QOZ II Flashcards
HIGH LEVEL INTRO:
Our last Fund is meant for investors with capital gains.
QOZ Program? ASK if they are familiar with the program
- The Qualified Opportunity Zone program was created under the 2017 legislation to incentivize investment and economic development in more than 8,700 designated communities
○ The QOZ investment must be made within 180 days of realizing the capital gain. Unlike, a 1031 exchange there is no “like-kind asset” requirement
○ Now, a pretty common misconception is that QOZ assets are always in underserved/ distressed locations. BUT this is not always the case. The 2017 legislation actually used the 2010 census and at the time some cities were already being developed. This only accelerated after the pandemic.
Ex: We have a property in the Edgehill neighborhood in Nashville. This neighborhood is surrounded by million $ homes.
HIGH LEVEL?
This fund allows investors to defer paying capital gain taxes through 2026 and gain tax free appreciation after a 10 year term. Returns are projected to be 10-12% IRR, 2.25 -2.5x equity multiple. (Net of FEES & includes distributions)
Timeline?
100% pure development. In the first 4 years, no distributions just pure growth.
- After the 4 year development period, the goal is to return 20-25% or more of invested capital (over a series of distributions) to investors prior to 2027 to pay deferred taxes. We’ll achieve this through re-finance proceeds, unlocking the value we create.
○ This is treated as RETURN of CAPITAL meaning it’s not taxable. - In years 4-10, once all properties are fully stabilized, there will be 6-7% annualized distributions quarterly based on initial committed amount. And in Year 10, you will be given the option to redeem from the fund and all the appreciation will be tax FREE. (We will survey investors in Year 9).
How long can you stay in the fund?
Real wealth is built in the long term so if you want to hold beyond 10 years, you can stay in the fund until 2047
Depreciation Recapture?
- Another benefit I’d like to highlight for this fund is that in a typical real estate deal, you pay 25% of depreciation recapture. This is eliminated here. Which is incredibly powerful.
Deals?
- We’ve closed the land on 7 deals and have 2 more in due diligence. (Phoenix, Atlanta, Nashville, Tampa, Charlotte, Colorado Springs). The goal is to have 12 assets in total. You’d be invested in all current properties and all the ones we acquire.
○ We are the LPs in each development deal and in certain cases we are Co-GP as well.
Legislation?
- QOZ tax extension bill will potentially extend deferral period till 2029 and reinstate 15% step up basis.
IF PASSED: This means that an investor who invested $1 million in a QOZ prior to the end of 2022 would only pay capital gains tax on $850,000
FEES?
FEES: (pg 19 of presentation) 0.5% acquisition fee on project cost (Equation = 0.5/.25 =2% = built into NAV), 1x set up fee depending on commitment amount, 1.25% NAV annual asset management fee
- 7% preferred return. Above 7%, Origin will split 50/50 until Origin receives 15%. Returns over 15% get split 85% to investors / 15% to Origin.
OR: Origin will take 15% of all profits the fund generates assuming the investor preferred return 7% hurdle is met cumulative and compound annually (just cumulative not annually)
Liquidity:
○ Before the Development Period ends, you have a 1 Year lock out. Penalty starts at Year 1 at 10% and drops by 1% each year. So, Year 2, 9%.
○ We can’t sell an asset until 10 years after the last investor hits the fund- Jan 31, 2034. Redemption is a balancing act. Can only monetize through operating cashflow, refinance, cash on hand (reserves) to settle.
Tax?
- K1s in each state; No income in the first 4 years, Year 5 option to elect composite. A composite will satisfy state level taxes for investors on their behalf without having to file K1s for those state. There needs to be more than 1 eligible state to put in the composite. Less tax fees for investor.
○ No depreciation in the initial years but also no income so it’s really net neutral. After 4 years, we can start claiming depreciation and offset ordinary income.
How do you file for tax exemption?
- You can file for QOZ tax exemption by filling out Form 8997. No paper trail required, you can move that money wherever you want.