Precision Analyses of OZ Tax Strategies

Michael Bernier

The Opportunity Zone Expo Podcast
Precision Analyses of OZ Tax Strategies


Jack: Welcome back everyone to The OZExpo Podcast. I am your host, Jack Heald. Joining me today is Michael Bernier, who is a partner at Ernst and Young. Michael, welcome to The OZExpo Podcast.

Michael: Thanks Jack. Pleasure to be here.

Jack: You'd think I've done this a couple of times before. The way I tripped over those words. So, tell us what you do at Ernst and Young.

Michael: I'm a partner in our national tax practice, so I help our clients throughout the firm with various areas. My areas include Opportunity Zones. I lead up our firm's efforts helping our clients across the country and Opportunity Zones. I also do monetizable tax credits. So your low income housing tax credit, historic tax credit, renewable energy tax credit and probably most relevant to this new market tax credit since a lot of the Opportunity Zone features are modeled after lift parts from the New Market Tax credit program.

Jack: And how long have you been with Ernst and Young?

Michael: 19 years.

Jack: So tell us about yourself. How did you get into this business? Where'd you come from, schooling, that kind of thing?

Michael: Sure. I grew up in Holyoke, Massachusetts. I went to school at Bentley College, was an accounting major. Didn't really ever plan on being in accounting for long, it wasn’t the career path of choice. If you're going to get to a higher level MBA, they always said you need your three years' experience, go get your CPA, you'll get to meet clients, learn the accounting and then you can move into finance. Had an internship at EY and never left despite all my best intentions over the years.

Jack: So, your goal was not to be an accountant?

Michael: No.

Jack: It was to get into finance.

Michael: I wanted to be an investment banker.

Jack: And you've been Ernst and Young literally since you graduated.

Michael: Yeah.

Jack: That's astonishing. So, let's talk about Opportunity Zones specifically the kinds of things that you're dealing with on a day-to-day basis. When you get called in to talk about, what to talk with a client, what are the questions you're getting asked?

Michael: So, I think we get different questions depending on what side of the table you're from. We have a lot of high net worth individual clients and they're all very excited about the tax benefits, but they want to know how to invest. They want to make sure they're doing it right. I think one of the challenges at the moment is, one, it's a new program and the rules are very complex as I'm sure you're well aware, very hard if you're a lay person to pick it up and say, ah, I get it. I understand. The other thing that it high net worth individuals are struggling with is a lot of the traditional places they would go to invest aren't offering funds yet, so you don't see your big brand name fund managers in the space yet. I expect them to get there shortly, but a lot of people want to understand how it works, understand the rules, help with diligence.

When we moved to the fund side, we have a lot of developers in the real estate space and a lot of operating businesses along with your traditional fund managers that are trying to figure out how to make it work.

The big challenge is usually talking them through how to take their existing model and kind of tell them to throw that out the window and this is how you have to do it for Opportunity Zones, right? Everyone wants to say, well why can't I do it the same way I've always done it? And that just doesn't work with this program. So it's working through what they need to change, why they need to change it, how they need to change it and getting them across the finish line so they can have a funded project.

Jack: Any particularly notable hurdles that you’ve run into so far?

Michael: I mean, I, I think one of the biggest hurdles is always timing. I think the traditional way people are used to doing it is going out and raising a fund or raising capital. You have the capital in hand, then you go out and find a project or you have the commitment, so you call the capital. This works very different. You really almost need the project before you go out and raise the capital. That creates timing. And then on the other side, as you know, once the fund gets the money, you have six months to push it down and then 31 months to build a project. So, you’re under these really tight deadlines that most funds aren’t used to dealing with.

Jack: I talked to someone who talked about the timing on the, on it was either the opening or the closing of the fund. In regard to the 180-day rule, is that the first dollar or the last dollar?

Michael: It’s the first dollar. And so that can make it really tricky if you’re trying to raise a fund for multiple people.
Jack: Oh my gosh, yeah.

Michael: Because I can have the ideas to raise my fund on June 1 but if someone mailed me a check on May 1,, I’ve started my, my clock, right? That person may want to end their 180-day clock or they just want to send me the check, now my six-month clock to invest the money into a QOZB or QOZP is started. And so that person inadvertently started my clock a month early. And you kind of have to account for that. If you’re going out to a large pool of investors, right? If it’s one or two people, you can manage it. If you’re trying to raise money from 100 people, someone’s going to mail you the check early.

