Inside Caliber’s OZ Fund Merger Program, With Chris Loeffler

Earlier this month, Caliber introduced a new merger program for self-directed Qualified Opportunity Funds (QOFs), allowing them to merge into its larger multi-asset QOFs.

Chris Loeffler, co-founder and CEO of Caliber, joins the show to discuss some of the strategic benefits of the merger platform and how it fits into Caliber’s broader goals of economic growth within Opportunity Zones.

Episode Highlights

  • A recap of Chris Loeffler’s recent OZ Insiders Masterclass presentation, “Distressed OZ Real Estate Investing Strategies.”
  • Details on how Caliber’s brand new QOF merger program works, and tax implications for captive QOF investors who merge into Caliber’s OZ funds.
  • Caliber’s first QOF roll-up (believed to be an OZ industry first), a $14 million transaction which closed earlier this fall.
  • The ideal type of captive QOF candidate that may be a good fit for this merger program.
  • How Chris views the upcoming election, and why he’s looking forward to a new Presidential administration in 2025, no matter who wins.

Guests: Chris Loeffler, Caliber

Featured On This Episode

About The Opportunity Zones Podcast

Hosted by OpportunityZones.com founder Jimmy Atkinson, The Opportunity Zones Podcast features guest interviews from fund managers, advisors, policymakers, tax professionals, and other foremost experts in the Opportunity Zones industry.

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Show Transcript

Jimmy: Welcome to the “Opportunity Zones Podcast.” I’m Jimmy Atkinson. Earlier this month, Caliber announced the launch of their QOF Merger Program, which allows self-directed Opportunity Zone Funds to merge into Caliber’s larger multi-asset QOZ Fund II, or I think it’s QOZ Fund I as well, Chris. But here to discuss this new platform, and get to the bottom of which fund it is, is Caliber’s co-founder and CEO, Chris Loeffler. And Chris, you’re joining us today from Caliber headquarters in Scottsdale, Arizona. Welcome, Chris. Great to have you back on the show.

Chris: Good to see you, Jimmy. And glad to announce what I think is a first-of-its-kind-in-the-nation program, and hopefully will be both helpful to, obviously, listeners who have Opportunity Zone Funds that might be interested, but also the rest of our peers in the industry, who have also launched their Opportunity Zone Funds, and may wanna use this same technique to grow their assets.

Jimmy: Yeah, absolutely, Chris. I think it’s a really cool program for those folks who may have set up self-directed or captive Qualified Opportunity Funds maybe a year or two years ago, and can’t quite find the right deal. I wanna get into much more detail on how your merger program works in just a moment. But first, I wanna just say it was great having you present at this month’s master class at OZ Insiders. Just a couple weeks back, you taught a course all about distressed OZ real estate investing, a really great discussion that we had at OZ Insiders. And to learn more about that class, which we have available on demand, and to learn more about my OZ Insiders mastermind group, I would encourage our audience today to visit ozinsiders.com.

Chris, Caliber is a household name in the Opportunity Zones industry. I think even one of our OZ Insiders members, a couple weeks ago, during that group discussion that we had at the conclusion of your class even mentioned that it was great just having you there because you, Chris Loeffler, that’s a household name in the OZ industry as well. But for anyone who may be new to Opportunity Zones, maybe this is one of their first, or if not the first episode of the “Opportunity Zones Podcast” that they might be watching or listening to, can you give a little bit of a background on you and Caliber, and your overall strategy?

Chris: Sure. Jimmy, I gotta commend you. Great OZ Insiders group. You know, really high-quality professionals in that group. I saw a bunch of names that I knew, and they seem to know what they’re doing. And the fact that they’re learning together as a team is impressive, so, good job.

Jimmy: Thanks.

Chris: On the Opportunity Zone side, and my story, I started out in late 2008, and left public accounting to start a real estate investment firm. That’s what Caliber is. We invest in, develop, and manage real estate, and we help investors do that. So, we’ve created a platform business, where, whether you’re a high-net-worth investor or ultra-high-net-worth investor, family office, registered investment advisor, broker-dealer, any institutional investor, anybody in this space that wants to invest in what we call middle-market real estate, which is $5 million to $50 million projects, in attractive markets, you can come to Caliber, and we typically will have something available for you to get involved with us. And being that we started in late 2008, in the first five years of our business, we do have some expertise in distressed properties. We have expertise in development. We have expertise in multiple asset classes. And so, we apply all that to try to make money for our investors in any market conditions, whether the market’s up, down, or sideways.

