and certainly no foundations, maybe 1 or 2. But, you know, foundation is going to want to support your golf course project. Um, but when you look at, um, affordable housing, um, if, if your initiatives are aligned with elected leaders. If your missions are aligned with local major employers like hospital systems or foundations, then there's an ability to work with the community [00:08:00] as a partner and to help make some investments that otherwise would not have been possible. That's that's really what doing good and doing well means.

Roger Harris: Yeah. And I think, again, you should be commended for doing that because, you know, this is one of the things a lot of times things are intended to have a positive effect in the tax code, but they really don't. I think Opportunity zones at least have the opportunity to actually use that word again, to do what was intended by Congress is to really help these things. And [00:08:30] so I commend you for looking beyond just the tax benefit and doing that. That's that's great. And, um, you actually, I guess, and I promise to our listeners, we'll get to the technical stuff here in a minute, which I know most tax professionals love. But you were really involved in a lot of working with. You mentioned it working with policy makers and whatever in this whole process of this opportunity zone one and two. Talk a little bit about that and let people understand. So when we get into the details, they'll know right where you're [00:09:00] coming from and what your involvement was and how that came about.

Jonathan Tower: Sure. I think at the starting point, our our core competency is using federal and local programs, things that are created by Congress to help benefit low income communities, our core competencies. Competency is using those programs and hopefully, you know, using them better than other people do more in the four corners of the legislation, the spirit of the legislation and [00:09:30] and hopefully better in terms of financial structuring. And because we've done that, I mean, going back to the 2010 Jobs Act, when we were using Jobs Act programs to invest in the lowest income parts of Detroit. It got the attention of the US Treasury Department that, you know, these tools they used were working really well for us in Detroit, and they wanted to learn more. So, um, I got a call from, uh, Treasury Secretary [00:10:00] Jacob Lew, chief of staff back in 2013, 2014, saying, hey, the Treasury Secretary wants to come and meet you in Detroit and meet with you. And, um, I was thrilled. And, you know, I cleared out my schedule to make sure I could get from Boston to Detroit to, to meet, to meet with him. And, uh, two, two U.S. senators joined him and 40 Secret Service members.

Annie Schwab: And you.

Jonathan Tower: We, you know, we didn't meet at a glass office building [00:10:30] in Detroit. We met at our office, which at that time was in Hamtramck, um, which is a kind of post-industrial, uh, neighborhood at the time, uh, where our, office at the time was, was, uh, inside of a stamping company that had actually been used as, as the movie set in eight mile. Eminem worked there in eight mile. It was.

Roger Harris: All right.

Annie Schwab: See how famous you get?

Jonathan Tower: And he, you [00:11:00] know, Treasury Secretary Lew thought that was that was kind of cool. And, you know, we had some movie posters around to prove it. But what he thought was really neat was that, you know, of the 160 workers that were in that plant, more than a third of them were on a, um, prison vocational program. It was a work release program where, uh, people who were currently incarcerated were able to go in and get vocational skills training and bolster their resume relative to what they might [00:11:30] have been doing before incarceration so that when they got out of jail, they would have some job experience and hopefully an offer and be able to come out there. And he really liked that. And he was he was kind enough to, uh, I call it word of mouth marketing, but I think the Treasury Secretary says something and people, people listen and.

Roger Harris: It gets their attention. Yeah.

Jonathan Tower: Started getting calls from a lot of different states and, and, uh, whatnot that wanted to do something similar to what we had built in, in Michigan. And, uh, that led to a [00:12:00] national fund. But that was also really the basis for, you know, more than a decade and a half of kind of, uh, pro bono advisory work that we've done with federal administrators trying to tell them how we're using their tools and how they could be used better. And then also a fair amount of, hey, if you change this and this, it would work a lot better. So, you know, getting, getting, getting feedback.

Annie Schwab: I like it.

Roger Harris: Yeah, real world feedback.

Jonathan Tower: And, and [00:12:30] you know, what I'd say is that, um, you know, even though everything is political these days, you know, anyone who is working in Treasury or HUD who's looking to do, um, you know, to use these programs better. You know, it's coming from the right place. I mean, these are these are public service professionals who, you know, want to know, how do we create more housing units? How do we create more jobs and underserved areas? How do we do these things better? So it's, it's given a unique perspective. And [00:13:00] then fast forward to 2017, when the Tax Cuts and Jobs Act was passed by Congress. I mean, that created Opportunity Zones 1.0. That was the first part of the program. That's what we've been investing in um, here to date. The it was it was clear to me that Opportunity zones were going to be really successful. It was going to be really big. And one point I was like, you know, if Congress could just pass this, it's going to be incredible. And, um, you know, lo and behold, Ozs [00:13:30] have become the most valuable acronym in our tool shed. I mean, like, we, we use Ozs more than all the other acronyms combined to create these types of economic development programs. And I think what's really good about it is it's efficient. It it is a tax incentive program. It doesn't require, you know, 150, uh, consultants in the middle of the transaction. There aren't a bunch of middlemen. It's a relatively simple filing [00:14:00] to add to a tax return. You've got ten years of, of, of hold and reporting and compliance, but it's, it's, uh, it's successful because of its simplicity. Uh, and we do new market tax credits, we do historic tax credits. We, we use a lot of different things there. Those all have a lot of fee drag. Opportunity zones are relatively pure going from the taxpayer through a fund into whatever the.

