How to Manage Mixed-Fund Investing in the Opportunity Zone Space

Kim Lisa Taylor

The Opportunity Zone Expo Podcast
How to Manage Mixed-Fund Investing in the Opportunity Zone Space


Jack Heald: Welcome back everyone to The OZExpo Podcast. I'm your host Jack Heald. And joining me today is Kim Lisa Taylor from Syndication Attorneys out of Saint Augustine, Florida. Kim, welcome to the show.

Kim Lisa: Hey, thanks Jack. How are you doing?

Jack: I'm great. I had a question when I saw your name. Do you always go by Kim Lisa, or do you just go by Kim?

Kim Lisa: You know, I go by Kim, Lisa professionally because I learned when I got onto Facebook that there's a whole lot of people named Kim Taylor, but there's not very many Kim Lisas.

Jack: Well, we're going to go with "Kim Lisa" today. You are here on The OZExpo Podcast because you are an attorney, a specialist at syndication. Now we've got a diverse set of listeners, many who know exactly what you do, many who are what you are. But we've got an awful lot of folks, when I say, “syndication attorney,” they don't know what that means. Fill us in.

Kim Lisa: Sure. Well, syndication is just a group formed for a common purpose. There’re all kinds of syndicates. There are syndicated TV shows, there are people who pull their funds together to buy airplanes and create an airplane syndicate. But there's a lot of people who are doing it to buy real estate or to buy companies or businesses. Syndication is pooling funds from multiple people, usually to acquire some specific asset.

Jack: That brings us very naturally into the Opportunity Zone. We want to pool funds to start a business or do some development in an Opportunity Zone. Why do we need you?

Kim Lisa: Well, because if you're raising money from private investors then you’re typically doing it one of two ways. One way would be to borrow money from private investors and pool it to buy the asset.

The other way would be to offer them interest in your company. And if you do that, then you're selling something called an investment contract. So that's when you're selling off interests in your company. The SEC considers that to be an investment contract and that investment contract is a security. Similarly, if you're repeatedly relying on issuing promissory notes to private investors to fund your business, those notes are also considered securities. So in both of those cases, you have to then follow securities laws and there's rules regarding how you can raise money, who you can raise it from, what kind of financial qualifications they have, what kind of disclosures you have to make if you're selling securities.

Jack: Whether you're funding through equity or funding through debt, when you're syndicating, it's considered a security and that's where the SEC gets involved. And that's why we need you. Have I got that right?

Kim Lisa: That's right.

Jack: Alright, well let's talk about the different categories of whether that's a debt or equity fundraising and we're not Opportunity Zone specific right now. Different categories of fundraising, friends and family versus private equity versus this relatively new means, crowdfunding. How are those requirements different for each and make sure that I've categorized these things accurately?

Kim Lisa: No, I think you've done a great job. The difference is that we've established that if you're selling interest in your company or you’re repeatedly borrowing money, you're selling securities. That means that if you are selling securities, then you either must get preapproval from regulatory agencies before you can start offering those to people. That's called registration.

Or you must qualify for an exemption from registration. And there's multiple exemptions that you could use that will allow you not to have to get preapproval from the regulatory agencies. Each one has a specific set of rules. It depends on what the financial qualifications of your investors are and whether you already have preexisting substantive relationships that's going to decide which exemption is going to be appropriate for your situation.
For instance, the most commonly used exemption by our clients and most commonly used in the United States is a regulation D rule 506, that's a federal role that's under the Securities Act of 1933. It's regulated by the Securities Exchange Commission. And then peripherally, it's also regulated by state securities agencies.

But primarily, if you want to do a regulation D rule 506 offering, you have two options. One of the options is to not advertise your offering and only offer it to people that you already have preexisting substantive relationships or preexisting means that predates your offering. A substantive means you already understand their financial situation and their investment criteria and goals before you start making offers to them. If you have a group of people that you feel meet that criteria and you won't have to advertise, you can contact them one-by-one, then you're allowed to raise an unlimited amount of money from an unlimited number of accredited investors.