We also have one other unique thing about our business, that is different than anyone else, you’ll probably find. We operate a private equity real estate model, so that means we make fees and profit from the success of our projects. And the general partner, or the manager, of that real estate is our operating company, Caliber, which is a small public company that’s listed on the NASDAQ. So, we’re one of the few public GPs of private equity real estate funds. So, you get the benefit of both a transparent partner in the public markets, and then you get the benefit of a private equity investment that’s not subject to the volatility of the public markets. So, that’s a unique component to our story, and actually will come into play as we talk about this merger program.

Jimmy: Yeah, really cool story, and we’ll get a little bit more detail on that as the episode progresses here. So, you’ve been doing more than just Opportunity Zones. Obviously, your company dates back to 2008. But Opportunity Zones has been a big component of your strategy since 2018. And you’ve raised, I think it’s over $180 million in QOZ Fund I, and you’re deploying capital into those assets now, and you’re raising currently for Fund II, is that right?

Chris: We’re right around $250 million in total between the two funds.

Jimmy: Right on. And, as things have changed over time, with the macroeconomic environment and the real estate market, has your strategy changed at all over the past few years?

Chris: Completely. As soon as interest rates started going up, we had actually had a strategic plan to launch a bunch of new funds, and build more projects on sites that we had just acquired. And we were very excited to go sell into that hot market that existed in the beginning of 2022. And then as we were gearing up for that, interest rates started going up, and we said, “Oh, real estate’s gonna crash. Values are gonna come down.” We immediately changed everything. We actually delayed the launch of three funds. We stepped out of the market. We were selling anything we could that wasn’t nailed down, and trying to make sure our investors captured what we saw as the tail end of a hot market. And, come to find out, we were right. Across the board, commercial real estate values are down over 20% nationwide, in some areas, 30% to 40%, in some asset classes, 30% to 40%. The most distressed asset class in the country is office. The second most distressed is multifamily.

So, all of those things are playing into the environment we’re in today. And it took from the beginning of the rise in interest rates in the beginning of 2022 to pretty much the middle to the end of this year to see the market turn over. And so, we’re now seeing it turn over. We’re now seeing the opportunity to buy at a new price point, at a lower price point. And that’s, in my experience, the best opportunity to start investing aggressively. So, that’s our current strategy. We’re focused heavily on buying existing assets if we can, buying projects that are, that have flamed out. Maybe they ran out of capital, or they had issues in their construction, buying land that’s no longer in favor, all of those types of things that we can take advantage of a new basis in those assets.

Jimmy: Good. Well, great overview of you and your firm, Caliber, and your strategy going forward here. Let’s start talking about now your Opportunity Zone Fund Merger Program, because it’s a unique program. We believe it’s the first of its kind, the only kind like this that’s available. And first, just to contextualize the entire program, I wanted to give an overview of the marketplace, currently, using some data from Novogradac, and extrapolating that data, which compensates for the fact that their survey only encompasses maybe about 25% to 33% of the overall marketplace. I estimated that through year-end 2023, roughly $150 billion of OZ equity had been invested across different Qualified Opportunity Funds all over the country. Now, there’s really… I mean, one way to think about the Opportunity Zone Fund universe is there are two basic types of Opportunity Zone Funds. There are large, institutional-quality funds, such as yours at Caliber, yours being a multi-asset fund, actually two different multi-asset funds, that hold dozens of different properties in them. There are also institutional-quality single-asset funds, that invest tens of millions of dollars into larger single-asset deals. But then the second type of Qualified Opportunity Fund are these captive, or self-directed, or sometimes I’ve heard them called mom-and-pop Qualified Opportunity Funds.

Chris: Yeah, we call them family funds, just because…

Jimmy: Family funds.