Annie Schwab: Yeah. Can you [00:14:30] tell us a little bit like, how does it actually work?

Jonathan Tower: Sure. So, um, the, the three main, uh, benefits of opportunity zone investing. And I'm going to answer the question based on Oz 2.0, which is the new program starting January 1st, 2027. Oh, Z 2.0 is better than Oz 1.0, but Oz 2.0 simple, simple. An eligible investor is someone who has, um, realized a short term or long term capital [00:15:00] gain in the last 180 days. So this is, um, an individual, a corporate, um, you know, banks, insurance companies, high net worth investors would be kind of the typical, uh, typical category here. They had a capital gain within the last 180 days. Uh, if it's a partnership gain, it actually 180 day mark starts March 15th of the following year that you had the gain because that's the partnership tax filing deadline. And then you have 180 days. But you know, [00:15:30] the rules are basically you had a short term or long term capital gain within the last 180 days. And by investing in the fund, you get to defer those taxes out five years. It's a five year rolling basis. So if you if you invest in 2027, it's 2032, it's, you know, so on and so forth, five, five years out. The second benefit is a tax basis step up. If you invest in a non rural area, if you invest basically in cities or suburban areas, you get a 10% [00:16:00] automatic tax basis step up. So instead of owing $1 million in taxes you owe $900,000. If you invest in rural opportunity zones, the tax basis step up is 30%. So you get a tremendous benefit there, 30%. Um, and then, um, the final piece is that, um, at exit after the 10th year, a qualified opportunity zone sale produces no capital gains. And that's really the biggest driver [00:16:30] of value.

Annie Schwab: Yeah.

Jonathan Tower: You can double your money or quintuple your money or, you know, make 0.1% return. There's no capital gains tax on an eligible exit. And in that, that's obviously good. I mean, if you think about, okay, I invested a dollar, now it's worth $5. I sell it for $5. It's nice to have $4 of tax free gains. Mhm. Since this is a tax benefit, the other side of the coin is actually even more interesting. And [00:17:00] that means that an Opportunity zone fund that invests in assets that generate depreciation for tax purposes. Um, so you could think about, you know, maybe an apartment building and you, you cost segregate that and you figure out that 35% of the apartment building is eligible for 100% bonus depreciation. That becomes a tax benefit that you take when that building is put into service. There's no depreciation recapture upon [00:17:30] exit because your tax basis steps up to the selling price. Yeah. So that, that that's really effective. And even though that, I mean, it's a little bit wonky and I mean, it takes, you know, more than a couple sentences to explain to the layperson why that's interesting. It's even more interesting when you're not investing in real estate and you're investing in broadband fiber or capital equipment, or [00:18:00] I mean, you would think like the ideal tax assets would be assets that are good and can be placed into useful service for 20, 30, 40, 50, 100 years, but are eligible for 100% bonus depreciation. So type that back into the other one big beautiful bill act provisions. We now have QP which is qualified production property. That's the ability to deduct 100% of the cost of a new factory. Not just the equipment, but [00:18:30] the actual building.

Roger Harris: Right?

Jonathan Tower: Um, yeah, the return of 100% bonus depreciation in general, these kinds of things. If an Oz fund can create the upfront ordinary income tax benefits from bonus depreciation, that's a significant benefit to the investors. You kind of get to have your cake and eat it too, but you get the tax deduction. But then you don't pay it back on on exit as you normally would outside the opportunity zone.

Roger Harris: So there's like three wins here. You defer the gain on the property that generated [00:19:00] the money. To do this you get the bonus depreciation which helps your current operating position in that property. And then you get to free sale at the end. So it sounds like one of the best things in the tax code.

Annie Schwab: Well, and you're doing you're investing in something that makes you feel good. You know, it's, it's helping the community. It's helping the local government. It's helping, you know, the people who live there. So then you've got this feel good part of it too.

