Jack: Welcome back everybody to the OZExpo Podcast. I'm your host, Jack Heald and I am here today with Matthew Rappaport of Falcon, Rappaport and Berkman Law. Welcome Matthew. Good to have you.
Matthew: Thanks a lot Jack. Appreciate the opportunity. No pun intended.
Jack: Yeah, right? So, tell us a little bit about yourself. Primarily right now we're interested in your practice of law. What is it you do and how does it apply to our audience? The Opportunity Zone audience.
Matthew: Sure. So my practice, as you mentioned, there's a law practice. The firm was formed on September 1, 2018 making it very young and very new. Before that, for three years I had my own law practice and that plays into the story of why we formed this firm. My practice is exclusively a tax practice, it's my personal practice. And I came out of Georgetown Law, I got my JD, which is my regular law degree and my LLM, a special law degree in taxation. And I came out of law school very eager to practice and quickly came to realize through my journeys that tax is only relevant in so far as it supports other areas. So, when I had a solo practice, I lent myself out as a sort of subcontractor to regular transactional attorneys, people who did real estate and corporate law and bankruptcy and trust and estates when they had difficult tax issues to sort through as part of their transactions or engagements. I would come in and I would help them out.
And that was successful often in its own right, except I kept getting questions from clients saying, “I think you're pretty good at this stuff. Are you able to help me on the transactional end of what I'm doing?” Or, “Do you also do litigation?” or “Do you also do any variety of these areas?” And when I told them that I had to ally with people from other law firms, it became a little clunky.
They would get multiple bills. They wouldn't know whether or not they had to call one number or another. And eventually I found some colleagues of mine, some of whom I had known for a very long time and some of whom I had just met through business. And I expanded my capabilities by allying with them. I trusted their work, I thought I would be able to work well with them and thankfully that concept has proven true.
Otherwise this would be even more stressful than it already is, and I teamed up with them to provide not only tax services, but a full range of services. My tax expertise goes pretty broad, whereas with most tax practitioners they tend to tunnel in or go into a cubby hole on one particular area. For me, I have a nice blend of trust and estates taxation, real estate taxation, corporate taxation and a few other general or miscellaneous areas and that happens to be along with the formation of the firm, very serendipitous timing.
When it came to the Opportunity Zone program, which is a tax incentive program that has very heavy private equity elements, meaning that you need to know tax, you need to know corporations, you need to know real estate, you need to know just general fund formation and securities law. And luckily we now have the vehicle in the form of this full-service law firm with 12 attorneys and a bunch of staff to help us out, to give people the optimal service informing Opportunity Funds, or simply just investing in them and trying to get advice on how to properly do that.
So I think that’s the semi-abridged version of where I'm at, what I'm doing, how I got there.
Jack: So, that's the story of the firm. What's your story? Where did Matthew Rappaport come from in terms of growing up and why did you choose this particular path for the practice of law?
Matthew: It's a really interesting question. So, I grew up, I grew up in Queens. My parents were both from Queens at one point or another. And I was born in, in Bayside. And for anybody who's listening, who's from the five boroughs, you know generally understand where the area is. My parents had an apartment in the high rise building that still exists and overlooks the Bay Terrace Shopping Centers, So, anyone local would know where that is. And my parents were not professionals.
My parents, I think looking back on it retrospectively, and I never would have known this at the time, what they had going for them was really good work ethic and they were smart. But they did not have the vantage point to understand how the professions and big business and networking and a lot of things that make many other families and professionals successful.
They didn't really understand the inner workings of how all that functioned. So, I grew up upper middle class for most of my life, but had no familiarity -- except from what I saw in the news -- of how the law works, or accounting works or entrepreneurship works. And all I got instilled with was from my parents and then my parents eventually divorced and my mother and father both remarried. So, I was fortunate that I almost had four parents and each of them all instilled in me work hard, make sure you're constantly learning, make sure you don't treat people like garbage and eventually you'll be able to make your way.
And fortunately, they were right. And I hit the books really hard in school and I realized that I wanted to be a lawyer. When I became almost obsessive, whether it came to playing games as a child or being in extracurricular activities in school or interpersonal relationships of all sorts. I became almost obsessively focused on rules and principles. And that's when a lot of people who were in a supervisory role at early stages in my life turned to me and said, all of these are pretty good ingredients to go into the law.