Chris: …we thought that was a little more, I don’t know, less derogatory. But I thought, you know, a lot of investors were advised, by their advisors, probably from… You know, the law was passed and made legal in January of 2018, but the rules weren’t written on how to follow that law until December of 2019. So, for the first two years, it was kind of the Wild West in Opportunity Zones, and we just had to work, manage our way through it. And then after that, COVID hit three months later, and then the rest is sort of history. So, quite a few investors, whether they were investing in 2018, 2019, during the COVID mess in 2020, or in 2021, were advised by their lawyers and their CPAs and their financial advisors to just set up their own, what I call a family fund, which is sort of, like, a husband-and-wife partnership, relatively inexpensive. You put your capital gain into that fund, and then you go on the hunt for projects. So, that’s the way I would describe it. I don’t know if that’s the way you describe it, Jimmy.

Jimmy: Right. No, that’s exactly right. I like the term “family fund.” And the reason why a lot of people were advised to do this is because you only have 180 days after triggering a capital gain to get that gain rolled over into a Qualified Opportunity Fund. Once you get that cash dropped into your own QOF, that buys you a lot of time. You have, I think it’s up to 30 months to basically deploy that capital into a QOZB, or Qualified Opportunity Zone Business, or Qualified Opportunity Zone property, and actually put that capital to work on either funding a startup business, or in the case of real estate, which is where the vast majority of these funds are being deployed, starting construction, or starting the heavy value-add on the project. I won’t get into all the details of how to comply there, but suffice it to say, getting the cash dropped into a QOF buys you a lot of time. Well, the problem is, what happens if a year passes, a couple years pass, and then you haven’t found the property that you wanna deploy into yet? Maybe real estate deals become much less feasible to come by, with increase in interest rates, which has happened over the past few years now, notwithstanding the fact that we have just had an interest rate drop last month. I don’t wanna ignore that.

But, still, Chris, I think that’s why you launched your QOF Merger Program when you did, because it can kind of act as a safety valve, I guess, for these family, or, I like to call them “mom-and-pop,” even if that might be derogatory. I don’t know how derogatory it is, but the mom-and-pop, or self-directed, or captive QOFs, these smaller QOFs, where a high-net-worth individual investor, or a high-net-worth family might drop in a few hundred thousand or a million or a couple million dollars into it. So, tell us a little bit more about the Caliber QOF, Qualified Opportunity Fund Merger Program. What is it, and how does it work exactly?

Chris: Well, I actually love “mom-and-pop,” and I love the “self-directed.” I don’t know why we came up with “family funds,” but it’s like, when you’re building an industry, someone has to make up the term, right?

Jimmy: Sure.

Chris: But, and I think, just finishing off on that marketplace, there’s probably dozens, maybe 50, maybe 100 of those institutional-quality players, and there’s at least thousands, if not many tens of thousands of these smaller funds.

Jimmy: That’s right.

Chris: So, you’ve got a lot of people who may or may not be stuck on an island, and… Why did we create the program? It starts with the need. So, the need that we saw in the market was, tens of thousands of people were advised in this direction, for logical and thoughtful reasons, by their advisors. Our first fund document was, like, 30 pages, and we basically told our investors, “We’re setting up a fund because we need to get it open, so you can put your money in in your 180-day window, but we have no idea if this is actually a Qualified Opportunity Zone Fund, if we’ve made any of the right decisions, and all the risk is on your shoulders,” right? Because we weren’t sure. We thought we had structured it right, but we weren’t sure.

We found out we ultimately did structure it right. But, I think, because of that, you’ve got different scenarios. You’ve got scenario A, like you kind of just mentioned. Someone put money in a fund, they’ve been rolling it through Treasuries, and they’re looking for projects. Scenario B is, they found a project, but that didn’t cover all their cash. Or scenario C is, they found a project, but their cash wasn’t enough to finish the project, where the project’s having problems, and needs more cash, and they don’t have it in their fund. And so now they’re kind of like, “Okay, how do I deal with this situation?” So, that’s what we’re finding across the board. And that was just me going to conferences, and our team listening to people talk about the challenges that they were facing, or what they were managing, whether they were an investor or a GP of a fund.