Jack: Absolutely. Okay. So, as we’re gathered here in Las Vegas for the second of the OZ Expos, what are you expecting to get out of your time here?

Michael: I think one of the big things is just to hear from other people what’s going on in this space. I think we’re very early on in, it’s a time where people are running through different issues. We’re still trying to figure things out. Other people are trying to figure out if anyone tells you they’ve read all of the regs. I have all of the answers. There’s no open questions. You know, they’re lying quite frankly at this point. And so, a lot of it is figuring out what’s going on, figuring out where the market’s at. Right? Cause we can say from a tax perspective, there’s some risk to this, but the real question isn’t, is there risk to this? It’s, is the investor paying for the risk? Is the investor not investing because of the risk? How does the investor react to that risk. And that’s both intelligent investors that understand there is a risk and are making a calculation in other investors that may not even be aware of it. So you want to get a number of sort of deals out. There are a number of fact patterns. You can start to see what the whole picture is. You don’t want to build everything off of one deal or one fund.

Jack: Is that the biggest question that you have right now? What’s the biggest question that you’re dealing with right now? Not necessarily that you hope to find addressed here at the OZ Expo, but what’s the biggest single question that you think still is unanswered?

Michael: So, I’m going to move away from the technical side.

Jack: Sure.

Michael: I think there's a lot of interesting technical questions, but I'm guessing, you know, the audience isn't necessarily into going deep tax technical. I think the question is how are investors going to manage what I'll call the uncertainty? That's not technical. It's not programmatic. So will I invest into funds if all of the properties aren't lined up, will I invest into a fund and how do I look at it? If the construction period’s supposed to be 28 months and I know I've got 31 to deploy it, what if it's a multiple asset fund? Do I worry about the exit? Right? How do I, how do investors start to price all of these things in, because that's ultimately going to weigh into your cost of capital. And the ultimate success of this program is being able to raise cheaper capital to help these communities out. So I think that's really what I'm looking for. And there's a lot of technical issues that underpin that, but it's really what our investors are going to pay. What are they worried about in how well will this program work, based upon that?

Jack: How are those investors responding? At least as far as Ernst and Young is concerned, what do you, what's the temperature out there?

Michael: So, investors are very excited. They really want to invest also, although I will say they're very cautious. So I think we're seeing very few blind pool funds at the moment. They want to be able to look at the investment that you're bringing them. They want to touch it, they want to feel it, they want to underwrite it, they want to know what it is. Very different than a traditional private equity fund or a traditional real estate fun, or traditional infrastructure fund where you don't see anything. I think there, that starts to dull the interest, cause there's not a lot of deals that are ready to go. And I think that's one of the difficulties with this program is that everyone wanted it to sort of start in, start running right away. Okay. We have the regs, what activities is there, well it takes awhile to sort of cycle through that.

Right? The funds have to digest the regs. They have to structure their deal though. They've to understand how the drugs work. They have to find the deal. They have to structure the deal. So there's a number of steps before you get to a closing or a number of steps before an investment that are all going to take some time. So I think there's an incredible amount of activity going on and you start to see people announcing a $250 million fund, $1 billion fund, and those announcements are out there. And I think that activity is starting to happen, but it's going to take awhile. I think in the activity that we're seeing now is maybe different than some of the early announcements where you saw somebody say, oh, I'm going to raise a $1 billion fund or a $3 billion fund or $500 million fund and you look at it and to date they might've raised $30 million.

Okay. So yeah, you have a $500 million fund, but you've really placed, you know, $30 million of it. I think we're starting to see the bigger players come in. We're starting to see the real estate get to the point where people are gonna start filling up funds fast and the dollars are going to really start racking up.

Jack: Any notable big projects that, that you've seen that have actually, that are actually underway? I'm not asking you to reveal secrets, but you know, locations or places where some really interesting development might be happening. Like, you know, right across the street we've got the Raiders new stadium going in. I dunno if that's an OZ Zone or not.

Michael: It is in an OZ Zone.

Jack: Yeah.

Michael: I think that what I'm most interested in are the things that are, I'll say a little bit off the beaten path, right? We see a lot of that.

Jack: Well, talk about those. I like off the beaten path.

