By now, you may have heard about Opportunity Zones. Opportunity Zones were created through legislation that was passed into law in the 2018 Tax Act. We now have over 8,700 zones across the United States where development is being promoted through a tax shelter. It is anticipated that over $100 Billion dollars in private funds will be invested into these opportunity zones. Each zone was designated by each state’s governing body and then approved by the U.S. Treasury Department. Since the recent update released in April was 169 pages, we break down some keys points below.

WHAT WE ALREADY KNEW

 Three Incentives to taxpayers to invest in economically distressed areas:

• Temporary Deferral: Defer capital gains tax until 2026 by investing unrealized gains in a Qualified Opportunity Fund of which is self-certified.
• Reduction of Capital Gains Tax: Tax liability cost basis is reduced by 10% if the investment is held in the fund for 5 years and an additional 5% reduction if held in the fund for 7 years.
• Exemption: If the investment is held in the fund for 10 years, the capital gains accrue tax-free
   

Who & How?

It is important to note that any taxpayer can elect to defer gains. Individuals, LLC’s, C-Corps, partnerships, S-Corps, trusts and estates can all elect to defer their gains by filing a Form 8949 with a tax return.

Only tax on capital gains from sale or exchange can be deferred. Ordinary gains are not eligible.

• Short-term capital gain
• Long-term capital gain
• Section 1231 gains from a sale of business assets
• Unrecaptured Section 1250 gains
• REIT and RIC capital gain dividends
• Collectible gains
• Carried interest
• Qualified Opportunity Fund

A qualified opportunity fund (QOF) is a self certified entity that owns interest in eligible property or businesses within an Opportunity Zone. 90% of the assets from the fund must be held in Opportunity Zone property which is reported on the tax return each year. Investments must be equity investments in businesses, tangible property, or real estate within an Opportunity Zone.

Opportunity Zone Investor -> Qualified Opportunity Fund -> Operating Partnership -> Qualified Opportunity Zone Business or Real Estate

 

NEW CLARIFICATIONS

Fund Contributions

• Taxpayers have 180 days from the end of the taxable year to invest the capital gain into the Opportunity Fund. For example, 180 days from December 31, 2018 is June 29th, 2019.

Qualifications of OZ Business Property

• Property within an Opportunity Zone has to be purchased after December 31, 2017.
• Land and vacant buildings are NOT required to be substantially improved after they are acquired
• Property that is straddling an Opportunity Zone has to have more than 50% of the square footage within the zone
• When exiting, proceeds from a sale or disposition of property must be reinvested within twelve months of the sale

These updates brought some much needed clarifications on many different topics within this legislation that was passed into law in the 2018 Tax Act. Please feel free to use this as a reference when making investment decisions on Qualified Opportunity Funds.

Scott Krone, founder and Managing Partner of Coda Management Group, joined Bill Manassero on the Old Dawg’s REI Network to discuss Self Storage and shares insider information and insight on the industry, as well as commentary on how to identify good investments from the bad. The Old Dawg’s REI Network is a community of people who are approaching retirement and interested in generating increased cash flow for their retirement years.

Some key takeaways from the interview include:

• Market shifts and the relationship to real estate investment strategies
• Why self-storage is better than single or multifamily properties
• What kind of returns you can expect when investing in self-storage
• How to weigh risk when investing in self-storage facilities

Listen to the full interview and read the complete show notes here!

Scott Krone, founder and Managing Partner of Coda Management Group joined John Carney, a highly-respected thought leader in the specialized and lucrative field of real estate investing, on the Real Estate Locker Room podcast. They discuss the importance of making profitable business adjustments for long-term success, and how doing so has proved key for Coda Management Group.

Some key takeaways from the interview include:

• Teamwork is important, and you need to work together for a collective goal.
• The overall market affects the real estate market.
• You can’t operate in a vacuum – you have to pay attention to what is happening around you – from the market to your competition.
• With commercial real estate, pay attention to the numbers. Commercial real estate is more numbers driven where residential real estate is more emotional driven.
• Never be content, and always look to improve.

Listen to the full interview, and read the complete show notes here!

Cashflow Ninja is a podcast aimed at empowering and inspiring people to discover how to generate their own income and manage, grow and protect their own wealth in the new economy. Scott Krone, founder and Managing Partner of Coda Management Group joined M.C. Laubscher on the Cashflow Ninja to share why and how he got started in the Self Storage space, and how buying distressed real estate assets in a non-distressed market has paid off for his business. He shares where his story all started, how Coda Management Group got started and some tips of the trade.

Some key takeaways from the interview include:

• Where there is an increased amount of risk, there is an increased amount of money potential.
• We make our money on the “buy” portion of a real estate investment deal. We focus on the acquisition to make sure that we are buying at a really good price point to take advantage of inefficiencies in the marketplace.
• The biggest factor in Self Storage is saturation levels – how many other competitors do you have in a very fixed radius.
• Self Storage is more of a “Crockpot” investment. It’s not a “microwave” investment where you get rich quick, but the time and investment pays off in the long run.

Listen to the full interview, and read the complete show notes here!