Those are people with over $1 million net worth or over $200,000 income if single. $300,000 if married. Okay. But if you do the rule of the exemption that allows you to not advertise, then you can also bring in up to 35 nonaccredited investors. These are people you already know. They could be nonaccredited, but everybody in this exemption should be sophisticated. They should have financial savvy based on their education, prior investing experience or just their background that would allow them to understand the risks and merits of what you have to offer. That's regulation D rule 506B.

Jack: That's option No. 1 that you’re talking about.

Kim Lisa: That's the friends and family exemption. If anybody that you know thinks that, “I can do whatever I want with my friends and family without having to qualify for an exemption,” that's not true.

You must follow the rules of 506B and 506B still requires that we file a notice with the SEC letting them know that you are claiming this exemption. And then we also must file what are called blue sky notices with state security's agency's letting them know that you've sold securities to investors within their jurisdiction. And if you have any nonaccredited investors in your offering, then you also are required to give them a disclosure document. And that's the thing you may have heard of before called a “private placement memorandum.”

Jack: Right.

Kim Lisa: So, that’s kind of rules of who you can ask. What you have to do in order to comply is you have to make sure that you also do these filings and provide the proper disclosures.

Jack: Right, okay.

Kim Lisa: The alternative to that for those that don't have a group of people with preexisting relationships or want to be able to advertise, is to use Regulation D rule 506C. So 506C allows you to raise an unlimited amount of money from an unlimited number of accredited investors, but the investors must be verified by a third party. It could be you, could be their own CPA investment advisor attorney or you could send them to a company that will provide that certification for them.

Jack: Verified by me? Of the person raising the money could be considered the third party?

Kim Lisa: Your obligation is to have a reasonable assurance that all the investors are accredited and that that has been reviewed within 90 days of when they make the investment. It can be by you. You know, if you have that you must have a documentation and record keeping system to show how you knew they were accredited and what you did verify that.

Jack: Okay. That covers raising money from friends and family on the one hand versus the private equity raise on the other. But there's this weird middle ground called crowdfunding that's relatively new. Talk about that.

Kim Lisa: Crowdfunding is the exemption that I just explained.

Jack: Oh really, the 506C covers Crowdfunding? Okay.

Kim Lisa: Okay. Crowdfunding is just a means to advertise a securities offering. What we've created when we know we're selling securities and go to a securities attorney and get them to help us select the exemption and then get them to help us draft the appropriate documents as you're creating something called a securities offering.

Jack: Right.

Kim Lisa: Once you have that in hand, now how are you going to be able to market that? Well, that's going to be determined by your exemption. So one of the ways to do it is to, to advertise and crowdfunding is really kind of sprung up out of the Internet and social media so that people could have the ability to use those avenues to spread the word about their offering as long as they had that protection in place that all the investors.

Jack: Well, when I first saw the word crowdfunding in regards to syndication, the place I first went mentally were to things like Kickstarter. And I just made this assumption that this was some kind of new exemption. “Exemption” is the wrong word, I guess in this context. But I didn't realize that the accredited investor rules still applied to that group of people. 

Kim Lisa: Well what actually happened is that when the jobs act came out in 2012 and we were waiting for the SEC to propose the regulations that would allow her to everybody to start using it they actually proposed something called Crowdfunding and they it was the rule that got all the initial buzz in the media saying, well, you could raise up to $2,000 from anybody without having to do any kind of a prequalification, but you have to do it through this Crowdfunding portal.

Jack: Right.

Kim Lisa: That's registered with the SEC. That is what the original term Crowdfunding was designed to cover. What happened though was that the SEC came out with the regulations for rule 506C first. And suddenly people could advertise and so the media jumped on that and started calling it Crowdfunding.

Jack: Gotcha.

Kim Lisa: It forced the SEC to go back and rename their original Crowdfunding rule, they've renamed that regulation Crowdfunding. So that is the kind of thing that you can still do, it doesn't work so well for real estate because it's limited to a $1 million raise in a 12-month period. In this day and age, you can't buy a whole lot of real estate and it must be for a specific project. But what it works really great for is for small businesses and startups that just need to get some initial capital or initial seed capital going then maybe they can go on and do a regular offering or even a public company registered their company and go public later on once they've got that initial capitalization.