Michael: We saw a lot of real estate, but we've, there's a project in South Carolina where they're expanding the ports and so there's going to be warehousing and equipment to move stuff off the ships to move stuff into, eventually onto the trucks in and out into the community. And that's an “infrastructure” project, which is in my mind, very different than real estate. It's going to bring a significant number of jobs and there's a number of real world issues in addition to just building it that you need to think about. Who's going to work there, how does it go, how do you get the right skilled people? But to me that's a great example of a project that is going to, or at least has the potential to really change these communities.

Jack: Right.

Michael: In the way that, you know, not that we don't need more housing because we clearly need more housing. There's a housing crisis in this country, but if you're buying a building for $5 million and putting $6 million in it, to substantially improve it, you have to raise the rents. There's just no other way.

Jack: Right.

Michael: You'd buy something worth 5, put 6 in it and charge the same amount.

Jack: Right.

Michael: And so that's where you start getting into displacement and sort of the gentrification. We have also seen some operating businesses. So, we have a client that did four grocery stores. Those are going to go in, that's going to help those communities out there¸ they are going to have access to groceries. And so, we are doing an incredible amount of real estate, but I tend to be most drawn to and sort of fascinated by something else.
I'm also aware of a client that's looking at an LNG facility talking about something that's a little bit different.

Jack: Liquid natural gas? Okay. Yeah. You know, given the fact that that 25% of the landmass United States is inside an Opportunity Zone and given the fact that an awful lot of that is rural. Not, you know, centered around high-density urban areas, it seems like any kinds of plays for some sort of energy would be good in those, in those rural low-density areas. And I keep asking and I keep not hearing much about energy plays. It's just seems to me like it would make a lot of sense.

Michael: I think energy plays can be tough, but those are the type of things that you need in more of those rural communities. Is something where you're going to have a job creation component to it.

Something where you can take advantage of the large amount of space that you have available to you in these zones too, right? It's not in an urban area. It's not where there is this small footprint for you to sort of build in. I think energy is one of those, it takes a long time to permit. It takes a long time to get there. And that'd be the perfect example.
Even if you came, you know, two weeks after the rules came out, which you couldn't have done because you didn't know where the zones were. But if you started trying to permit a solar facility or a wind farm, there's zero chance you've broken ground yet. You're probably still a year or two out.

Jack: You may have just answered the question that I've asked of a number of people. And that is fourth generation nuclear. The permitting process is probably the thing that's going to keep any fourth generation nuclear from being able to take advantage of Opportunity Zones.

Michael: I'll say if they do, they were going to do the project anyways, right? So they're really a project that already, you know, was six months out and now it fits. But if you're at square one or saying, hey, let's move it here…

Jack: Yeah.

Michael: That's gotta be a particular nuclear, that's a decade plus.

Jack: Yeah. Yeah, that's long as well. And fourth generation nuclear is so comparatively new. Anyway. All right, well that makes a lot of sense. Good. This is helpful, I like figuring out this stuff. Okay. So, let's, let's take the conversation in a slightly different direction. Somebody who's involved in tax generally has a particular kind of mind. What drew you into this business? So, such that it kept you there and I'm not talking so much about the business itself. How are you wired that this kind of thing keeps your interest for 19 years?

Michael: So, I would say that it's an, it's the fact that it's always changing, right? So I talked about, I did monetizable tax credits before I did Opportunity Zones. But if you really look through, I started doing low income housing tax credits, then I did historic tax credits then I did new markets and it was renewable energy and now it's Opportunity Zone. And so I always like to be learning something new, adding something new. I think it's helpful that there is a number of different things you can look at. So when I look at Opportunity Zones, there's a number of things that are lifted from new market tax credits, different program in the fact that new markets ads is for providing debt to these communities.

This is providing equity, slightly different rules, but you have a platform in sort of a conceptual structure to work together. And to be honest, you know, I see myself doing this for a couple of years. I'll probably always be doing some deals, but just the way that I'm wired in three or four years, there'll be another program, another thing that I'm working on, cause I'm not the type of person who could do the same thing for 19 years, but I can keep, you know, learning something new, adding something different, getting new, different experiences.

Jack: So, I try to figure out who I'm talking to by asking questions like this. Wow. How do you relax when you're not working? What's a relaxing activity for you?

Michael: So that the key is when I'm not working, which I think particularly since Opportunity Zone came on is becoming less and less. My hobby is, I really enjoy playing chess. I play chess fairly regularly.