And the more I learned about civics and the constitution and how core cases shaped American life and American culture and those were able to advance general progress in this country. I took an interest in being a lawyer and the more I got exposed to it, the more enthusiastic I became about it.
And then I was in college. I went to college at Washington University in Saint Louis and after, a career in school and studying day and night for, I can't even tell you how many years I had my sights set on the Ivy League. And then out of nowhere I got an aggressive recruiting pitch from this school in the Midwest I had never heard of. And eventually realized that it had this very cool academic reputation where they were more flexible than other schools in choosing your major and choosing your path. And I went to go visit the school and I really fell in love with it. And that's where I ended up. And there was a friend of mine who was local.
Jack: That's Washington your talking about, right?
Matthew: Well, it's funny actually because Washington University in Saint Louis gets confused with U-Dub, University of Washington, Wazoo, Washington state, George Washington, Georgetown, which is where I eventually ended up for law school, but it's Washington University and it's in Saint Louis, which is inherently confusing.
But for me, I looked right past it. I took a look at the campus and I visited and I got a sense of who was there and I just really fell head over heels for it and had a great time there. And it was an excellent experience. And I consider it the place where I really grew up for so, many reasons that we don't don't even have time to get into. And I met a friend of mine there who was from Saint Louis. He was local, his father was a real estate attorney. And I'm a huge, enormous sports fan and one of my passions unfortunately, because all they do is give me a misery and heartache, is the Mets.
Jack: You're a New York fan in Saint Louis. Oh.
Matthew: And not only that, I was a New York fan in Saint Louis during game seven of the 2006 National League Championship series. And I always tell people my heart will never be broken like that ever again. Carlos Beltran looking at strike three and it's not like I blame him for looking at strike three by the way, because nobody hits that Wainwright curve ball. I blame him for taking strike one, which was a middle and fast ball. That he would have crushed, if he swung at it. But at the end of the day he was a great player. I loved watching him.
Jack: Not that your scarred by it or anything…
Matthew: No, of course. Right? But, but the Mets are owned by the Wilpon's who are real estate folks. And I just kinda looked at it and said, you know, goodness gracious. Like that's how they got rich and, and you know, Trump not even being president, it wasn't even on his radar at that time. It had a few halfhearted runs, which everybody figured were merely for publicity. But he got rich that way and there were several hundred prominent people that were nationally known that I said, “You know, if all these people are being successful in real estate, they’ve gotta be doing something right.” So, given that I had an interest in the law, I said, “Okay, real estate law might be something worth looking into.” So, my friend's father did it and I was at his house one day and I made it a point to strike up a conversation with him about real estate law.
And they turned to me and he said, “Look, you're thinking about real estate law, right? It's a great area of the law to practice. It's exciting. It's dynamic if you get thrill out of doing deals,” which I had no idea whether or not I would at the time. But he said, “If the idea of doing deals thrills you, real estate law is a nice path for you.” But he said, “I have one regret.” And I said, “What's that?” He said, “Every time I get into a particularly large deal, it's the tax guy who controls the deal.” I said, “Really?” He said. “Yes. Real estate in this country is driven entirely by tax.” I said, “Get out of here.” He said, No. There real estate folks have so many tax issues that they have to deal with if so many tax problems.”
There are so many tax things to sort out. He said, “My role in the deal 80% of the time, it's just a formality. I have a tax guy that I worked with and eventually hired into my office and that opened up a brand new world for me. Knowing how it really works now, if I had one way to do it all over again, I would have done a dual focus in real estate law and tax law.” And I was fascinated by this. And so, my mother, who later in life became an entrepreneur, had a client who was also a tax lawyer. And then I spoke to that person and I said to him, “Hey, you know I was a recommended by a real estate attorney to go into the tax part of it.” And he just looked at me and he said it was great advice.
He said, “You should do it because I have probably a better lifestyle than my colleagues. I'm an essential party in my law firm and they all need me because tax is such a guiding force, not only in real estate deals but in a bunch of other types of deals.” And he said, “You would be well served if you built up your knowledge and went into it. So, when I was applying to law school, I got some great offers, thankfully. And one of the offers was from Georgetown and I was talking to the admissions director and he said, “Well, what are you interested in?” And I said, “I'm interested in tax law.” And he said, “Tell you what, we have a program here called the Master of Laws or LLM.”