Jonathan Tower: And that I mean, that I think that feel good is important for us. It's [00:19:30] important for, you know, the majority of our investors, but it's an investment with really good tax attributes too. So even if your mission or your philanthropy has nothing to do with revitalizing underserved communities, it's still an interesting proposition there. You know, the the data is always lagging because the when you say what has Opportunity Zones done for America? You know, the best data right now is from 2024 tax returns. [00:20:00] Uh, I'm sure 25 and 26 will be good too. But through 2024, well over $100 billion have gone into opportunity zones. Well over 400,000 housing units had been built. And we're still in the middle of a national housing deficit. There's a.

Roger Harris: Shortage.

Jonathan Tower: 7 million housing units in America today. So it's a good thing we got 400,000 out of it. Um, and and that that's still that's still counting a lot of those housing units. [00:20:30] I mean, given their location, they were in the workforce to affordable housing spectrum. Sure. You know, you can find examples of luxury apartments that went up to. But I mean, the majority of these things were accessible to people below 120% of Ami, and many of them went below 80% Ami. So, um, you know, the, the ability to use a tax incentive to unlock private capital from investors sitting [00:21:00] on large amounts of unrealized gains. And then to use that for community development is, is pretty remarkable. And it reduces the burden on government. It reduces the burden on the taxpayer. The government could just say, we're going to build 400,000 affordable housing units and we'll raise taxes 10%. But I mean like that, that's not easy to do either. No. Um. It's. I'd say that the strategy of Opportunity [00:21:30] Zones is creating the conditions precedent, where private capital wants to do the job that federal government would have otherwise been obligated to hold.

Roger Harris: And I'm sure that's part of the reason this was got through Congress and had so much support, is that it allows the benefit to come without government having to foot the bill. Yeah. Yeah. Which which is a big part of the the benefits beyond the help to the investor and the help to the [00:22:00] community is that local communities, government is relieved of some of the pressure, perhaps that they're under financially to, to accommodate, uh, the underserved community.

Jonathan Tower: Mhm.

Annie Schwab: So I know we're, we're coming up on like a, like a 2026 deadline. Like how, what is, what does that mean?

Jonathan Tower: Yeah. So, um, this is, uh, an interesting time in, you know, this is the end of the main part of Opportunity Zones 1.0 and the start very [00:22:30] soon of Opportunity Zones 2.0. Any investor who's put in a penny into an Opportunity Zone fund today was able to defer their money till the end of 2026. Time goes fast. You know, you might have invested back.

Roger Harris: You're almost there.

Jonathan Tower: And suddenly we're there. And now these tax bills are coming due. So, um, an investor who invested in Oz 1.0 at the start of the program would have put in, you know, a dollar and then they got a 15% [00:23:00] tax basis step up. So their taxes are reduced to $0.85. And, um, the, the next piece that's going on right now is the actual code says that your deferred gain at the end of 2026 will be calculated based on the lesser of two formulas. One would be the adjusted amount that you invested back in 2019, minus any distributions or. [00:23:30] The second piece would be the reduced fair market value of those assets at the end of 2026. So if someone invested in, you know, class A office buildings in 2019, untimely trade, you know, that's probably worth less now than it was constructed. And, and that, that means that the investors can get potentially some degree of tax relief as a result of that. But the the other flip side of that is that, um, you know, [00:24:00] investors are now working with accounting firms to do a valuation analysis. So every, you know, every SEC registered Oz fund is going to have an annual audit and very likely third party valuation. So you've got a valuation of the asset, but the, the tax analysis. That's GAAP. The tax analysis starts there. And that says what are these really worth. Let's take into consideration things like DLO EMS discount [00:24:30] for lack of marketability discount for lack of control. Um if those discounts are supportable, uh, investors, uh, meaning fund managers may be able to work with the fund tax preparers and their investors to construct a view that the portfolio is worth, uh, less than what the audit says. And that's completely counterintuitive that a fund manager would be, [00:25:00] you know, working with their investors to demonstrate, you know, valuations.

Roger Harris: Their investments have gone down.

Annie Schwab: Right.

Jonathan Tower: And, and you absolutely can't play games with those kinds of things. But if, if you own 25% of a building and you can't control it and you can't, um, you can't force it into sale. And, you know, you're a minority shareholder of that building, then it's a, it's a different thing. And I, I know this is [00:25:30] probably a good time for me to mention what I, what I am, am not, you know.

Roger Harris: Just.

Jonathan Tower: A quick note. I mean, nothing you hear on this episode is tax, legal or investment advice from me or from our terrace opportunity zone rules are complicated. They continue to change and how they apply depends on each investor's facts. So you've heard the disclaimer before, but you know, I manage an Opportunity Zone fund platform. I don't I don't give tax advice.

