EquityMultiple On Real Estate Opportunity Zone Investments

ValueWalk’s interview with the team of EquityMultiple. In this interview, the team discusses if their platform is exclusively for accredited investors, the impact of monetary polices on private-market commercial real estate, their Opportunity Zone investments offering and how it works, and if EOZs impact real state prices.

Opportunity Zone Investments

mohamed_hassan / Pixabay

How does it work? Do you need to be registered with FINRA, SIPC or any of those?

While we originate, underwrite, and structure all of our investments, our securities are offered through a partner broker/dealer, who is registered with FINRA and SIPC.

Get The Full Series in PDF

Get the entire 10-part series on Charlie Munger in PDF. Save it to your desktop, read it on your tablet, or email to your colleagues.

Q2 hedge fund letters, conference, scoops etc

Is your platform exclusively for qualified or accredited investors only?

Yes, by law we are only able to offer investments to accredited investors. Our investments are structured via Rule 506(b) of Regulation D of the Securities Act, meaning that we do not engage in any “general solicitation”, and establish that our investors have the requisite financial means and investing experience to participate before presenting investment opportunities.

Do you vet potential investors and allocators?

Beyond the accredited investor qualification mentioned above, we also abide by The Bank Secrecy Act, which mandates that all financial institutions perform Know Your Customer (KYC) and perform Anti Money Laundering (AML) verifications. Hence all EquityMultiple investors must be verified via an IRS-issued tax identification number and government-issued ID.

In addition to adhering to regulatory strictures, we also have bank-grade security protocols in place throughout our platform and investment process.

Is any industry more impacted by rates than real estate? How much does Fed policy matter for your firm?

As we’ve observed time and again, changes in monetary policy (or even whispers of Fed action) can roil public markets. Interest rates directly dictate the cost of borrowing money, and hence do have a material impact on real estate investment activity and profitability. At the same time, if the Fed increases interest rates, it is fundamentally a response to robust economic growth, with the aim of keeping inflation in check and keeping the economy from overheating. This situation tends to bode well for real estate investment, as it means that jobs are being created and demand remains strong in property markets.  

Furthermore, our thesis is that private-market commercial real estate remains a smart choice throughout market cycles, and irrespective of shifts in monetary policy - the underlying asset has inherent and irreplaceable worth, and thus commercial real estate generally exhibits less volatility over time than do public assets. 

Are you involved with EOZs?

Yes, we followed the evolution of the program closely following passage of the tax bill in late 2017 and the Investing in Opportunity component. Because real estate - and affordable housing in particular - is such an obvious fit for the Opportunity Zone program, we became interested early on in offering Opportunity Zone investments to our investor network, given the monumental potential tax benefits the program affords.

We began evaluating potential QOZ projects in mid-2018, but waited to receive more fulsome guidance from the Treasury Department before proceeding. We have now successfully opened two QOZ investments to our investor network: an industrial development in the Phoenix MSA and a manufactured housing community (MHC) fund that spans a number of Opportunity Zones across several states.

Can you explain how they work?

Opportunity Zones are designated census tracts selected by the state and federal governments for economic development. They can be found in every state and in urban, suburban and rural areas. This new program is intended to spur substantial private investment into these communities, and seeks to do so through robust tax incentives.

Qualifying investments offer three unique and compelling tax advantages - investors can defer paying federal capital gains tax from recently sold investments until December 31, 2026, reduce that tax payment by up to 15%, and pay as little as zero taxes on their Opportunity Fund investment if held for 10+ years. Investors can also help spur economic growth in historically underinvested neighborhoods.

An example with a hypothetical investor, who we’ll call John: When Amazon hits $2,000 per share, John decides to sell the 600 shares he purchased back in 2015. The sale results in a $1 million profit and $238,000 in federal tax liability. Instead of paying $238,000 in federal taxes on this sale, John invests his $1 million gain into a real estate Opportunity Fund targeting workforce housing in Opportunity Zones. Assuming an annual return rate of approximately 8.5%, the post-tax value of his investment in 2028 - after a 10-year hold - is $2 million. John’s post-tax earnings are more double than if he had invested elsewhere.

Through our platform, we are able to offer fractional investment into Opportunity Zone real estate to accredited individuals (such as John), with minimums as low as $50k. I would encourage any investors who are interested to take a look at our Opportunity Zone resource page, which has more information on the program and links to further reading.

We have heard EOZs are super hot; what is going on and what should those investing there know?

The new program has certainly captured a ton of buzz. At the risk of being vulgar, a joke making the rounds in investing circles is “Opportunity Zones are like sex in highschool: everyone is talking about it, very few are actually doing it”. The fact is, it isn’t easy for individual investors to understand, much less access Opportunity Zone investments, which is why our platform is a bit unique. We are able to offer participation in QOZ investments at relatively low minimums while providing the investor support and resources to understand the mechanics of the program and how to roll over their capital gains.

I think a lot of the attention has gone toward the more glamorous designated QOZs, such as Downtown Brooklyn, The Pearl in Portland, OR, and parts of central Los Angeles, like Koreatown. These areas were already gentrifying, and should face heightened competition as a result of the new program. While areas like this will continue to benefit, we believe that investors should not sleep on less heralded census tracts across the country. There are over 8,700 qualified Opportunity Zones across the U.S., spanning infill urban areas, suburbs, and rural areas. Different property types and development plans can create value in different areas of the country in countless ways. For example the Manufactured Home Community fund I mentioned earlier, which not only offers a strong, recession-resistant investment thesis but also seeks to add affordable housing stock across a number of suburban and exurban communities in the interior of the country.

Are EOZs having any impact on real estate prices?

Yes. There is some debate as to how much, and this definitely isn’t happening uniformly across all QOZs. Zillow’s recent study showed that property values in QOZs have increased by 20% since the Tax Cuts & Jobs Act was signed into law in late 2017.  Certainly there’s some multicollinearity to this figure: many of these areas were already gentrifying and experiencing growth in property values. However, this same study showed that property values in census tracts that were eligible for QOZ status but not designated as such have only grown by about 8% over that same time frame. So there’s definitely some cause and effect here.



About the Author

Jacob Wolinsky
Jacob Wolinsky is the founder of ValueWalk.com, a popular value investing and hedge fund focused investment website. Prior to ValueWalk, Jacob was VP of Business Development at SumZero. Prior to SumZero, Jacob worked as an equity analyst first at a micro-cap focused private equity firm, followed by a stint at a smid cap focused research shop. Jacob lives with his wife and four kids in Passaic NJ. - Email: jacob(at)valuewalk.com - Twitter username: JacobWolinsky - Full Disclosure: I do not purchase any equities anymore to avoid even the appearance of a conflict of interest and because at times I may receive grey areas of insider information. I have a few existing holdings from years ago, but I have sold off most of the equities and now only purchase mutual funds and some ETFs. I also own a few grams of Gold and Silver