Jack: Ahh. I was going to ask what that meant.
Matthew: Well right. The reason why it’s LL is because it's Master of Laws
not Master of Law. I still don't really understand how that works entirely, but that's the name of the gray.. So, he said, “We have a program here known as an LLM where you could go for an extra year and you could get a particular concentration in a certain area. Our tax program is the best program in the country.”
You could look it up. And he said, “For our JD students, if you're in good standing after your second year of law school, we'll let you into the program as a matter of course.” And he said, “When it comes to the LLM program, it's normally a year, but when you combine it with your JD program, the way we work it is that you can actually get your LLM with an extra half year, not with an extra year as other students normally would.” I said, “This is a very enticing offer.” And I did my research, I looked further into it and it turns out that the tax LLM program there is in fact the best program in the country.
I guess reasonable minds may differ because there are several other strong ones that say they have a claim to it. But I was satisfied that the admissions director was not blowing smoke and they really had a great program. And eventually I accepted the offer. I went to Georgetown. The first year was a little bit rough because I just felt that I wasn't learning anything practical. But second and third year and that extra semester, I loaded up on tax and I did internships in the area and the more I dove into it, the more I fell in love with it.
And I came out of school, I got into the thick of it and I have relished it ever since. And I'm really fortunate because between undergrad and graduate school, I have a really staggering student debt obligation that thankfully I'm able to meet and that I don't feel bad about having over my head because I felt that the investment that I made, my education was worth it.
And I now have a platform where thankfully I have the chance to do things like this where I can appear on a podcast with you that'll be syndicated nationally and perhaps internationally. And I can get in front of people as a voice on a topic that's really interesting to them and I can give them expertise and advice and I can get really deeply into the rules that I relished when I grew up.
And when it was about trading card games I used to play, the way to resolve interpersonal disputes and approach all different sorts of stuff that never paid me any money or got me any accolades. It didn't mean anything. But now when I dive into the regulations that were recently released and I know about them, all of a sudden people will pay me just to talk to them about how these things work and what I believe they can do and they can't do.
And I relish it. I love it. And I think that passion has brought me to a really nice place professionally. And, I'm thankful for that every day. And I'm sure you understand this just as well as I do or if not more. But as you go through life and you see people experience things and you experience things on your own, you're more and more grateful for waking up every day and going to work with people you like and doing something that motivates you.
And people in your life are thankfully healthy and they're not suffering, and they're not locked up somewhere in prison. And the more you experience, the more thankful you get for just being able to go about your life and having a nice, normal, plain existence on a day to day basis. It's cool. And I'm really happy that I came onto this program with you today, so that I could share some of the knowledge with you and you and your listeners.
Jack: I love the passion, Matthew. This is why I love what I do is I get to talk to people like this. You know, when you talk to people who love what they're doing, the enthusiasm is contagious. it just makes it makes all of life feel better. I didn't warn you about this. I'm going to throw you a question I found that somebody asked you on LinkedIn. And I think it's very applicable.
I suspect you've already answered this multiple times, but I didn't see the answer. And I want to know. So, here's the quote. Somebody asked you this question, "When eventually selling your qualified Opportunity Zone investments, wouldn't the Qualified Opportunity Fund itself benefit from a 1031 exchange on gains from its investments, not eligible for the basis step up election?"
And then he references some part of the tax code.
Matthew: I think it's one of the major angles, especially after these regulations were released recently, that people just somehow are not talking about, So, the way the rules work is if you have an Opportunity Fund and the equity holders have not reached a 10-year holding period yet if the asset, the fund holds, gets sold for cash. If the fund itself does not use a tax deferral or avoidance technique, the fund itself, will pay taxes on the sales proceeds. So, if I have a multifamily real estate investment I developed from the ground up, I stabilize it, I rented it out and the area around it is leading to a really hot market. I can get an offer five years after construction started. So, three x or four x my investment and really do well.