Roger Harris: Exactly.

Jonathan Tower: But, um, you know, I think the people on [00:26:00] this podcast are very qualified to give tax advice. Um, I'm not, I'm not part of that, that badge.

Roger Harris: Yeah. I imagine you have somebody that helps you with your taxes so you're not, so you're not giving tax advice. But yeah, that's clear. And that's true with, I guess we should say that on every podcast.

Annie Schwab: Yeah.

Roger Harris: I think we do say it in writing, but if you didn't read it, that's true for all of us. Yeah. Every situation is unique and different. And you need to consult your local tax advisor for exact situations as they pertain to you. So now we're all covered. [00:26:30] So you.

Jonathan Tower: Memorized that you've been doing this, but.

Roger Harris: Yeah, just for a while.

Annie Schwab: All right. Well, so then we've got 2.0 coming, 1.0 going up. What are you what are your thoughts. What's making you excited about this. What do you think is on the horizon.

Jonathan Tower: Well I mean I think our investment model um is typically focused on providing communities [00:27:00] what they need, what's missing in order to become vibrant. A lot of the communities that we work in, they had a heyday. Maybe it was in the 1850s, maybe it was in the 1950s, but these were strong, thriving economies at one point in time, and a major employer or a major industry left town, which led to, you know, de-population unemployment, uh, widespread problems. And, and, [00:27:30] um, so if, if you said back in back in 2012, what were we really looking at? We were looking at creating quality jobs in places where capital was scarce. Um, today it's less about creating quality jobs. We still do that. We still invest in opportunity zone operating businesses. Right. Um, but I think the critical crisis right now is really around housing. [00:28:00] And, uh, you know, we're approaching housing from three different angles. Uh, one is we are investing in new housing developments now. It's much harder to build affordable housing or workforce housing now than it was five years ago. Interest rates are up, costs are up.

Roger Harris: Labor up.

Jonathan Tower: Like.

Roger Harris: That.

Jonathan Tower: And and you've got oversupply. Yeah. Yeah. Um, but, but we are still doing some, some ground up, uh, ground up development, [00:28:30] um, more so we have a lot of buildings that we started four years ago that are finally getting ready for their ribbon cuttings. Um, but the second one is, um, we're buying underutilized assets and repurposing them to be housing. So adaptive reuse. Um, we bought a 37 story Embassy Suites hotel that lost its flag during the pandemic. It shut down. Uh, it's in Baltimore, inner [00:29:00] Harbor, neat, historic looking high rise building. And, uh, you know, we bought it at a very low cost base. I mean, it was the basis was $25,000 per room. And then we put about $80,000 per room into converting it into a nice call it kind of class A minus, um, uh, housing unit one one bedrooms, uh, 37 story views, uh, over Baltimore. They're, they're very, [00:29:30] uh, they're very nice. And you know, that that model works well for an opportunity zone fund because if you're buying an existing asset, you can't just buy a parking lot and keep it as a parking lot. You actually have to substantially improve these assets. So we bought we bought the asset, and then we put money into converting and upgrading it and making it nice as an apartment. So, um, project projects like that, we've, we've done a couple hotel to residential conversions. [00:30:00] We've also done, uh, over 100 single family homes at this point too, in abandoned homes in downtown Detroit. Um, and, you know, they're not expensive to buy.

Jonathan Tower: They're expensive to bring back to habitability. And, uh, we're, we're expanding that, um, that plan to flint. Now we're going to buy 150 homes in Flint and, and do the same thing. And there we, we rent them to, to tenants under the Housing Choice Vouchers program. This is for extremely low income families [00:30:30] that can pay 10% of the rent. Hud pays 90% of the rent. And then at the end of two years, which is the safe harbor period for 1031 exchanges, we, uh, give the, uh, the renters the opportunity to buy those homes. Um, anyone with a 580 credit score, uh, and a 5% down payment can get an FHA loan to, um, to buy those properties and their, their foundations [00:31:00] and different, uh, you know, corporate social responsibility programs that can assist with that too. So, um, you know, we're loathe to generating unexpected taxable income in our funds, so selling a property during the ten year period is not exactly the goal. But by doing a 1031 exchange within the Opportunity Zone fund, it gives an ability to, um, a family to buy a home, to plant real roots in the community. I just, you know, in a rentership society, people [00:31:30] treat their neighborhoods like rental cars and an ownership society. People invest in their communities more. And I, and I think it's become so hard for working families, lower middle class families to afford homeownership. Um, I think this is an important gateway to allow that to happen further.

