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Strategic Opportunity Zone Investment

Editor's note: This Q&A appears in the April 2021 DS News magazine, available here. 

Robert Hutchins is Managing Director of the Ellavoz Shared Values Opportunity Fund, and President and CEO of Ellavoz Impact Capital. The company sponsors and manages the Ellavoz Shared Values Opportunity Fund and the Ellavoz Impact Angel Network.

Hutchins is a retired Partner of WithumSmith+Brown (WSB), a regional CPA firm with approximately 1,300 employees. He
graduated from St. Peter’s College and began his professional career with Price Waterhouse in Hackensack, New Jersey. Prior to combining his accounting practice with WSB, he was Managing Partner of Hutchins, Farrell, Meyer & Allison. Hutchins is a member of the American Institute of Certified Public Accountants and the New Jersey Society of Certified Public Accountants, as well as the National Association of Certified Valuation Analysts.

Hutchins recently joined DS5 to discuss the options available in Opportunity Zones and how investing in them can profoundly impact communities nationwide.

Could you discuss how Ellavoz's Shared Values Opportunity Fund is working to leverage Opportunity Zone investment for the betterment of communities? 

Our mission with Ellavoz Impact Capital is to drive private capital to distressed asset communities. Ellavoz Shared Values Opportunity Fund, along with our not-for-profit partners, New Jersey Community Capital and Community Asset Protection Corporation has created a low-risk superior market return asset class for accredited investors. That is a great incentive for direct participation and rebuilding great American communities. We function very similar to a family office, real estate investment club. Thereby, affording a vehicle for our high-net-worth accredited individuals to directly invest and to see the tangible benefits they are making in communities. 

We've leveraged various financing to our community development financing institution, New Jersey Community Capital. We have no carried interest or promote fees to provide an economical, efficient investment vehicle for these angel investors. We call them Ellavoz Impact Angel Network Investors. We pass on all of these high-value add efficiencies to our investors from ground acquisition, to rehab or construction, or property management, to exit after 10 years. That is the time period investors will hold their investment in our fund in order to gain the benefits of complete exclusion from taxation for federal and most state tax authorities. 

Can you detail just how the Ellavoz Impact Angel Network works? 

It's somewhat unique and somewhat similar to many angel groups that exist in that we invest alongside each other. We draw on the expertise and experience of each of our members. Our three Opportunity Zone Funds, and soon to launch social impact Ellavoz Neighborhood Homes Fund, are real estate-focused with a goal of 80% affordable residential workforce and 20% non-residential. We are looking at mixed-use projects and industrial, maybe some commercial as well, to not only provide housing but also some economic development in the areas we are targeting. 

We are very much like a family office real estate investment club. Each of us have the same direct investment opportunity to any deal that's brought to the group. Ellavoz Impact Capital is the management firm for the funds. My investment and any other Angel's investments are treated exactly the same. If you invest $1 and I invest $1, you're going to pay exactly the same fees that I pay, which are low compared to industry. You're going to receive exactly the same proceeds on your dollar that I receive on my dollar, so it's very much a direct investment. 

Do you think Opportunity Zones are now living up to their full potential thus far? Are there areas that could help take Opportunity Zone investment to the next level? 

They have not so far, but the potential is tremendous. In the beginning, there were some sad projects that were taking advantage of new tax laws.  

As I say to some of our investors, "Beware of pigs with lipstick, because a bad deal in an Opportunity Zone is just a bad deal." I look at a lot of deals and they're all very transactional in their mentality and strategy. When you find a deal in an Opportunity Zone, it can be sold as a tax benefit. A bad deal in an Opportunity Zone is just that … a bad deal! There are too many of those floating around. 

What they have in common is the risk mostly on the Opportunity Zone equity investor. The Opportunity Zone tax law 1400Z-2 requires that if you're going to receive Opportunity Zone benefits, you must be an equity investor and not a debt investor. Therefore, the risk is on my investors and myself. 