So, what did we create? Well, as you know, Opportunity Zone Funds can’t invest in another Opportunity Zone Fund. So, if I put 5 million bucks into my family fund, I can’t go invest a million of that into Caliber’s fund. And unless they change the law, which we’re all hoping and praying they do, that’s not gonna be a viable strategy. So, that 5 million bucks is now stuck in that fund. It has to be co-invested into a project. So, Caliber could conceivably meet that investor, and say, “Hey, we’ll put in 3 million, you put in 3 million from your fund, and we’ll own this project together.” But that’s about where it stops. They still have to manage their fund. They still have to deal with everything. What we discovered, about a year ago, and we wrote a white paper about it, and started to distribute it out to other parties in our industry, is that two funds can merge together. So, I can have my own fund over here, Caliber can have its fund over there, and we can merge the funds. In doing so, it creates a non-taxable exchange, essentially. The fund that you set up in your family fund gets dissolved, so you no longer have to be reporting to the IRS every six months, and dealing with the management of the fund, but you become an investor, in essence. Think of it as becoming an LP in the larger fund. And if you owned one asset for $10 million, and we had a fund for $100 million, you might end up owning 10%, or 9% of the combined $110 million fund. So, that’s kind of how that functions.

Jimmy: And you just did the first one of these. I think it just closed a few weeks ago, literally. Are you able to walk us through exactly what that case was, and how this all came together, and what the final outcome was, both for you, for Caliber, and for this investor who merged into your program?

Chris: Yeah, sure. So, I feel like there’s too many things in the world that get launched, and nothing ever gets completed. So, we decided, strategically, to not talk about the program until we closed one. That way, we would be not only having launched the program, but also could show you that we’ve executed. So, the scenario was this. Investor, you know, I won’t name them, for the benefit of their own privacy. But, great investor, very successful business person, running a national platform company, that is very successful at what it does. They are generating sizable amount of wealth in their company, and had a private equity experience, and took some of the money, and rolled it into two different Opportunity Zone Funds.

So, we took one of those funds, which was a larger fund, of around $14 million. And he had been looking at co-investing with us into a project, just like I mentioned. And frankly, we had a hard time getting him on the phone. He was busy. We would spend time with him. We’d go out and see the project. He’d say, “Okay, I feel comfortable with it.” But then, like, he’d have something going on in his life, and then we’d have something going on in our lives, and it was kind of a constant start-stop-continue type program. And then, as soon as he was ready to make an investment, we actually had a delay in the project, and so we had to wait for that delay to get cleared out, and we’ve actually been reworking some of the numbers on that project, so we said, “Well, let’s start showing you a different project.” And during that conversation, I said, “Why don’t we just merge your fund into ours?” He had sat on this $14 million for about two years, had been rolling the money through treasuries, and, to keep the fund compliance, moving in and out every six months, and all the things you do to maintain compliance with the regs.

And he was running out of room. At some point in time, he needed to make investments with the money, or he was going to lose his Opportunity Zone status. And his conclusion was, “I was more confident in having the money in my own fund, but now that I’ve gone out and tried to find stuff for a couple years, and seen how the market’s evolved, I can see Caliber’s fund. I can see the fact that they have 25 projects,” and we executed the merger. The merger is actually an incredibly easy process. The documentation is templated at this point in time. It’s easy to understand. We gathered his lawyer, his CPA, and his entire team, matched them up with our tax people and our attorneys. Everybody got comfortable with the program quickly. And then we do due diligence on this fund. We ensure it’s in compliance. We ensure that if it’s not in compliance, we clean it up. We ensure the tax return’s on file. We ensure all that kind of stuff. And then, if he had had assets, we would do typical due diligence on his real estate assets. He only had cash, but if he had assets, we do the due diligence on that.

We then presented him with a merger presentation, where he sees everything that we own, how we valued it all, what price per share he’d be coming in at, what the status is of all those projects, so he could do reverse due diligence, and look at it on his own account. And then we showed him the combined model of his $14 million being added to our fund, what percentage ownership he would have. And in the case of the fact that it was a sizable investment, we offered him the right to be a non-voting sort of advisor to the fund, so he would have some visibility, get some more detailed quarterly reporting, and that kind of stuff. So, once we had a meeting of the minds between the business people, the paperwork was faster and easier than a typical real estate closing. And there was a bunch of different complicated tax issues we worked through, but I can probably speak to those if you’re interested, Jimmy.

Jimmy: Yeah, let’s get back to those in a minute. And just to clarify, I kind of tripped over this in the intro. Was this a merger into Fund I or Fund II? I couldn’t remember.