Roger Harris: Yeah. I think the timing, I mean, with this, it is difficult. It's hard to think how, you know, a young couple getting started [00:32:00] could possibly afford to buy a house in today's economy. I mean, the as you mentioned, the interest rates, the prices of houses. I mean, historically, if interest rates went up, prices of houses went down, but now the prices of the house aren't really dropping as much as you would like them to accommodate for the higher interest rates. So it's almost impossible. And I want to go back to something when we were both covering ourselves when saying we're not tax experts. I want to I want to position what I think you do and for our audience, because [00:32:30] you're not really doing this for tax reasons. Um, for our listeners who are tax preparers, accountants who have clients who may want to participate in an advisory, I mean, in an opportunity zone, if I get your situation properly, you're not the tax preparer, you're not the, you have a company that can help put the strategies together. If these accountants have someone who sold something and they're interested in opportunity [00:33:00] zones, they can contact you to work on the strategies that will satisfy their customers needs. Am I saying that properly?

Jonathan Tower: Yeah. Perfectly. I thank thank thank you Roger. Yeah. We we love talking to people in the industry about strategies. Uh, you know, problems are fun to solve. Um, there there's, uh, you know, we love to, you know, get, get calls with questions about, you know, specific client needs and, uh, you know, always happy to take those [00:33:30] info@arcteryx.com is, you know, the easiest way we really do read and respond to that. Um, but, uh, you know, happy to set up a call to talk about how this can be, um, you know, optimized for sure.

Roger Harris: Is there a minimum amount? I mean, I mean, I'm sure you've dealt with people, you know, with a lot of money, but I mean, is there a point at which for the average person that sells something, is there a dollar amount that it needs to be before it makes sense? Or is there any, you [00:34:00] know, numbers that we that I'm thinking our listeners thinking, well, I got a client that sold something to me, you know, $3,000 or, you know, something stupid. You know, what is the point at which I guess anybody's eligible? But when does it make sense to really consider this as a strategy?

Jonathan Tower: Yeah. I mean, broadly speaking, I mean, I've seen I've seen some Opportunity zone funds that accept investments as, as low as $1 million. Um, and some that are as low as $100,000. So, um, [00:34:30] I think the, um, the questions are more about, um, you know, is, is a ten year lock up investment strategy appropriate for, um, someone who is investing kind of below those, those thresholds. And I'm sure in some cases, um, it could be, it could be suitable. Um, the [00:35:00] Majority of investors who have put capital into Opportunity Zone funds, according to Treasury data. It is currently 85% are individuals as opposed to corporate taxpayers. And, um, that's a little bit surprising because, um, you know, the potential tax benefits for a corporate taxpayer can be greater. Uh, you know, corporate taxpayer [00:35:30] can take your one bonus depreciation as an offset to ordinary income. Um, most individuals don't have that ability, right. And, and so it, it's, you know, there, there, I think there's a big untold story about why opportunity zones are so attractive to corporates. Um, but, uh, you know, we, you know, we're always happy to talk with, with both, both sides of the, uh, the equation on that about, you know, our, our approach and what types of opportunities we're seeing in [00:36:00] the communities where we participate right now.

Annie Schwab: And it sounds like such a perfect little package that gets delivered, but there's there's plenty of risk here. Um, you know, that these investments are not guaranteed by any means. So, you know, whether it be the ten year lock up period or, or, you know, obviously if we all had a crystal ball, we would all invest in this. But, um, you know, it is something that is risky. Um, and not for everybody. Not everybody likes that degree [00:36:30] of risk.

Jonathan Tower: Absolutely. I mean, a, um, a tax break on an investment that has zero capital gain is not very useful to anybody.

Annie Schwab: It's not going to work.

Jonathan Tower: Well, um, you know, I, I think it would be um poor for people to let the tax tail wag the dog too much just simply because, you know, the, the, the investment has to make sense on its own. And then the Oz a benefit is is icing [00:37:00] on the cake. It makes it makes a good investment better. It doesn't make a bad investment good.

Roger Harris: Yeah. No, a lot of people think tax decisions should drive every decision in life. And that's not the case. I mean, sometimes it's the it's maybe second or third or maybe even 10th in line of what's really important about the action you're about to take. And this is like everything else. If it's a bad investment, there's plenty of bad investments that will produce tax advantages. I mean, oh yeah, just try a few and see how that works for you.

Jonathan Tower: But that's. [00:37:30] Absolutely, absolutely.

Annie Schwab: I mean, there's. Correct me if I'm wrong, but I mean, there has been some, some negative, um, public belief, uh, circulating around opportunity zones. Um, you know, there's a lot of credits, like Roger said in the beginning, there are a lot of credits that get promoted that are not even real. Um, opportunity zones are real, but what, what kind of have you dealt with any sort of negativity or what is your opinion on, on that?