Much of the upside goes to the developer based on how these deals have been formatted. We turned this around, we're very much an investor-focused private equity firm. We protect our investors because we are investors and invest with them. It takes an independent and highly qualified due diligence process for the exclusive benefit of investors—not the developers—to weed out the bad actors and let the best deals come to the top of the pile. 

When we find a deal that meets our criteria, we generally revalue it to what we feel is the required internal way to return for our investors before we consider investments. We do a significant amount of negotiation when we do find what we believe to be economically viable deals that should be done. 

In addition to our social impact criteria, our financial impact due diligence is considerable. As an entrepreneur and a retained intermediary for a couple of family offices, I've been doing this for decades. So, this is something that we do as an advisory service, which is a division within our private equity firm. 

For anyone who's an investor looking to potentially pursue opportunities on investment, what are some of the most critical information they need to know? 

As I discuss with my investor partners, we look at their tax situation. What is the deal that is creating the capital gain that you're thinking of investing in an Opportunity Zone for significant tax benefits? Coming from a background as an advisor partner, tax partner in a major accounting firm, and CPA firm, my background is one of a certified public accountant, as well as a certified valuation analyst. 

I tend to get a more holistic view of our investor clients’ entire investment portfolio to see if they are reinvesting too much of your gain in a 10-year hold investment, simply because they just want the tax benefits? That's the first question you should ask. The second question, or the second that must meet criteria, is if the investment a good investment. It should be a conservative investment because you don't need to have the promise of skyrocketing returns in a riskier investment. What you're really looking for is a very low risk investment with a 10% to 12% annual internal rate of return (IRR) that's going to be tax-free. 

once sold my bioinformatics business at about 10 times my original cost. Using those proceeds in a conservative Opportunity Zone investment fund, I'm protecting my money, while getting a much enhanced IRR after tax by using the Opportunity Zone fund investment. 

There are hotel deals and luxury apartment deals out there … I'm very wary of those. I've seen them, have gone through the projections, and have gone through their business strategy. Many of them rely on tenants paying some significant rents. What I have found frankly is that as a somewhat conservative investor myself, if you've already made a significant capital gain, especially if it's one that you're probably only going to make once in your life, put it into something that is rock solid, low risk and with a reasonable return. Don't be sold on, "It's too good to be true" projections. 

With a new presidential administration now in control, what are you anticipating as far as potential impact on Opportunities Zones under the Biden Administration? 

Well, I'm very optimistic under the new administration because Opportunity Zones have really become a very bipartisan effort. Sen. Tim Scott (South Carolina) and Sen. Cory Booker of my home state of New Jersey were principal sponsors of the original internal revenue code section 1400Z-2. Sen. Scott recently signed on a bill to increase economic impact measurements for Opportunity Zone qualification. 

As a member of a national Opportunity Zone working group, I welcome it because our funds are already exceeding the social impact reporting requirements that the new bill would possibly legislate. In addition to that, the Biden Administration is looking for more distressed community redevelopment and will support those programs, both in and out of Opportunity Zones. 

In a few weeks, we will be launching our Ellavoz Neighborhood Homes Fund. This is not an Opportunity Zone Fund, but we'll be developing, rehabbing, and selling quality homes in and around the same targeted communities that our Opportunity Zone Funds are making significant investments at affordable rates. 

We take a very strategic business approach to our investments, as opposed to a more transactional hit-and-run type. The other most significant possible tax change is the loss of step-up in basis, which has been a tax loophole or benefit, depending on how you look at it. 

When you die, you pay state taxes based on the value of your estate, but you get this tax-free step-up in basis. President Biden's plan is to eliminate the step-up in basis, or charge a tax on the capital gain. Being the difference between your cost basis and the value at your day of death. If Opportunity Zones specifically exclude capital gains from taxation, tax-qualified Opportunity Zones will essentially be a workaround toward the increase in wealth tax at death. 

I believe there'll only be an increase in incentives. New market tax credits have been increased, community development financial institutions (CDFIs) allocation of funding has been increased, and our partners are a CDFI. We see even more tax incentives and financing incentives available to our investment partnerships, and we pass those benefits directly through to our angel investors.