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Episode #28: Real Estate Tax Incentives with Blake Christian

In this episode, Millionacres editor Deidre Woollard talks with Blake Christian of HCVT about opportunity zones and other real estate tax incentives that both developers and investors can use.

Blake Christian has over 40 years of experience providing tax consulting and compliance services to a wide variety of clients. Blake specializes in federal, state, and local tax incentive programs. He is a CPA and he and the HCVT OZ Team have been involved in the formation of over 100 Qualified Opportunity Funds and Qualified Opportunity Zone Businesses. They have also advised hundreds of other investors and professionals regarding the complexities of formation, operation, semi-annual testing and restructuring of QOFs and QOZBs. Learn more at

Deidre Woollard: Hello, I'm Deidre Woollard, an Editor at Millionacres, and thank you so much for tuning into the Millionacres Podcast. As I record this in February, we're heading into the heart of tax season, and we want to give you as much information on taxes as possible. One of the things I've learned, in covering real estate for decades is that everyone's tax situation is different so please note that anything you are about to hear does not constitute individual tax advice, and always talk to your individual tax professional. My guest today is Blake Christian who has specific expertise on Opportunity Zones. You may have seen him quoted in some Millionacres articles about that subject. He brings over 40 years of experience providing tax consulting, and compliance services to a wide variety of clients. He specializes in federal state and local tax incentive programs and is a CPA. He and the HCVT OZ team have been involved in the formation up over a hundred qualified opportunity funds at qualified opportunities on businesses. They've also advised hundreds of other investors and professionals regarding the complexities of formation, operation, testing, and restructuring of both QOFs and QOZBs. Well, Blake, thank you so much for joining me today.

Blake Christian: Glad to be here.

Deidre Woollard: We've talked a lot about Opportunity Zones on the show before. The appetite for it from the investors I talked to is really vast, partly because it's still so new and it's been a long process getting all of the rules in place. Do you find that most people that are reaching out to you are looking to build an opportunity's fund, or find one to invest in?

Blake Christian: Most of what we do is for what we call captive Opportunity Zone funds, and so there are family office, high net worth individuals that are interested in deferring, and then ultimately exempting their tax gain. Much more interested in forming their own than looking to place it in a third-party's Opportunity Zone fund.

Deidre Woollard: Interesting. Are they looking to do that for one particular investment, or are they looking to do that to then invest across a couple of different projects in Opportunity Zones?

Blake Christian: It's about 50-50. Half of my clients are either serial developers or serial entrepreneurs with operating businesses so they have their next two or three ventures already set up when they have this gain generated, and so the Opportunity Zone format is perfect for them to defer the taxes, and then save taxes. The other half are really a little unclear about what they want to do with the money long-term and are looking for guidance, and put it into their qualified opportunity fund. They have in most cases with COVID, up to 55 months to figure out what they're going to do with it.

Deidre Woollard: Well, that's an interesting point too, is that we keep seeing these extensions happen. At the start of the year, we got another Opportunity Zone update from the IRS that extended the deadline to invest the capital gains until the end of March, but it also extended the period for a qualified Opportunity Zone fund, or a qualified Opportunity Zone business to double the basis. It looks like to me, from what I've seen, that basically takes out the entire period from April 1st of 2020 to March 31st of 2021. Is that right?

Blake Christian: That's correct. They essentially froze that period from April 1st through March 31st of 2021, and so the 30-month clock stops ticking during that period. If somebody already had the project going, and had set up their QOZB subsidiary, by April 1st, they'd have a 12-month extension on that period of time to double their basis.

Deidre Woollard: Okay, that makes sense. Just to clarify, for the listeners, what do we mean by basis?

Blake Christian: Very good question. Let's say I buy a piece of land with the building already on it. The land has a billion-dollar basis, the building has a two-million-dollar basis. I have to double my basis in the two million dollar building, I don't have to count the land. That's the 30-month period that you have to improve that building or put a secondary building on that property.

Deidre Woollard: Right. One of the things that we've seen people use Opportunity Zone funds for is developing a multifamily property on maybe something that didn't have anything on it before. But I also know that Opportunity Zone funds can be used for developing a business too. It's not just real estate, right?