Chris: Yeah. That’s actually an interesting, one of the complicated tax issues. So, what we had to match up was, when was the money invested in his fund? Because that’s the starting point of his 10-year mark. And then we had to look at our funds, and say, “Okay, when was most of the money raised?” And we had to match-make between those two. So, even though we wanted him to merge into Fund II, he wanted to merge in, or he needed to merge into the first fund, because that money in our fund was raised mostly in 2019 and 2021, ’22, and that’s when he invested his money. So, that way, his timeline for his 10-year mark matches up with our new fund, and those two things can hang together. So, it’s really simplified what we can offer to the market, which is, anybody who started their fund July 2022 or later can come into Fund II. Anyone who started in June 2022 or prior can come into Fund I.

Jimmy: Got it. Well, that makes sense. I hadn’t even considered that. So, it was a Fund I merger in this case, but you do have the ability to merge into Fund II as well. You know, we mentioned, we believe this is the first QOF merger program of its kind, and I’m curious to get your take on why you guys, right? Why Caliber? Why is Caliber uniquely positioned to be the one to launch a program like this?

Chris: Yeah, I think, first things first, I think vintage is important in investing. So, any real estate investor, whether they’re looking at an Opportunity Zone fund, or a distressed real estate fund, or a construction fund, or whatever the case may be, you need to look at the vintage, of the timing they’re gonna come into that fund, and the strategy that’s gonna work. So, in this particular scenario, there’s been enough time that the market has matured. There’s tens of thousands of these funds out there. The people who put their money into their own funds have had the experience they’re gonna have. And it now has opened up people’s minds to wanting to do something different. So, part of the reason why we’re doing it is we’ve heard enough of a groundswell of people from different parts of the ecosystem, saying, “Gee, this isn’t what I expected,” for good or bad reasons. And we saw an opportunity to solve the problem. So, that’s one thing. We know the need’s out there.

Two is, of the hundred or so or less institutional-quality fund management companies out there, we’re one of the only ones that is diversified in asset classes, that is experienced in multi-asset funds, with multi-strategy. So, not just different types of assets, but different types of strategies. We know adaptive reuse, we know ground-up construction, we know heavy value-add. And, because of that, we have a broad enough platform to say to the marketplace, “Bring us your projects, and we can evaluate them,” whether they’re a retail project, or an entertainment project, or a multifamily project, or, God forbid, an office project, we have the ability inside of Caliber to do that.

The other thing that we have, which is unique, is we have our own in-house development company, and our own in-house construction management company, and our own in-house brokerage business. And so, if there’s a problem in the project, we have enough confidence that we can maybe fix the development, or fix the construction, or fire the GC and hire someone new. So, that’s a component to some projects that we anticipate we’ll see that are having some challenges. We’re experienced in distress, so we know how to manage through non-performing notes and bankruptcies and all that kind of stuff. And unfortunately, there’s a couple of those going on in our industry right now because of timing.

And then, if you add all that together with the last component, which I started the podcast off with, which is, our operating business is a listed company on NASDAQ. So, we offer a transparent partner to that merger candidate, and we have experience with M&A, with complex tax issues, with properly managing the legal structure around that, with the type of reporting we would need to do to make sure that that investor still feels connected to their capital, and doesn’t feel like they just sort of released the reins, and have no connection to what’s gonna happen with their money. And, the fact that we happen to have two funds that are both good, quality candidates for these mergers, and good deal flow for the use of that capital. I think we took in the $14 million, and we had it deployed within a week.

So, I think all those things hang together to say, “We’re good at this.” I think other people in industry could offer the same thing. Maybe, if they’re only multifamily, it’d be targeted at the multifamily, or in a specific area of the country. And the last thing that was very, very attractive to our merger candidate was, we have Fund I, which we hope will own around $500 million in assets. We have Fund II, which we hope will own at least $500 million in assets. So, that’s about a billion in total. With this merger program, and some other plans that we have for our business over the next eight years or so, we think we’ll be at a position, as we get closer to that 10-year mark for our first fund, to merge all of these funds together, and list them as a diversified REIT. So, if you get, instead of having LP shares in a private fund, that has to wind down and sell off assets over time, if I exchange those for you at a high valuation, and a great value for you, into listed stock, then you, as the investor, can margin your stock, so you don’t have to sell your shares if you don’t want…and you want liquidity. You can borrow against those shares, keep the tax benefit for a longer period of time than you were planning for. You get a nice dividend. In a listed company, you’re gonna have a low debt scenario, so that your safety is pretty high, and you can sell your shares when you want, and manage your tax position to unwind how you wanna do it. So, a company that combines the ability to deal with complexity at the top level, and then zero in on, like, “What’s going on with that $5 million project right there?” I think that’s what made us a good candidate for this.