The problem is that if I want to take that offer, the fund has to pay capital gains tax because none of the equity holders have hit that magic 10-year holding period yet. So, that's where the 1031 exchange comes in. That if I want to go accept this offer on the multifamily property that I've built up and stabilized already, I have to reinvest my after tax proceeds. If I don't do a 1031 exchange, which may not be as attractive -- not only for the sponsor, but also for the investors who may have signed up for the fund -- without anticipating any events where they would have to pay income tax other than 2026 coming around and forcing them to recognize the capital gains that they deferred.
Matthew: So, if the fund ends up selling for cash and doesn't do any tax planning, they could face the ire of their investors. Even if the sponsors think that selling for cash is okay. So, what I proposed was why wouldn't you do a section 1031 exchange with different Opportunity Zone investment?
At which point people turned to me and say, well, well the section 1031 exchange under typical circumstances, you have to develop the improvements you're seeking within six months. And the issue synthesizing that with the Opportunity Zone program is that Opportunity Zones require substantial improvement to existing real estate. So, that if you were to buy a building, or even if you buy empty land and you're looking to put a new development on it, typically speaking, spending down the money that you need to spend in order to meet that requirement is going take you along in the six months. And that is where a court case come comes in known as Bartelle, which was a 2016 tax court case that said, if a certain requirements are met and the circumstances are right, a 1031 exchange is permissible, even if the construction process for improvements or a brand new development takes longer than six months.
And while doing so, is not a slam dunk; you're not going to be able to take so much comfort in the tax outcome that you can sleep at night without nary a wink. But, at the same time, it's enough authority to be able to recommend to the funds that if they want to acquire a new property, they have two options. They can do this Bartells-style exchange, which the industry calls a non-safe harbor, in which they can take all of their sales proceeds and not only use the proceeds and acquisition but also the substantial improvement requirement of a brand new property. Or they could use the 1031 exchange proceeds to acquire raw land and then make a capital call for other capital gains to be invested.
Or they could borrow money and they could use the non 1031 money to build all their improvements or otherwise gut renovate the property that they just acquired. And either scenario they would be compliant with both 1031 and with the Opportunity Zone laws and this would give them the opportunity not only to take that really enticing offer on the first property that they went into, but to keep the gravy train going and perhaps inherently diversify their investments because you can 1031 not only into a single investment, but into multiple investments. And you'll meet the Opportunity Zone standards as long as your next 1031 investments are also an Opportunity Zones. So, I think it's a major play that I haven't really seen a lot of other people mentioning. But I have made it a point to try to evangelize it because I think that it might be the only exit strategy when an Opportunity Fund is invested in real estate and wants to sell before 10 years anyway.
Jack: Right. And I know, I'll be honest with you, this is the first explanation I have heard that really -- not merely makes sense rationally -- but makes sense in terms of, as I understand the law. I'm certainly not a legal expert, but all the other early exit strategies I've heard don't make sense to me. This one does.
Well I want to change...
Matthew: Speaking of which, by the way.
Matthew: Before you change gears, there's one thing I think it's important to say, I think it's obvious, but just in case you don't have a built in disclaimer, the podcast itself is not legal or tax advice, right? So, of course I am a tax lawyer, but none of what I'm saying here should be implemented without seeking your own tax advisor to help you out with it because otherwise there's too much possibility for everything to go to go haywire. And I certainly don't want the liability for that to blow back on me. But the other thing that I will say that is contrary to your standard disclaimer is that the views that I express here are the views of our firm.
Normally, people speaking from tax departments of large firms say, “Well this is not necessarily the views of our firm.” The one thing I'll tell you is the views that I express on this podcast are also the views of our firm. That whatever I say here is the approach that our firm is actually taking to each and every one of its Opportunity Zone projects, both present and future. Unless, subsequent IRS guidance changes our minds.
Jack: That's good to know. We do actually have a disclaimer, but I appreciate you throwing that in there. Okay. So, I am going to change directions a little bit. I like to know a little bit more about what drives my guests outside of work. This is probably my favorite question. Suppose you are given the title of King of the World for a day. One day. That's all you get. Tomorrow you’ve got to relinquish the title. What's the one problem you're going to fix?
Matthew: Well what an interesting question. I guess it has to be, I'm not also given supernatural powers. Is that correct?
Jack: Nah, you're just the sovereign. That's all
Matthew: Right. I am just a sovereign and I have the opportunity to fix to a single issue.
Jack: One issue, the one thing that drives you out of your mind.