Jack: Are you good?

Michael: It's all relative.

Jack: Okay. that was a fair answer. How good are you? What's your ranking?

Michael: I'm rated about 1600.

Jack: Okay. And what's the level? Put that in perspective for me.

Michael: It's probably the 80th 90th percentile. Somewhere between 80 and 90th percentile, I would guess.

Jack: You play online?

Michael: I do most of the time online. I enjoy it. I actually play daily chess when I travel.

Jack: What is daily chess?

Michael: So normally you would go sit down and play with someone and you have a fixed period of time to complete the game.

Jack: Uh huh, right.

Michael: On daily chess, you have let's say 24 hours to make a move.

Jack: Okay.

Michael: So, I can go do whatever I'm doing. I may go back to the room, you know, at the end of tonight and I can go and play, you know, four or five moves and then I will wake up in the morning and the other person will move and you're kind of just keep going through. So it allows you to keep playing without having to set aside a block of time.

Jack: Are you aware, of how you process the visual element of chess, do you, do you visualize the board and see patterns unfold or, or is it more of maybe a non-visual kind of problem solving? So, does that question make sense to you?

Michael: It does. So, I mean did the visualization is obviously a large part of it where you have to be able to calculate moves ahead and sort of go through where it is in, in you're going to the...

Jack: These are geospatial moves.

Michael: Yes.

Jack: As opposed to the kind of very abstract problem solving that you're dealing with the tax code.

Michael: I would say that it is, I'll disagree with that.

Jack: Okay.

Michael: Because I would say that there's patterns and there's a construct and so, whether it's the tax code and you're learning, this is how this works. How do I take those patterns and apply them to my client's fact pattern the same way I'm saying, okay, I learned this pattern, this pattern, this pattern in chess? How do I apply that?
Michael: Which one do I take out of the bag and apply to this fact pattern on the board at the moment?

Jack: Does it feel like the same type of problem solving to you cognitively? It seems like it would be very different to me.

Michael: When it's new and you're learning it, right? So let's just go back maybe 10 days we got the regulations, right?
Michael: Then it's very similar to it where you're sitting there in your going through and you're trying to figure it out and you're really trying to think through not just what does this say, right? Because anyone can help with what they say. What our clients really want is what does this mean to me?

Jack: What does it mean?

Michael: So, it's trying to first figure out what it says and then how does this apply to the real estate client, the client that's doing maybe the Raiders, that client that's doing the Opportunity Zone business, right?

Michael: Because it's gonna apply very differently. That feels very similar to playing over the board where you're trying to figure out how does this work? What I would say is that more of the day-to-day, what I do is almost more like practice where you're going to try to do, I'm going to do 10 problems using this pattern so I can really drill it in. After you learn this, it becomes like a repetition where, yeah, I'm going to do a call with the client, but clients are often going to ask similar questions.

Michael: So, you might be on the 12th explanation of how this rule applies.

Michael: And every time it's getting a little bit better, but it does also become a little bit easier. It's not the first time you go through explaining something. It can be really struggling and taxing. The 12th time it should one: be much better, but two, it should be much easier.

Jack: Oh, okay. That makes complete sense. I'm still just baffled because, and this is because I'm a terrible chess player probably, but when I sit down and I look at a chess board, to me it's primarily a set of geospatial, a sequence of geospatial problems.

Michael: Mmmhmm.

Jack: That's how I perceive I conceptualize it. And what I'm hearing you say, if I understand correctly, cognitively, it feels the same to you.

Michael: Yeah. Because it's less for me, it's less geospatial, it's more pattern recognition. Right. So you have these pieces in this particular sort of set up and it may not be exactly the same, but if it's something I've seen before and what did somebody else do in this situation, what works in this situation?

What do I need to be careful of? What when I was in this six months ago in and I screwed up, what did I screw up? Do remember that? To me that's very similar to talking to you about your project, right? I might not know about your project. You're going to be asking me questions. I'm going to be asked to fairly rapidly answer your questions with your fact pattern, pulling back discussions that I knew from the last real estate client or three clients before or, because sometimes you get questions you've never been asked, but a lot of times it's come up, maybe it's slightly different.