Jack: Okay. My confusion is quite understandable.

Kim Lisa: Absolutely.

Jack: Okay. Alright. That's good to know. I want to follow up on this Crowdfunding thing. It may not be Opportunity Zone specific. I'd never had this thought until I heard you talking. I'd always assumed crowdfunding as the Kickstarter model of crowdfunding not the 506C, but the Kickstarter model, I've always assumed that was an equity play. Can that be also a debt play?

Kim Lisa: Yeah, I know. Well, if what you're doing is getting investments for a specific project, that's really the limitation. And why it is mostly used as an equity play.

Jack: Yeah, that makes sense. Let's drill down into the specifics now of Opportunity Zone raising capital for Opportunity Zone projects. What additional legal hurdles will I see as the entrepreneur as the one raising money? What added legal hurdles do I have to address? And the first one that I want to know about is setting up a Qualified Opportunity Fund.

Kim Lisa: Yeah, I'm sure you've had some guests in the past talk about some of the rules, but if you're doing a real estate fund, then you can do a Qualified Opportunity Fund that has to invest 90 percent of its assets in real estate. That's one thing that you'd have to be aware of. And so regardless of whether you're pooling funds or your own funds, that rule is going to apply to what you're doing if you want to take advantage of the tax benefits.

Jack: Right.

Kim Lisa: That's number one. Then if you're investing in a Qualified Opportunity Zone Business, then that rule is relaxed a little bit so that the 70 percent of the assets of the company have to be invested in a trade or business that's within or used within or tools that are used within a qualified Opportunity Zone. There's some complicated structures that people are using. They'll create a Qualified Opportunity Fund and then that will create a qualified Opportunity Zone Business. And the fund will invest in the business and then the business has a 70% of course fun cast to have 90% of the investments. The structures can get a little bit squirrelly. If you want to be able to take advantage of that 70% investment rule instead of the 90% investment rule.

Jack: Specifically, one that I wanted to ask you about. Let's follow that trail. I want to be able to take advantage of the 70% rule rather than be limited by the 90% rule. How the heck am I going to pull that off?

Kim Lisa: You're going to create a company that's going to be the title holding entity. Are you doing it for real estate or for something else?

Jack: Yeah, we're going to do it for real estate, but we want to get the 70% rule rather than the 90%.

Kim Lisa: You create a single-special purpose entity that's going to take title to the real estate. And you make sure that whatever funding that company receives is 70% invested in real estate. Then above that you create a pooled investment entity for your pooled investors and that's your Qualified Opportunity Fund. You take 90% the interests that that fund or 90% of the cash that fund has pooled from investors and you invested in that special purpose entity. And then that special purpose entity must invest at least 70% of that into the actual real estate project itself.

Jack: Does the various timing rules, the windows in terms of when the money comes in, when the money goes out with this multi-layered structured, how does that affect the 180-day rule and the 31- month rule,  how is that all effected by this multilayer structure?

Kim Lisa: You just must really monitor and pay attention to it so that you're not running afoul of those rules in it. And you still want to be mindful of those rules. There are some deferrals for government delays. If you're waiting on a permit approval and you've submitted the application and they're causing you to exceed the 31 months limit, that's fine. And even within that 31 month limited, if you have some cash that you haven't been able to invest yet, either have to hold it in cash or you're even allowed to make a short term debt obligations with it for up to 18 months.

Jack: You just listed two possible deferrals that I have not heard of. I don't know how I've missed that, but this is really the first time I've heard these things. And I guess that's why you hire an attorney like you.

Kim Lisa: I'm not a tax expert. I've just read the reg. So that's in the right the updated regulations that came out.

Jack: The April stuff?

Kim Lisa: Yes. And so, it talked about that.

Jack: Okay. If I have some sort of governmental delay that holds me up, I get a deferral for that?

Kim Lisa: You're not getting an extra deferral. It's just giving you an opportunity to do something with those funds while you're waiting.

Jack: Okay.