Jimmy: Well, let’s definitely have you get back on the podcast in 2031 or 2032 to discuss that strategy of merging …

Chris: Come one, come all. If you have high-quality assets, we will be welcoming with open arms. We’ll be running the strategy, and our friendly competitors out there, if they’ve built a nice pool of assets, we’d love to welcome them into it, so, I’m ready for it.

Jimmy: Excellent. And I hope I’m running this podcast still in the early 2030s …

Chris: I think you will be. I have faith.

Jimmy: Or something like it, at least. So, this first merger that you did, $14-plus million, but it was cash only. So I think it was fairly simple. Who are some other candidates that this merger program is designed for? And I know some of these candidates might have a mix of cash and actual hard assets, real estate properties inside of the fund. And how does that work? And are there any other hypothetical examples you can kind of walk us through as to how a QOF merger program would work?

Chris: I don’t know if any of these will execute, but here’s a live example. There’s a group, small family fund. They invested in a parcel of land with two APNs, so two parcels. They built phase one. I think it was 40, 50 units. It’s leased up, it’s rocking and rolling. But they saw how fun it is to build ground-up real estate. It’s not easy. And they’re staring… You know, they have the money, but they’re looking at building phase two, and they realized, “I’m not gonna get the value for the land that I want if I don’t build this thing. But if I build it, I’m gonna shave another couple years off my life.” And so, they’re saying, “Wow. We can merge. We get full value for the one we built. The land comes in at a reasonable value, and then we get to share on the upside as Caliber builds out that land, instead of us.” So, that’s an example.

There’s a project that we’ve been tracking in bankruptcy, as the stalking horse bidder. And we’re trying to approach that, the main OZ investor, to say, “Hey, look. Your GP was not successful. Your project’s in bankruptcy. It’s half-built. We’re gonna be the bidder on the stalking horse, so we could just buy it, and you would get whatever the result is, which is probably not a good result for you. But, what would be better is if you merge your fund into ours, we clear the bankruptcy, and we can start fixing this project.” I would much rather be a white knight than a shark, because white knights still do really well. So, that’s another scenario.

We’ve been looking at a stabilized building, that’s beautiful, that’s been out trying to just raise preferred equity, to bridge the gap and get it past its refinance, because it can’t get the refinance done because of the debt markets. It’s beautiful. It’s well-done. It’s a trophy asset to own. They’re just caught in the financial market. And instead of raising preferred, they can merge into us, and then we can just de-lever them, through cash. So, lots of those types of scenarios out there, and we welcome investors to come in, and frankly, try to win in the real estate market with us.

Jimmy: And what’s the ideal size of a candidate for a merger? What’s the minimum family QOF that you would consider going through a merger?

Chris: You know, anything a million or more. Since we have the documents templated, and the cost due to the merger is very low, we can go pretty down-market. So, anything million-plus is fine. A couple hundred thousand bucks is just, it’s too much work…

Jimmy: Yeah.

Chris: … too much money to do that. And then, anything that’s, like, a fund that’s probably, like, $50 to $100 million, we can still do something bigger, but that’s a much bigger transaction, in a much bigger conversation about comparative valuation, and what’s the fund manager gonna do once we merge, because they have a role to play in that fund today, and do they have a role to play in the merged fund? That’s a whole ‘nother thing. So, I’d say the sweet spot would be sort of the $1 million to $25-ish million size, because it’s most likely pretty obvious that we just do the merger, it’s a clean transaction, it’s really easy to execute, and everybody wins.

Jimmy: Okay. So, if I have my own family QOF, and there’s 2 or 3 million bucks in it, and I’m throwing in the towel, right? I’ve decided, “You know what? I don’t actually wanna operate…”

Chris: And for good reason. Like, you may have succeeded. It’s not necessarily that you didn’t succeed. It’s just that, hey, you’ve got your…you got what you got, and now it’s time. Yeah.

Jimmy: Yeah, yeah, yeah. So, whatever the case is, there’s a compelling case for me wanting to merge into your fund, and just let you guys handle all of the complexities. I just wanna be an LP, essentially, going forward, right?

Chris: Yeah.