Blake Christian: Absolutely right. About a third of our projects are operating businesses. Actually, I find that those are going to have the most impact, they will create more jobs, they'll be much more sustainable. If you figure, really, a home run on a real estate project, you more than double your investment over a 10-year period. That's sounds good, it's exciting, but you do an operating business, and you could end up getting a hundred multiple on your investment if you have a successful high-tech business or some good idea. There will be some very large gains coming out of operating businesses.

Deidre Woollard: Interesting. In terms of the improvement, can you also use this if you've got an existing building or something like that, you would just have to improve it in order to double that cost basis?

Blake Christian: Yeah, it gets a little trickier where you've owned the property before 2018, that asset in your hands is not a qualified Opportunity Zone project. But as you said, you could make improvements to the building, or put another building, put a parking lot in there. Those assets would be qualified opportunity assets. So when you sold it in 10 years, you'd basically bifurcate the sales proceeds into the non-qualified asset, the old building that you had, a legacy building, and then the improvements, that portion of it would be eligible for tax exemption. It's a little trickier that way.

Deidre Woollard: Just to clarify for people, what Opportunities Zone projects are, you can take your capital gains, and you can invest them into a project within an Opportunities Zone. How many Opportunities Zones are there? I forgot the exact number.

Blake Christian: There is over 8,700 throughout the country. About 15 percent of the footprint of the United States is an Opportunities Zone. They're pretty plentiful. They're basically allocated out based on population, so California, New York, Florida have the most. Wyoming wouldn't have a whole lot, but they do. Every state has some. It's also important to point out that US territories, US Virgin Islands, Guam, any territory of the US also has large tracks of Opportunity Zones.

Deidre Woollard: That includes Puerto Rico, right?

Blake Christian: Thank you, I was trying [LAUGHTER] to remember Puerto Rico, at about 97 percent of Puerto Rico. There's a whole subgroup of people that work in this area that focus on Puerto Rico because they have some really interesting federal tax laws. They're under the 1954 Internal Revenue Code, and so they have some really unique aspects to their tax structure.

Deidre Woollard: That's also an area that really needs some help. That's originally, the Opportunity Zone program was designed to encourage development in these areas to incentivize developers and business owners to spend their money in these areas to create jobs and things like that, and that's why you have that capital gains deferment. But there's also some interesting things around Opportunity Zones that I think people find really confusing, which are; how long people can defer tax, and also what happened in 2026, because I know there is a deadline around that.

Blake Christian: All good questions, and hopefully I won't add to the confusion, but in its simplest form, let's go back to a qualified capital gain. Both long-term and short-term capital gains are eligible. Also for you in the real estate world, 1231 assets, which are trader business assets held for more than 12 months, all of those are considered. Also 1,250 depreciation. The depreciation on the shell of your building is allowed to be rolled into an Opportunity Zone fund, but depreciation on personal property, desk, chairs, other equipment, that is not eligible. So you roll the gain into a qualified opportunity fund. Again, you can set up your own or invest in the third-party's fund. Generally, the rule is 180 days from the date of sale, but that rarely applies. It can be as many as 870 days. With the COVID relief, you can go back and amend 2019 returns for some gains and invest those by March 31st, 2021, as you mentioned, and amend your returns and save a lot of money. Once that money goes into the qualified opportunity fund, then as long as you follow the rest of the rules, that gain is deferred until December 31st, 2026. The gain matures at that point in time. In between, after you've held the fund for five years, you get to 10 percent bump in your basis. Let's say you had a million dollars deferred gain, you roll it into QOF, qualified opportunity fund, and after five years, you get $100,000 basis bump. So when you recognize that gain in 2026, it's a million dollars minus the $100,000 basis bump, so you only report $900,000.

Blake Christian: One caution is, we don't know what the capital gain rate is going to be in 2026. That's one area that people get a little nervous. President Biden has talked about increasing both long-term and short-term capital gain rates for the wealthy. But still, when you run the numbers out, it's still a compelling investment even if he takes the rate all the way up. The tax exemption after you hold that qualified opportunity fund for 10 years, you get a complete federal tax exemption on any post-reinvestment appreciation. In my example, a million-dollar rolls in, it ends up being worth five million dollars in 10 years, a four million dollar gain goes poof, you never pay federal tax on it. You also don't pay state tax in all but four states. Those are California, Mississippi, North Carolina, and Massachusetts.