Kim Lisa: Okay. So, it's still within the same deferral period, but it's giving you something that you can do with the funds instead of just having cash in the bank and they're depreciating.

Jack: Alright. I want to find out a little bit more about Kim Lisa Taylor. Did you always want to be an attorney? How did you end up in this highly specialized kind of practice of law?

Kim Lisa: I remember distinctly having a conversation with my mother when I was like, I'm going into first grade and saying I'm either going to be an architect or a lawyer. I have no idea why I wanted to do that. But that was my plan. I love to read. And I read tons of books when I was a little kid. And I ended up having a boyfriend at one point that went to law school and I was like, “well why not?”

I worked for a while as a scientist. I actually am a professional geologist licensed in California and I worked as an environmental consultant for a number of years. I just looked into my future and said, “Hmm, I don't really want to be standing behind drill rigs with steel toed boots and hard hats in my 50s. I should think about doing something else.”
I went to law school. I went kind of late in life and knowing that I didn't want to compete with a bunch of 25-year-old and big law firms and work 80 hours a week, I just kind of started doing my own thing, working for multiple attorneys.
And then I met my mentor who was Gene Trowbridge and worked for him for several years and then we started a firm -- a corporate securities firm -- in California. And then in 2016 I decided I wanted to move to Florida. Moved out here and decided to start my own thing.

Jack: I want to point out to our listeners that what Kim just said to us is demonstration that she is really, really smart. She went to law school late in life and when she got out, she knew she didn't want to have to fight with 25-year-olds who could put in 80-hour weeks and found another way to do it. That's the kind of lawyer I want. 
Okay. The Opportunity Zone act, the whole program has created a tremendous amount of excitement and interest and I think reasonably so. However, I suspect that you have run into some challenges that we haven't ever seen before. Anything come to mind right now that would be fun to talk about?

Kim Lisa: Well, for real estate, the buzz at the real estate conferences and kind of my own sense of it is: it's more than it's cracked up to be because there are some limitations that it puts on you and your fund that might not be advantageous for all of your investors and the gains investors are probably not the bulk of the people that you already know, who are the most likely people that are going to invest with you.

Jack: Talk more about that.

Kim Lisa: What it's done is it's opened the world to people who previously were restricted with 1031 exchanges to only investing in like-kind property. So now it doesn't matter what you sell. Sell your car, stocks or bonds or something like that. If you sell that stuff and you have gains, then you can invest it in real estate. You can invest it in anything else you want.

You know, it just gives you the ability to talk to a wider group of people than you had before. And it's also difficult for syndicators to pool money from 1031 investors because there hasn't been a way for them to do that with the tenant-in-common structure that actually made it beneficial for the actual syndicator to do the work because we really have to sell off a piece of that property. And then the 1031 investors entitled to their share before the syndicator gets their cut. So really then it just kind of diminishes the amount available for the syndicator for all the work they're going to do to maintain that property and finding it and all that.

It's created this added group of potential investors, but still the primary group of investors out there are cash investors with self-directed IRAs, savings. There are a lot more of them, I think than there are the people who have the gain.

The only people that you can cater to in an Opportunity Zone fund are your gains investors. And the problem with that then is that whatever rules you have to set up for your fund to be able to accommodate those Opportunity Zone investors -= if you don't do it right – could end up also restricting the ability of your cash investors.

So now your cash investors are stuck in a deal for 10 years because you're gain investors must be in it for 10 years to get the benefit. There are some workarounds where you can structure it, maybe have side-by-side funds that co-invest -- one for your cash investors, one for your non-cash investors.

There’re some rules. “Mixed fund rules” is what they're called in the Qualified Opportunity Fund regulations. Those talk about how you would handle that as far as calculating who gets what gain and who gets the deferral, who doesn't and those kinds of things. But it's going to be a little bit more complicated for your accounting. You can do it. You can certainly do Qualified Opportunity Funds and if you have the right opportunities, it's fantastic. If you're a seasoned syndicator and you've got plenty of investors with gains that want to be able to invest and take advantage of this, then it's fantastic.