Jimmy: So, what are some of the other… You walked through one big tax implication, which was that 10-year timeline. Are there any other tax implications that I should be aware of? Is this potentially gonna screw up any of my other OZ benefits that I could take advantage of, or…? How have you sorted all that out?

Chris: Yeah. All of them are, actually, are mostly to the positive on the merger. So, one of the other tax implications is you no longer have to do fund compliance. And come to find out, if, Jimmy, you’ve been to all the recent conferences, you know, there’s a problem with fund compliance in these smaller funds. They weren’t exactly done the right way. They didn’t have their written plans in place. There’s other things like that. So, we lift that off your shoulders, and make sure that you have clean compliance coming in, and that you’ll have clean compliance going forward, which saves you from tax penalties that you may unexpectedly inure.

Two is, if you invested in a single asset, considering the interest rate environment, and the current environment we have with being able to sell assets or refinance assets, we don’t know what 2026 looks like. And if we get close to that 12/31/2026 date, and then the due date for your tax bill… In a single asset, it may be much harder for you to produce the cash you need to pay your taxes without tapping other investment resources you have. As merged into a multi-asset fund, we’ve been planning for years to produce the cash necessary to make that tax payment. So, we’re not guaranteeing it. Can’t guarantee it. But we are very well-structured, and that’s where we spent most of our time with our current merger candidate, so that he could see that we have multiple ways to produce that cash at the right time for him to pay his tax bill.

Jimmy: Because that current merger candidate, who brought in that 14-plus million dollars, he’s gonna have a seven-figure tax bill due April 15, 2027, unless…unless legislation to extend out that deferral date gets passed at some point here in the next year or so.

Chris: Yeah, you could bet on the government if you want, but …

Jimmy: Yeah. But it’s usually not a great strategy.

Chris: Yep. And so, that’s good. And then, the only other thing that I think you need to consider is what our strategy is versus what your strategy might have been. Your strategy might have been to invest, hold this asset for 10 years, and sell it. Our strategy is actually to turn assets. And so, in turning assets, we are compounding the return on investment inside the fund, because when you buy something, turn it around or build it, after that five-year period, you’ve kind of maximized the upside potential of it. There’s usually a great opportunity to sell it stabilized, generate a return on your equity, and then reinvest the gains, and compound your returns. Now, we’re managing that inside of a multi-asset fund, we think we have offsetting tax losses, but there is a potential risk of interim taxable gain that could be pushed through to you, which you may not have experienced, and you just held your asset for 10 years.

Now, offsetting that risk is the fact that we intend to send you distributions, so you can pay the tax. And the fact that compounding those returns is much more likely to produce a much higher tax benefit on the other side of the fund, when we liquidate the whole thing, and produce a better ROI for you. So, we’re trying to take the ROI you had locked yourself into, and make it better. And if you merge into our fund, and your asset is actually ready for sale, we might actually sell that asset, and then reinvest the proceeds, and do it all over again, and generate another round of return for you. So, you have to be on board with the complexity that comes from that. That may bother you, but we do have Deloitte as the fund’s auditor, and we have Baker Tilly doing valuation work, and we have great tax people at Novogradac, and other places that help us with this. So I think we’re well-positioned to take care of that for you.

Jimmy: There’s a trade-off, right? You get a little bit more complexity on one hand, but the headache shifts from you to Chris, right? So…

Chris: That’s right. It becomes a report out.

Jimmy: Yeah, exactly. Okay. Well, very good. Chris, thanks for going through your QOF merger program. Really cool. Congrats on the first one that you did, just a few weeks back. Now, Chris, we are less than two weeks from Election Day. There’s a big presidential election. I don’t know if you’ve heard. And maybe without getting too political, or go ahead, get as political as you want. I’m just curious. I’m sure you have investors asking you about the election, what might happen, what might happen with OZs. But if there are any investors out there, maybe just real estate investors, maybe OZ investors, how are you advising them to think about this upcoming election, and what impact do you think the election may have on both real estate markets, and on OZs more specifically?

Chris: Thank you, Jimmy. I don’t have any bold announcements, but I can tell you that, living in Arizona, and living in a swing state, I am desperate for this thing to end, because, for some reason, the canvassers think that knocking on our door at 6:00 in the morning on a Saturday is a good idea, so we’re getting tired of that. The dog barking, and the baby waking up, and it’s like, “Oh, my gosh. Guys, we’re, we don’t need any more propaganda.” I’ve been thinking about this a lot, because this election, in particular, is, I think, quite poignant, in terms of the direction the country’s gonna go. And I’ll share with the audience my experience.