Deidre Woollard: Interesting. I think a lot of people get excited about the capital gains tax deferment, but the part that's always interesting to me is that if you invest in the right project, you get to defer all of the gains from the project, and that seems to be an even bigger incentive.

Blake Christian: Right. Again, for your listeners, and 90 percent of them are in the real estate world, it really doesn't get much press, but a massive additional benefit under this program, you claim depreciation for 10 years on your project, or 15, or 20 years, if you hold it that long, you never recapture that depreciation expense. You're getting ordinary deductions during the operating period, and then when you sell it, you never recapture that. It's a permanent savings, and also pops your internal rate of return pretty dramatically on these projects.

Deidre Woollard: That's important because in a normal project, when you sell, you do have to deal with that depreciation recapture, right?

Blake Christian: Right. I have several very large solar projects. Sometimes they're associated with the building, sometimes they're not. But when you start talking hundreds of millions of dollars of tax credits and depreciation, which under the bonus depreciation rules you can claim in year 1, the economic benefits on some of these projects are pretty astronomical.

Deidre Woollard: I have a question about the difference between qualified Opportunity Zone funds and qualified Opportunity Zone businesses. I know you've worked with both. What's the difference between the two classifications?

Blake Christian: The way the structure is on virtually every Opportunity Zone fund is you have the qualified opportunity fund up on top. That's generally an LLC partnership. Then below that is, you would establish the secondary, in most cases, LLC partnership. They'll be 99 percent owned by the QOF above, and then they'll have a minority owner in the mix. That secondary entity, that's referred to technically as a qualified Opportunity Zone business. But it's a little bit of a misnomer because that could be a real estate project, but it could also be an operating business. It's a little confusing, but technically, it's a qualified Opportunity Zone business regardless of whether it's real estate or an operating business.

Deidre Woollard: Thank you. I think that's part of the confusion with the Opportunity Zones, there's so many acronyms, there's so many rules. I think a lot of people get excited about it, and then they get confused. I know another thing that I found confusing is that there are all these rules regarding the qualification process and how often businesses are tested. Can you explain a little bit about how that testing process works?

Blake Christian: In general, you have to test both the QOF, the parent entity, as well as the QOZB every six months. The basic test, there's more to it, but the basic test is that your QOF up on top. Just think of that really, it's like your bank account or a holding company. It really doesn't do a whole lot typically. Every six months, 90 percent of its assets has to be qualified Opportunity Zone business property. It would include your investment in the QOZB, that with any money that's in that. As long as the QOZB is qualified, that all counts. Then you could have, say, 10 percent sitting in cash, or Bitcoin, or whatever you want. You can have 10 percent bad assets. Now, it gets more interesting when you get down to the QOZB, the rules are much more liberal, and you can have 30 percent, what we refer to as bad assets or non-qualifying property. You generally have to have a business purpose to back it up. But you could have a 70 percent project, let's say, real estate project, sitting in a economically challenged area, and then let's not cut it too close, but let's say, 25 percent could be a small development in Beverly Hills. Both of those after 10 years could end up being both tax-exempt on the appreciation. It's highly flexible, but you do have to monitor this every six months.

Deidre Woollard: So the testing is done by the IRS, is that correct?

Blake Christian: The beauty of the program is, most of the rules, including the initial qualification are all done by the fund. It's a self-policing process and the IRS, obviously, has the right to come in and confirm your compliance with all these rules, and there's a whole bunch of them. There's 980 pages of regulations. [LAUGHTER] It's not a simple process. Essentially, you file a form and basically confirm that you're in compliance, but they have the right to come in and audit that, and they will.

Deidre Woollard: Interesting. There's no independent verification of it. It's really a self-attestation?

Blake Christian: That's correct.

Deidre Woollard: Well, I can understand why given all of these complications, there's much more of an interest probably for people, for the average investor in trying to get into an Opportunity Zone fund rather than sometimes in trying to set up their own. Do you also help the people that you work with get investors for their individual Opportunity Zone funds, or Opportunity Zone businesses?