Jonathan Tower: Yeah. Um we [00:38:00] do. I mean, more so in the early days of the program. I mean, back, back in 2018, um, I remember being in a room of foundations at the New York Federal Reserve and they were saying the foundations were saying, thank God Congress just created another tax break for the wealthy, for the wealthy. You know, they. Yeah.

Roger Harris: But of course.

Jonathan Tower: Uh, and, and frankly, like a lot of good things came out of that meeting, including, you know, partnerships with those foundations that led to making [00:38:30] sure that a significant amount of ozone capital would go into things that communities needed to, to be able to thrive. Um, you know, there have been, there was, there was an article that talked about a Ritz Carlton that went up in an opportunity zone in Portland and it was like, oh, okay. You know, this is a tax break for the wealth building, hotel rooms for the wealthy. Um, what does that actually mean? And it's like, it's a, it was actually a true story. Uh, a Ritz Carlton [00:39:00] did go up in an opportunity zone in Portland, but it wasn't funded with Opportunity Zone Capital. They just raised equity and debt like any other hotel.

Roger Harris: Like anybody else.

Jonathan Tower: Oh, good. So like, it was like, oh my God, something luxurious happened in a low income neighborhood that that was the full extent of the headline. Took it 30 miles further. Um, right. But there was a yacht Marina in Miami and it was like, oh, great. You know, federal tax incentives for yacht owners. That's, uh, that's just what we need. But, [00:39:30] but I think the truth of the matter is that opportunity zones are census tracts. And, you know, you designate a low income area. The left part of town might be much better off than the right part of town. I mean, like within a within a census tract, there could be upper income and lower income neighborhoods all within the same gerrymandered district. So, um, some parts of Opportunity zones don't look like opportunity zones. Some census tracts [00:40:00] that you might swear were opportunity zones were not designated because the governor gets to select which tracts are eligible.

Annie Schwab: Got it.

Jonathan Tower: And, um, you know, just, just like IPOs bring good companies to the public markets and sometimes bad companies. It's opportunity zones are the vessel. And I think the mission of government economic development agencies, federal administrators and foundations should really be encouraging [00:40:30] the flow of that river of capital into the kinds of projects that they want to see happen, that they're proud of. Um, you'd think of, you know, a mayor or a governor's top projects, um, you know, a foundation. We work with a lot of foundations and they say, look, we are specifically set up to promote economic development in a very low income city. And, you know, we're concerned about housing. We're concerned about jobs, we need infrastructure. We need grocery stores and food deserts. We [00:41:00] need public transportation. We need to expand our schools, and we don't have money to do it. And Opportunity Zones can be a great vehicle for that. Working in conjunction or amplifying whatever government or foundation resources are available. So I think government foundations have an important role to be leaders in this, to make sure that they're working in conjunction with opportunity Zones as opposed to working [00:41:30] against them. Um, I live, I live in, in Boston and, um, you know, of the city that I live in, but I mean, I, I can say pretty much only bad things about the opportunity zone selections that were picked by, uh, Massachusetts. The last time around. Um, and if you look, I mean, and I'm I'm Monday morning quarterbacking here. Sure.

Roger Harris: We all do.

Jonathan Tower: I'm like, I have the wisdom [00:42:00] that like, hey, now we're in the middle of a housing crisis that nobody forecasted, uh, let alone the pandemic in 2018. So, but, um, but, but given that I have, um, that, that, that knowledge, um, you know, you look back and you said that the, the public policy theory was we shouldn't be anointing census tracts that have a pulse already, you know, like, like the low income places that are up and coming.

Roger Harris: Right? [00:42:30]

Jonathan Tower: Private capital is going to flow there anyway.

Roger Harris: They found on their own.

Jonathan Tower: Let's look at the places that are hardest ever to imagine development in in Massachusetts. We'll pick them because we're just going to pick the hardest hit cities without regard for, you know, do people actually want to live there? Would a developer want to develop there? If there were no taxes? And you know, so the public policy was just go to the bottom like the weakest, the hardest to finance areas. [00:43:00] And unfortunately, like I said before, a tax break on a zero capital gain investment doesn't mean a whole lot to an investor.

Roger Harris: Yeah. And you have no gain. Zero times zero is zero.