Matthew: Right? The first thing that comes to mind, and it's the funny answer that I would want to give that if I were more inclined to make light of it, would be the robo calls.
Jack: You know what? But according to the broken windows, you remember. Gosh, who was the Bastiat? Frederic Bastiat.
Matthew: That's out of Freakanomics. The broken windows was discussed, and Freakonomics.
Jack: Well Frederic Bastiat was actually the first one to write about it in the mid 1800s.
Matthew: Oh no, I'm sure he came up with the theory, but the broken windows I feel was popularized when, I think it was Levitt and Dubner…
Matthew: Wrote about it in, in Freakonomics.
Jack: So, if you think by solving these small problems, you can make the world a better place. I would not poopoo eliminating rode up robo calls.
Matthew: Oh, not completely. I’m the king of the world. You turn around and say, “That's it. No more robo calls, forever.” I would at that point, be universally praised. You would not get a single objection except from the crooks that are doing the robo calls. So, I would take that. But if I were to answer the question seriously, I think I would take the entire day to contemplate what I can mandate because I happen to believe, and I guess for whatever reason there is controversy around this politically, but I think climate change is an existential issue.
And if I were given the king of the world tite, I would implement every advisable measure to try and stave off climate change, destroying everything. Because I'm of a mind that if you don't do something about it, we're all going to die. And that's what I would do if I'm king of the world for one day. I turned around and consulted the right experts to say, what do we have to do here with no restrictions and no holds barred? What do we have to do? Let's do it. And that would be how I spent the day. And I believe it'd be good for the human race and, and for every other living being, and if that's the way it happened, then, I probably be satisfied with that. So, if I were answering in jest, I'd answer robo calls. If I were answering seriously, I would answer, put as much as you can to try and stave off climate change getting worse.
Jack: I think we have chewed up enough of the listeners' time. I think you've done a brilliant job of telling us where you came from and demonstrating beyond question your expertise. I know I'm very grateful to get an explanation about an early exit from a 103 from an Opportunity Zone program that makes sense. That really makes sense. If folks want to get ahold of you, Matthew, what's the best way to contact you and get more information about you firm?
Matthew: By a long shot, it's email. The phone, I tell people can only be reserved for people who really need it because everything is just overwhelming and I do so much work on off hours that the phone is not a great method of getting in touch. So, email’s best. You can reach me at my initials, M E R, So, that's standing for Matthew Evan Rappaport. firstname.lastname@example.org, and that will be the best way to get in touch. Certainly, mention the podcast if you do reach out and I'll be happy to banter by email, pretty much at a mutual convenience, but the phone is actually not great. So, I will not disseminate the phone information here because it's only going to frustrate everybody. It's going to frustrate me. It's going to frustrate the guests when I don't get back to them and it's gonna It's, it's really not gonna work out great.
Jack: Well, I will remind our listeners that contact information for each of our guests on every episode will be available on the podcast website. So, you don't have to write it down. Just go to the OZExpo Podcast website and you'll get that information. Well. Matthew, any final words for us before we sign off?
Matthew: I think I'll put it at this. Whether you're, you're looking at the program as a mere investor or you're looking at the program as a fund sponsor, whether you're thinking about it large or small for real estate or an operating business, don't hesitate to reach out and see how we can help you. Our firm is full service. We can handle every aspect of it. Not only that, but we handle all of these aspects. We feel at a higher level of service and a more efficient price point. Then some of the other folks who are in the industry with us who are equally smart and work equally hard and are equally motivated, but we feel what sets us apart is the service, the communication, the synthesis of all of our different departments together to put together a coherent whole and, and we'd love to be able to show everybody who's listening how that difference works in action. And that's what I got.
Jack: Well thank you Matthew. Fabulous conversation. I love getting to talk to smart people.
Matthew: Well, I appreciate it very much. Now you just got to tell my wife.
Jack: You know what? That's up to you, my friend. I don't get involved. I don't get involved in those kinds of things.
Matthew: Well for the best.
Jack: For Matthew Rappaport and the OZExpo. I am Jack the host of the OZExpo Podcast. We will talk to you next time.Announcer: This podcast is for informational purposes only and does not constitute legal tax or investment advice. For specific recommendations, please consult with your financial, legal, or tax professional.
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