Blake Christian: That's not a big role we play just because we want to stay independent, and we have so many of these. We're very busy just forming them, structuring them. There is a lot of time that goes into that. I mean, we run into some extremely interesting projects. We'll definitely flag those for certainly a percentage of our clients and say, "Hey, when you see something interesting, run it by me." We do certainly share some of the investment opportunities with our client base.

Deidre Woollard: Are you seeing more of an interest in Opportunity Zones in urban areas? I know one of the criticisms of the program has been, that there are those 8,700 zones all across the country, but that there has been an outsized interest in places like Portland, Oregon, or other cities that have a lot of zones that are much more investable, that maybe it's not getting to the rural areas as much.

Blake Christian: Yeah, I think that's still the case. Most people want to do projects in their backyard and so a lot of our clients are in big urban areas. Definitely, probably 80 plus percent is going into the cities. This one hasn't taken off, but I have been contacted by a couple of ventures that are consolidating farmland. It's interesting because the way census tracks are drawn in an urban area, it's a very tight multi-block area. In a undeveloped area, it could be many square miles of space. There's definitely some people out there that are capitalizing on the less developed areas, but that's going to be a little slower process. I probably get two calls a week from areas that are away of the beating path.

Deidre Woollard: Interesting. Yeah, I've heard a little bit about farmland Opportunity Zone projects. A part of the problem there is it's very hard to do that doubling of the cost basis as well.

Blake Christian: Right. Although if it's undeveloped, the land doesn't have structures on it. If you just buy raw land, there's not a specific improvement requirement. It was an implicit [LAUGHTER] requirement because you can't just leave it as farmland, but you'd have to put some structure on it at some point but there's no magical doubling a basis because there's nothing there yet.

Deidre Woollard: In the first half of the show, we talked a lot about Opportunity Zones, and why they are really exciting, but I know that there are also a whole bunch of other tax incentives to incentive development. What are some of those?

Blake Christian: It's referred to it as twinning, in the Opportunity Zone and just tax jargon. That means bringing two different code sections of two or more together. One of the beauties of the Opportunity Zone program is you can couple other tax provisions. The new markets tax credit program, which is more of a debt-based credit on the project, you can couple that with an Opportunity Zone project. Then Opportunity Zone project, as we talked in the first half, is really an equity-based incentive. It's nice that you get both pieces of the capital stack at some incentive. There's a lot of people that are working together on the new markets tax credit. Now, on the Consolidated Appropriations Act that passed at year-end, they extended that program for another five years, and so that renewed interest in that whole program and merging it in with an Opportunity Zone project. The other one, housing obviously, and especially affordable housing, is a massive problem throughout the US. A lot of people are using those. You get a lot of states and cities, they may layer some other tax benefits in their property tax exemptions, etc., to make the economics work. Those are probably two of the biggest ones that are natural programs to marry up with an Opportunity Zone project. Not a specific program, but just the depreciation rules that we touched on in the first session, that is very useful for big capital projects. The other thing that we're starting to see too is government agencies partnering with private industry to do public-private partnerships using OZ. I haven't seen a whole lot from the Biden administration yet, but I do foresee, knowing what I know about this administration, I think we'll see the OZ projects used for infrastructure projects, because you're in the program for ten years, so larger-scale projects are perfect for this.

Deidre Woollard: That makes sense because we've definitely got an infrastructure problem in this country. The other thing that I know the Biden administration has been focusing a lot on is affordable housing, and workforce housing. I think we're just seeing the start of that. Are you seeing developers get more interested in that, and starting to think about how they can provide workforce housing?

Blake Christian: Yes, I'm working on a few workforce housing projects, and in fact, I have a business that we convert shipping containers into housing, and we are in the final stages of putting that into an Opportunities Zone fund. I live in Park City, Utah. We have a huge seasonal housing problem because we have about 3,000 workers come to town to work the ski resorts, and there's no place for them to stay. It's hard to get developers to build projects that are only going to be used for five or six months of the year. It's a constant problem. Anywhere you live, that's probably the biggest issue. But we're seeing OZ be a partial solution for that. We're definitely working with a lot of government agencies, and things on those projects.