But for somebody just starting out, chances are you're not going to be able to have enough investors that need that gains benefit to be able to fulfill your fund. You might want to not try to do it starting out fresh out of the gate.

Jack: Right. Let’s take that situation where I've got a mix of gain investors and cash investors. Do you have kind of an overarching rule where you say, “Structure it this way,” or is it taken on a case-by-case basis?

Kim Lisa: We would want to work with your CPA to make sure that they either understand the mixed fund requirements so that they're capable of doing those dual distribution calculations and capital accounts. Or it might be easier for you and for the Opportunity Zone investors to be able to have two funds side-by-side that just co-invest where one set of rules applies to one, one set of rules applies to the other. It's certainly possible to set it up where you could just have multiple classes within your fund where one fund or cash invest, or one class is your fund investors are your Opportunity Zone investors one class or your cash investors. And there's different rules that apply to each and even the cash investors could be cashed out or you could do a refinance and cash them out earlier.

Jack: Right.

Kim Lisa: Other investors can stay in longer.

Jack: The short version: the bottom line is that even if you've got a mix of cash and capital gains investors, this is certainly doable. It's complicated but certainly doable.

Kim Lisa: Oh, absolutely. It absolutely is. You just don't know; you're going to want to work closely again with your accountants and with your securities attorney just to make sure that you're not creating an adverse tax situation. But that's true for any syndicate. You always want to be sure that you're working with qualified counsel that's not putting you in it.

Jack: Right. We want to make sure when it comes to the Opportunity Zone stuff, because the primary benefit is the step up in basis and then the 10-year/100% market-value basis at that point and you certainly don't want to screw that up. That's the whole point. The whole point in doing it, at least from a financial standpoint. Right.

Kim Lisa: Well, the upper limitation right now is that you know, current regs say you must make your investment by the end of this year to qualify for the full 10 year. I have heard some rumors that there might be some talk of extending into next year so that people have another year to make their investments.

Jack: Oh, you know what, that's not what I understood. I was under the impression that the 10-year full step-up in basis was you could, you could get in anytime between now and the end of 2026. What you're not qualified for is the 10% and the 15% step-up in basis on your initial investment. But hey, I'm not the expert so…

Kim Lisa: Well, there's a lot of confusion amongst the tax community out there right now. If you look this up on the Internet, you'll find both positions out there on the Internet. I interpreted the way you did, and I have been corrected a couple of times by tax professionals and said, “No, you’ve got to do it by the end of the year.” I'm not going to be the final say so on that. Do your own diligence.

Jack: Well, Kim, Lisa Taylor, it has been great to talk with you. I love talking to smart experts, but you know, I think one of my favorite things is your story of standing behind the drill rig and deciding if you want to be doing that in your 50s. I think there's probably a good story there. Any last words for us before I let you go?

Kim Lisa: Um, no, this was great at great opportunity. Just make sure you get good advice before you go doing this. This isn't something for the faint of heart or do-it-yourselfers.

Jack: Yeah. This is, this is a professional, don't try this at home. Like they showed the commercial.

Kim Lisa: That's right. And attend conferences, right. Attend conferences where you're going to learn about these things.

Jack: It really does make a difference. Kim, how do folks get a hold of you if they want more specific information about you and your offering?

Kim Lisa: Our website is and there is actually a webinar that we did about Opportunity Zones on our website. We do three monthly webinars. If you want to find out when those were going to happen join our newsletter mailing list and they'll tell you about those. There's a lot of articles, there is an article about Opportunity Zones there that you're free to read. Lots of articles, often asked questions, educational material that you can get from our website and you can also schedule an appointment with us if you would like. Or you can call us at 844-Syndicate. That's 844-796-3428.

Jack: Very good. And I will remind our listeners that this contact information for Kim and Syndication Attorneys is also available at the podcast website. So, don't wreck the car trying to write it down. What Kim, thank you for your time today on behalf of Kim Lisa Taylor with Syndication Attorneys. I in the Jack Yield for The OZExpo Podcast. Thanks for listening. Be sure to subscribe so that you're updated for our, every time we get a new podcast published, we've got new coming out all the time and 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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