And it's similar and you can pull it in. And so that's very much like the chess. It's not exactly this, but this happened and I remember it and I looked at it and I studied it and now I can sort of play it over the board. I can have that conversation because I looked at it and I studied it. A client asks this question and I researched it and now I'm ready to answer quickly and be on point with it.

Jack: I'm asking these questions because I'm fascinated with how the human brain works. So that's what this, the, my next question is related to that. What about artistic endeavors? Do you have any artistic interests of any kind and or artistic skills of any kind? I'm trying to figure out your brain.

Michael: Zero artistic skills. I will readily admit zero artistic skills.

Artistic endeavors. Not that many.

Jack: What about the more creative types of interests? Not music or dance or theater or things that you're interested in? You don't have any skills? Anything like that get you going and gets you excited? Anything about poetry?

Michael: No. Now it is much, I think that literature can get me going. Like I can really appreciate how somebody tells a story or constructs it.

Jack: Is it primarily a structural thing for you rather than the content?

Michael: It's how you deliver the content, right?

I mean, you, you can even take a famous book. There's like the little kid's version that might be 20 pages.
Then there's the junior high version.

The adult’s 400-page version.

What do you cut out? What do you change? How does that change what's going on? As you go through it or, you know, when you watch a movie from a book, they have to cut a ton out to get it. What do you keep what you change in, in? How does that change the overall interpretation of it?

Jack: So, are you constantly aware of the patterns of the arc, the shape of these kinds of things? Is that what you're seeing?

Michael: I try to. I've always found it interesting when you can see where somebody redoes something right? Whether it's a, a movie, right? So the Great Gatsby, there's two or three different movie versions.

They are different, why are they different? How does that change the way you look at it? And then similarly from a musical perspective, if you wrote music, I've always been interested where you hear a remake of a song that sounds entirely different and how does that change the way you think about the song and what does that song feel like, et Cetera. Right? And so, you can just very different versions of the same song that can give you different sort of emotions because of the speed they play at or the pace. But the words and the basic rhythm are the same.

Jack: Uh huh. Okay. Well, time for my favorite question. I hope you enjoy this one. You get to imagine now for a moment that you are the king of the world, but just one day you only get one day to be king of the world. Your word is law for one day and you get to solve one problem. What one problem are you going to solve with your grand power?

Michael: That's getting deep.

Jack: That is getting deep.

Michael: This is one I wish I knew in advance because I'm sure I will come up with a better answer five minutes after you stop recording. I would say the, the biggest problem I feel like we have, I'm trying to go down to the source. I feel like it's hard for people in not necessarily people want to be, but just really being educated about things, right? In today's day and age, people hear the, “Oh I watched the two-minute thing on the news.” Really do the one-hour version, right? So there's a couple of podcasts that I, I really love listening to.

Jack: Do tell.

Michael: They're all like an hour version. So, Chris Hayes, what's happening now? Or why is this, why is this happening? Something like that. But they spend an hour on a single nuance topics. So if you want to, if food stamps or in the news, they might give you an hour, hour and a half on the food stamp program so you can really have an opinion, you can understand what's going on. There's an investing podcast that I listened to where they'll spend a whole hour just talking about one topic and I feel like we've lost the ability to go into that detail and if you're not willing to go into that detail, it makes it really hard because that becomes your foundation. Maybe back to our chess things. When you're making decisions, when you're making life decisions, you're relying on all the information that you've collected to date. I feel like we don't do a good job of really digging in, really thinking about collect, collecting the data. So I guess the thing that I would like to change is have people more educated and more thinking deeply and more knowledgeable about stuff and I feel like that would solve a lot of the other problems coming out of it.

Jack: I think you're right. I really do. Well Michael, it has been really a lot of fun. It's just such a good time to get to, to scratch brain cells with other people and see what's underneath. This has been a really entertaining conversation. If you got any last words for us before we say goodbye.

Michael: I just want to thank you and they really enjoyed it and it's been a pleasure being here at the Opportunity Zone Expo and I'm looking forward to the rest of it.

Jack: Absolutely. Now folks want to get ahold of you or your division and Ernst and Young, what's the best way to do that?

Michael: Sure. Email is always the best way. It's

Jack: Very good. And I will remind our listeners that information is available online at the podcast website. You can get it there. So, on behalf of Michael Bernier with Ernst and Young, I am Jack Heald with the OZ Expo Podcast. Thanks for listening. Be sure to hit that subscribe button 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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