Deidre Woollard: That's fascinating about the shipping containers. I've heard, and I believe it was in Aspen they were trying to do tiny houses, and things like that for those seasonal workers because Park City and Aspen are these markets where rentals are astronomical, but you have all these workers who are working in restaurants, working on the mountain, and need a place to stay that's affordable.

Blake Christian: The shipping container concept, number one, it's ultra-green. The portability of those, those can be moved in the off-season. It's not super cheap to do that, but you can move them around. You can build a little community of these, and then when permanent housing comes in, you can move those and re-purpose them somewhere else.

Deidre Woollard: Well, you mentioned green and that's something else I'm wondering about, is tax incentives for green investing responses to climate change. I know it's a major focus for the new administration. Do you think we're going to see more tax incentives around that?

Blake Christian: Yeah. Actually, again, part of the Consolidated Appropriations Act which passed right at year-end, they beat [LAUGHTER] the Biden administration to the punch. But I'm sure we'll see more out of his tax policies. But they extended the solar credits for a couple of years so that we're at the full 26 percent credit rate, which is fantastic. As I said, wrapping that and then the OZ fund really makes it pop the internal rate of return on these projects. You only have to reduce your depreciable basis by 50 percent of the credit you claimed, which is a little unusual. That got extended for a couple of years, the full 26 percent. There's a whole variety of other alternative energy credits that got extended, and I'm confident we are going to see much more of that. Again, that was under the Trump administration. Biden is bringing on steroids, so I think we'll see a whole lot more out of his tax policies real quick.

Deidre Woollard: I think that's really interesting too because you mentioned before that you can layer in these different types of incentives. I feel like maybe some developers aren't fully aware of all of the different types of incentives that you can combine if you're putting green features like solar panels, or rainwater recycling, and if you're doing workforce housing or affordable housing, there are a lot of different incentives that you can do together. One of the questions I wanted to ask, I know that you live in Park City but you also have offices in California. What are we seeing from California? I know they've been the leader in some of these tax incentives. Is Gavin Newsom going to come out with some more incentives?

Blake Christian: Well, we hope so. The legislature there, they're not real keen as other states are on certain incentives. Green, yes. Affordable housing, yes. But beyond that, not so much. Gavin Newsom has, for the last couple of years, expressed a desire to have some very limited conformity on the OZ program. It would only be though for alternative energy production. It's narrower than just throwing solar panels on. Then also for low-income housing, that those projects would be allowed to be under the OZ program, but everything else is not. I'm on an OZ panel there in California. We actually have a letter going out next week that'll stress some of these others. I can't talk about the details [LAUGHTER] on that yet.

Deidre Woollard: Okay. That does make me wonder. Are there those types of panels across all different states, is that something that happens? Is that different people that are involved in these programs are constantly making changes or asking for changes as these different programs go along?

Blake Christian: Absolutely. Every state has the advocacy group made up of Opportunity Zone professionals. [LAUGHTER] Frankly, thankfully, we have Tim Scott in South Carolina, who's been the co-author of the program with Corey Booker. He has been just an unbelievable champion. But I will tell you that I think both his office as well as Congress, in general, or probably have a little bit of OZ fatigue. I have to admit, from the regulations to notices, COVID relief, they've been tremendously taxpayer-friendly on this program, like no other program. That what we're hearing is, "Look, don't ask us for anything else, [LAUGHTER] we've given you every benefit." I'm not expecting large taxpayer-friendly expansions more than we have right now. Absolutely, we're going to see some changes, like more disclosure in tax returns as to what your projects are doing and stuff. For the most part, the industry applauds that. That's fine. We're not fighting them.

Deidre Woollard: Well, you mentioned COVID. I can't talk to anybody without asking about COVID impact. My impression was that COVID-19 had slowed some of the interest in Opportunity Zones and perhaps some of the investing as well. Is that something that you saw?

Blake Christian: Absolutely. I mean, I've got three clients with projects over in Hawaii, but they don't live there. Just flying back and forth is very difficult, certainly during the early stages. They couldn't even look for land, they couldn't meet with zoning people, and so that 12-month extension that we talked about in the first segment was much needed to give you more time to double your basis in a project that you're working on. Absolutely. Then the operating business is same thing, it's just slowed the process.