So, my experience, through the first, the Trump administration, when we had the OZ program first launched, was frankly pretty incredible. The execution was fantastic. We got direct communication from the White House daily, on what was happening with the program, who was doing what projects. It was really clear how the program was evolving across the country, and we could see, “Oh, that’s how they did it. Oh, that’s how we’re doing it. Okay.” So, that’s how we kind of all got on the same page. And that was amazing. The same person who kind of ran that for the Trump administration happened to be a Democrat, and he was retained to run it for the Biden administration. So, I called him after Biden was elected, and I said, “Hey, looking forward to continuing to work with you.” And he’s like, “I’m getting no guidance. I have no idea what’s going on.”

So, it was not a good start, and I haven’t seen the same level of engagement. So, I’m looking forward to a change in administrations, because, no matter what, you’re either gonna have a Harris administration, which I’m hoping she will embrace and deeply engage this program, or a Trump administration, and I already know they’re gonna embrace and deeply engage with the program. So, either way, any change will be good, I think, for the program, and some attention and some light on it would be fantastic. It is, by far, one of the most successful economic development programs in the history of the country. And the reason why was because it empowered investors, and it actually caused them to change decisions on what types of gains they would take. It caused them to redirect that money instead of into another foreign investment, or into some sort of conservation easement, or some goofy tax play, into investing into, like, downtown Mesa, the third-largest city in Arizona. And it made a major impact. You can see it across the entire country, and everybody knows it.

So, it started out as a bipartisan bill. It should continue to be a bipartisan piece of legislation. I think both sides of the aisle can see benefit in the Opportunity Zone program. I don’t think it costs a lot of money, and I think it creates a lot of benefit. So, I’m looking forward to whoever the new administration is, and engaging with them as deeply as we possibly can, to see that the program gets renewed, extended, and then that we find success. And we wanna report out the good work we’ve done. If you go to opportunityzones.gov, I don’t think the website even functions anymore. And we really need to have that good partner in government.

Jimmy: Yeah, there’s a note on my website. I do still link to opportunityzones.gov, and the HUD website about Opportunity Zones, but in parentheses, next to those links on my resources page, I do mention, by the way, the map no longer works. I think the White House or HUD may have stopped paying their bill to their OZ map makers. But fortunately, there are OZ maps available from Novogradac, and from my team at opportunityzones.com, and a couple other groups out there. But yeah, it’s amazing. The federal government support of this program kind of fell by the wayside once Biden took office a few years back. And I think that was really well-said, Chris. And no matter what happens with the election, we’re gonna get a new administration come January 2025. And hopefully, whichever way that goes, well, one, the election’ll be over. So that’s huge for you and your family. No more knocks at the door at 6 a.m. Makes me glad to live in Texas, where nobody has ever knocked on my door asking me about presidential elections.

But then, two, I think it’ll give investors a lot more certainty. And then three, hopefully, we get a little bit more support from the federal government and our congressional leaders, on both sides of the aisle, on this program, with the election behind us. I think maybe they can start working together in more bipartisan fashion. Really well-said, Chris. And thanks for joining me today. Thanks for all your insights on your merger program, and how you’re considering this upcoming election. Before we go, where can our audience of Opportunity Zone investors and advisors go to learn more about you, Caliber, and your merger program?

Chris: Yeah. So, you can look it up. There’s a press release that went out. So, if you just look “Caliber Opportunity Zone merger,” you’ll find us on Google, and you can read the press release, and you can see some of the articles that have come out since then. But of course, you can just go to caliberco.com, and you can always find me, and I’m [email protected].

Jimmy: Fantastic. I’ll be sure to link to that press release in today’s show notes for this episode, which we’ll have available at opportunityzones.com/podcast. I’ll link to all the resources that Chris and I discussed on today’s show. And please be sure to subscribe to us on YouTube, or your favorite podcast listing platform, to always get the latest episode. If you’re watching this on YouTube, give us a thumbs up if you like this conversation today. Chris, thanks again for joining me today. Really appreciate your time.

Chris: Great job. Thanks, Jimmy.