Jonathan Tower: Yeah. Yeah. Massachusetts didn't see a lot of opportunity zone investment relative to like Alabama or Phoenix or places like that. That just raked it in. This time around, Massachusetts and a lot of other states that took that same position [00:43:30] where they said, look, you know, we're we're only doing the hardest hit places. A lot of states are now rethinking it and saying, okay, we don't want to miss out on opportunity zones this time. Let's think more about areas that are prime for infill development where there's high demand for housing. And let's think about how to how to make this more effective. So Massachusetts just submitted its, uh, census tracts, uh, Hawaii, Washington, Texas. A lot of different states have now put in their census tract designations [00:44:00] for the next ten years and much better job this time and incredible. And they've actually explained this is why we picked census tract. 0602 and they explained that and it's, uh, it's much better. So as the program matures, I think there's better alignment with, with designations and government.

Roger Harris: And I'll say this, I'm not this is not you speaking that probably going back to the. And we all knew that when these came out, that there was some [00:44:30] help the rich, you know, another tax break for the rich. The politics have probably gotten a little less involved in it now, so that the second time around, these governors are realizing this is really a good program, that we should try to make it work the way it's intended to. Because I think I was going to ask you, and you've covered most of the governors do this, but every ten years they get to designate where the Opportunity zones in their state is. So that's kind of targets. Hopefully the investment. I think now they've probably come to the realization this is not this is not [00:45:00] political. This is what's good for our state or our city or whatever we're doing. So let's designate the places where these opportunity zones can really help. And I think it's hopefully a sign that the politics of this program has been kind of squeezed out of it over time. As people see the benefits now, are somebody going to make money off of it? Of course they are. But that's okay as long as and this is why I'm so, uh, complimentary of what you're doing. It's almost like you're working backwards. You're [00:45:30] more concerned about the property that is being developed and the town it's in or whatever than anything else. And I think it's hard to be critical of, of an investment that works in that direction. Let's help the community. And oh, by the way, we'll give a tax break in doing so.

Jonathan Tower: Yeah, yeah I think so.

Annie Schwab: We're going to have an Aussie three.

Jonathan Tower: Well I mean there's there are a few changes right now um uh that are underway at Treasury and excited about that. Um, [00:46:00] those are probably more administrative changes than, than legislative. But, um, you know, there are a few things that are on the horizon for um, 2027. Um, there's, uh, I'd say there's, there's political opposition to data centers right now strong enough potentially to say, get opportunity zone funds out of data center funding. And I, I, I can see certain communities where, you know, there's probably value [00:46:30] in not having a data center. And there are a lot of communities where there is benefit, but it's, it's a politically charged topic right now. And I think that'll go through. Yeah. Um, I mean, opportunity zones are already prohibited from investing in, you know, golf courses and tanning salons and, you know, hot tub parlors and, you know, banks, you know, all that bad stuff, but like opportunities, but like to add to add data centers to the list. I mean, there [00:47:00] might be things, I think the, the healthier political debates have been from Republicans and Democrats sitting in the same room saying, hey, we like Opportunity zones, but let's make them better. Uh, let's, let's ensure greater transparency when you file your tax returns. Like, you know, how many affordable housing units, how many jobs did you create? What did you like? What, what, what, what did the taxpayer get in return for your tax break? And I think that that greater level of, of impact reporting was a good addition that [00:47:30] came out of one big, beautiful bill act.

Jonathan Tower: Um, there's talk about interim gains. Um, you know, I've been very focused on affordable home ownership. Uh, as, uh, an administrative change. And that's something that Treasury's been very active on this year. So, um, you know, I think there's, there's room to improve. Um, and then I think there's also, um, growing sentiment that, um, more rural areas [00:48:00] should be qualified as opportunity zones than are currently available. Um, uh, a, a rural census tract has to have much lower income than an urban census tract to be able to qualify. And it's just quirky things about the way the census works. But, um, yeah, there are a lot of places that pretty much look like opportunity zones that didn't even make the list because of that. So I [00:48:30] think Treasury and Congress can be responsive. You know, after the, uh, weather disasters we saw in Puerto Rico Last time, 96% of the island of Puerto Rico became an opportunity zone. Wow. After the wildfires in Malibu, uh, Malibu was not made an opportunity zone. It's a public policy decision. I mean, there are needs and there are needs, but, uh.

Roger Harris: Yeah. Well, yeah, and I think so. Right now, rural areas are harder to find an [00:49:00] opportunity zone in. And that's not to say that rural, rural areas don't need the development or the, the housing or the jobs or whatever. But so, you know, hopefully that, you know, as there are more opportunity zones are more accepted as a good idea. I like the idea of making it better. You know, we should always try to make everything better. And, and I like the idea of reporting, you know, what this actually did. So we can make a judgment. We gave up X dollars in taxes to get X number of jobs or X number of [00:49:30] housings, I think. Mhm. Hopefully that would be something that would cut through any political wrangling. It would just be look at what we gave up and look at what we got in exchange. Exchange, which would be unique in Washington today. But that would be it would be nice to have. And again, I'm speaking for me. Don't bring. This is if you listen to this podcast, you know, we try to not be political, but we do have opinions.