Deidre Woollard: As we wrap up, I wanted to talk a little bit about the criticism around Opportunity Zones. I mentioned it briefly before, but there have been some negative media around it, there have been some advocacy groups or low-income housing, and things like that have criticized the programs. I know President Biden has mentioned it too. Is that something that you're worried about? What is your response to that because I know you're obviously an advocate for the program?

Blake Christian: Yeah, and I will absolutely. Does Palo Alto, California need a Opportunity Zone census tracts? Probably not. But each governor was allowed to pick from a larger group and say that strategically a better census tract than others. Had there been abuses? Yes, but very limited. The fix is going to be from what I'm hearing from Washington is that they will grandfather those census tracts that have already been identified. If you have a project going there, you're okay. But if you haven't started a project there, because of the 2020 census, the census tracts are going to get redesigned a little bit anyway. Once that happens, they'll grandfather those old ones, but they're going to probably eliminate some of those, like Palo Alto, and say, "Hey, you can't be a qualified census tract for any new project," and they'll replace it with another one. They'll fine-tune that. The press individuals that are looking for examples of problems, you are always going to be able to find an exception. I can tell you because I work in this area every day. I'm just not seeing abuse in here. I think the naysayers that say this is going to be a big flop, 10 years down the road, I think they'll be eating their words. I think this is going to be a very, very good model for the long term.

Deidre Woollard: Well, that tease me up perfectly for my last question, which is looking ahead 10-years, certainly, there are going to be some changes to the Opportunity Zone designations, there've been little tweaks to the program all along. What is your hope for the future of this? Do you feel like there's going to be an overhaul of the program at some point, or do you think we're going to continue to see just a refining process?

Blake Christian: I think it's going to be refining and I'm hopeful in some states, like Ohio, they've been trendsetters and layered in other state incentives, like an extra five percent credit for doing this, or layering and hiring credits for employees that get hired in these Opportunity Zones. That I think is going to be the trend. As I mentioned earlier, I think using it for infrastructure project, more public-private partnership arrangements. The real power of these hasn't been fully released. There's a lot of innovative people out there that are starting to see the light. It took two years to get all the regulations out. We've really only been operating for a year with perfect clarity on how all the rules work. I think the best is yet to come. The final thing I'll say is, this program actually goes out to 4046. Now, you can only defer your gain and things up till 2026, and we think they'll extend that. But you can hold onto a project till 2046, and let that appreciation all buildup tax-free. That's where my really smart clients are saying, "Hey, I don't want to sell after 10 years, I want to let this thing, appreciate, appreciate, appreciate, and then sell it." It's all tax-free because you sell it in year 10 or 11, and then what are you going to do with the money? Invest it in a taxable investment? This is tax-free forever.

Deidre Woollard: Well, I have one more question on that actually, since you talked about that is, I know in the beginning of the program, there was the 15 percent step-up basis and it's now at 10 percent step-up basis. Do you think there's going to be a return of that 15 percent? Will Opportunity Zone reset at any point?

Blake Christian: Yeah. There's a very good chance. There's a lot of talk on both sides of the aisle right now. I was on the phone a couple of weeks ago with one of Senator Scott's legislative assistants. They're pushing to delay the deferred recognition date till December 31st, 2028. There was an effort a year-ago to push it out to 2030. But I think 2028 honestly is reasonable because of COVID. We definitely have a two-year impact minimum on this. If they push it out that far, then that essentially refreshes the seven-year hold by the time you get to 2028, as long as you make your investment by the end of this year. I think there's about a 70 percent chance that we'll get through, and then we'll be back to a 15 percent basis bump instead of just the current 10 percent. Excellent question.

Deidre Woollard: That would be an incentive for a lot of people. I know that would be very interesting, and would probably bring more people back into the program.

Blake Christian: Absolutely.

Deidre Woollard: This was really fascinating. Thank you so much for your time. Just a reminder for our listeners, I was talking with, Blake Christian, you can learn more about his work at Stay well and stay invested.