Like its name suggests, Commercial Real Estate Pro Network is a podcast about Commercial Real Estate Investing. It is designed to be a resource for investors and professionals engaged in Commercial Real Estate.

Scott Krone, founder and Managing Partner of Coda Management Group, joined J. Darrin Gross on Commercial Real Estate Pro Network to discuss Self Storage real estate investing being an attractive alternative to low cap multifamily. In addition to providing some basic Self Storage education, Scott shares some secrets to Coda Management Group’s success.

Some key takeaways from the interview include:

• The ideal Self Storage opportunity is an existing building with current zoning in place that allows for Self Storage. There is less hassle, and the timeline is shorter.
• Understanding the opportunity better than your competition is the key to success.
• The difference between renovating and new construction is staggering including the total timeline and costs. 

Listen to the full interview, and read the complete show notes here!

How To Lose Money is a wealth-building podcast dedicated to the honest, sometimes gut-wrenching stories of business and life lessons learned. Scott Krone, founder and Managing Partner of Coda Management Group, joined How To Lose Money podcast hosts, Paul Moore and Josh Thomas to discuss the importance of getting everything in writing. In this podcast episode, he shares a specific example that could have turned out very differently had written (and not verbal) consent been obtained.

 

Some key takeaways from the interview include:

• There are things you can control and things you can’t control in life. Maximize the things that you can control, so that you don’t have to experience those pains.
• Look for and seek out mentors – you can grow from their experiences, you don’t have to recreate the wheel, and you can grow faster.
• Don’t go into panic mode, do your research, and look for alternative, viable solutions to get you out of bad situations.

Listen to the full interview, and read the complete show notes here!

Historic tax credits (HTC) were initiated into the federal tax code in 1976, making it one of the top federal programs which  has helped preserve America's historic structures.

After an amendment to the federal tax code in 1986, 20% of the total construction costs are eligible for credits on both the state and federal side. (Ex. – If construction is $3,000,000, 20% state level is $600,000, 20% federal level is $600,000. This is a total of $1,200,000 in tax credit eligibility!)

Your tax credit is administered through the National Park Service and the IRS. Tax credits you'll receive are 20% of all your qualified rehabilitation expenditures, otherwise known as QREs. National banks have authority to provide financing for these projects.

Details on the Application Process
There is a three part application process.

In Part 1 of the application, you'll provide details on the Evaluation of Significance. This helps determine whether your storage unit property is eligible to receive funding or tax credits.

Part 2 is Description of Rehabilitation, which will determine if the improvements being made will compromise the existing historic significant characteristics of the building.

Part 3 is Request for Certification so you can get an official historic preservation certification from the State Historic Preservation Office.

One copy of the application will be going to the State Historic Preservation Office and the other to the National Park Service. The State Historic Preservation Office generally reviews Parts 1 & 2 of the application first and within 60 days.

Qualifications and Exclusions
The money you receive is required to go toward the rehabilitation, with the cost of rehab exceeding the pre-rehabilitation cost of the structures.

Look out for some exclusions on the IRS page about HTCs. Some expenses you're facing aren't covered with the funding. For instance, you can't use the tax credits on acquisition costs, carpeting, decks, furniture, or parking lots as just a few examples. 

Be sure to hire a consultant to assist you to study the rules carefully before you spent time filling out the application.

"Don't put all of your eggs in one basket." 

This philosophy revolves around the risk of losing everything when we become dependent upon one person, plan, or resource. While this advice applies in many scenarios, it is particularly relevant to real estate investment portfolios.

A diversified portfolio can protect against significant loss by spreading risk across multiple investments, markets, and/or industries. If something goes wrong with one investment, other investments can offset the losses.

How Can Self-Storage Help to Diversify Your Portfolio?
Diversification helps to mitigate risk, but it does not eliminate it altogether. One must take measures to introduce low-risk investments to a portfolio in order to counterbalance high-risk investments.

The relatively low risk of self-storage investments make them an ideal solution for passive investors looking to diversify a portfolio. Self-storage facilities are an ideal investment opportunity for the following reasons:

• Low vacancy - Self-storage units generally boast low vacancy rates, especially when compared to their traditional real estate property counterparts.
• Diverse customer base - The average self-storage unit serves a wide variety of customers, including millennials, baby boomers, businesses, military personnel, and more.
• Performs well in volatile markets - The self-storage industry has repeatedly outperformed other real estate sectors, even in times of economic downturn.
• Strong, reliable cash flow - The self-storage industry has been a safe bet for investors for the past 50 years. Occupancy has held steady and value has continued to increase over time. 

Mitigate Risk by Delegating Managerial Duties
Real estate investments rely on tenant’s rents to produce income for their investors. The upkeep of each property must be maintained in order to preserve the quality of each investment. If the quality declines, tenants may no longer be interested in the property and its valuation will fall. 

Hiring a property management service to perform tasks related to customer service, sales, property maintenance, and daily operations can help to mitigate risk. This removes the responsibility from the owner and allows the experts to facilitate the relationship with the tenants.

In turn, hiring a professional management company will also allow more time to scale the portfolio. Coda Management Group uses a top 3 nationwide operator to manage their properties to do just that, scale the business. Well worth the cost.