Jonathan Tower: So I totally agree with you. I mean, I think the best kinds of economic development tools are ones [00:50:00] that are in response to an acute issue, like a pandemic or, you know, the great financial crisis. Um, and, and they're useful for five, maybe ten years. And then you put those tools back on the shelf because the crisis is over and there's something more important for government to work on. And I, and I think the nice thing with Opportunity Zones is it plans things out on a, you know, it's a ten year plan. Like, you know, these are the areas of America that are going to rebuild more [00:50:30] than others over the next decade. And, and there's a cluster benefit, you know, having having housing and jobs created in the same city is a good thing. Having jobs without housing exacerbates a shortage. So the clustering makes a lot of sense. So I'm I'm, I like the way that opportunity zones adapt to the needs and changes. Historically, federal government has not been able to respond or kind of change its programs [00:51:00] as nimbly as, say, a commercial bank, a commercial bank can say, well, we're going to stop doing adjustable rate mortgages. We're going to do fixed rate, we're going to take more credit risk, less credit risk. Federal government has to move more slowly. The nice thing with Opportunity Zones is it it's kind of an exercise in new federalism. The federal government is saying governors, you pretty much know what's best for your states and where the growth areas are. We're just going to let you choose. And, [00:51:30] um, and then they let it roll out at the local level. Um, so it, it's better than some of the other kind of Byzantine programs that have been around for 100 years, or those programs that require 15 middlemen to get a transaction done.

Roger Harris: Right? Right. That once they get in place, they never go away and they never change. They're just they're just there.

Jonathan Tower: But most people are afraid to put them away.

Jonathan Tower: It's like, I don't want to be the guy that cut funding for this program. It's, [00:52:00] it's not a bad program. It's just not as effective as it used to be. And a lot of people think that they rely on it. So it's.It's.

Roger Harris: And whatever you get rid of, it does impact somebody. You know, somebody's going to lose something or maybe it's just a job. But, you know, it's, that's, that's a lot to that person. Um, we got to wrap up in a minute. Is there any kind of I mean, thank you. First of all, thank you for this is.

Annie Schwab: Yeah, this is great.

Roger Harris: I've got a thousand more questions, but we don't have time to ask them. But, um, anything you would like, [00:52:30] I mean, to our listeners, is there any kind of final wrap up that you would like to make? Uh, and again, thank you so much for doing this.

Jonathan Tower: Yeah.

Jonathan Tower: Well, I'd say you know, the, the types of your clients that are probably going to be most interested in these topics are, are people that have, um, you know, realized a significant capital gain. Um, you know, someone that built a business over decades and sold it and they have kind of a one time wealth creation event and they want to think, think [00:53:00] smartly about taxes. The second category would be corporate taxpayers. And these could be multinational corporates or smaller smaller business but corporates true C Corp uh, because of their ability to apply the depreciation tax benefits to your one, two, three, four income. It's a, it's a much faster payback to, to the corporate tax payer, typically to the individual. [00:53:30] And then and then thirdly, to, you know, the philanthropically minded. Uh, you know, whether it's a foundation or, um, you know, a philanthropic individual that says. Look, look, I, I, I grew up in Erie, Pennsylvania. Uh, I don't like the fact that the average median income of the downtown corridor dropped to $11,000 per family. I want to help bring it back. Uh, you know, there are people like that in Erie, in Baltimore, in Detroit [00:54:00] and Cleveland, almost in every community that we work. And, and I think that those kinds of people are looking for the ability to use their philanthropic capital alongside Opportunity Zone capital to ensure that good things go. You want the right capital from the right investors going into the right projects. And I think philanthropy has a, um, a large potential to expand its role in guiding that capital to the communities [00:54:30] and the people who count.

Roger Harris: Yeah. Well, that's. Yeah. Thank you for that. That's a great summary. And I think that last group is one that, um, again, I think people need to think about that more because it really is a way to get a tax break and do some good for your community at the same time. Um, and hopefully more people take advantage of that. Again, Jonathan, thank you so much. This has been great. Andy, why don't you take us home?

Annie Schwab: Yes. Thank you so much. I learned a lot on this podcast. So I appreciate you being here. [00:55:00] Um, we will hopefully get you back at some future podcast time. Um, and with that, thank you to all of our listeners who, um, continue to watch the federal updates podcast, tell your friends, tell your family, we'd love to have more listeners. Thanks again.

Jonathan Tower: Thank you, Andy and Roger. It was really a pleasure.

Roger Harris: Thanks, everyone.