Greg Genovese, principal of Sound West Realty Capital.

SEATTLE— Sound West Group, a leading property developer and asset manager in Seattle, recently revealed the launch of Sound West Realty Capital, an investment firm primarily focused on the sponsorship of project-specific qualified opportunity zone funds, in partnership with securities and real estate investment industry veteran Greg Genovese. Sound West Realty Capital is well-positioned to capitalize on the recent tax incentives of Opportunity Zones investment programs and company principal, Genovese, chats with about how investors can strategically grow their portfolio by leveraging the returns on their existing equities. What was the impetus to launch Sound West Realty Capital? Was it a market-driven decision?

Greg Genovese: Last March, we conducted a research study on the Tax Cuts and Job Act of 2017, which allowed for the creation of opportunity zones in each of the 50 states. With the study, we sought to find out if these would be beneficial to the investing public. Within 60 days of our scheduled 90-day study, we were confident about moving forward and creating a new investment platform. We found that there would be significant demand for opportunity zone programs (also known as “OZ funds”), which sync up nicely with the expertise and skill set of Sound West Group, a premier developer and asset manager in the Greater Seattle area, as it was a natural evolutionary step for the company to move into these markets. Our study revealed strong indicators that this would not be short lived either. In fact, the feedback we received was analogous to the 1031 exchange industry in the early 2000s, which has since boomed and is one of the top alternative, direct investment vehicles. It was an especially good fit for us to pivot into because we have a strong reputation as a revitalizing developer. We had already purchased many properties that were fortuitously located in these newly designated opportunity zones, so we not only had the properties, we also had Class A projects already on the books ready for development. Weighing all these favorable factors together, with the philosophy behind opportunity zone funds, motivated us to quickly embrace a project-oriented approach to this new investment initiative. Why project-oriented funds?

Genovese: While conducting the study and simultaneously collecting guidance from the IRS and our legal experts, we made the decision to focus on project-oriented OZ Funds versus going to market with a blind pool fund.  I like blind pool programs and believe they serve a valuable purpose for the investing public; however, we believe that given the 180-day mandated timeline an investor has to place their gains into a qualified opportunity zone fund, and the fact that the penalties for missing this mandate are extremely punishing for the tax payer, project-specific programs serve the investor best for many reasons. This includes the risk mitigation a project-oriented fund provides from a tax liability standpoint. What are Opportunity Zones?

Genovese: Opportunity zones incentivize capital investments into state designated tracts. What’s phenomenal about the tax act is that this was a truly bipartisan effort. It was crafted by both Republicans and Democrats during the Obama administration. The Trump administration carried this ball down the field and put it into this Tax Act at the end of 2017. It’s a federal program, yet each individual state determines where it should meet the mandate to find the best suited tracts to maximize economic development and job creation in their state.

From our perspective, not all opportunity zones make for good opportunity zone programs however. In the end, it’s the deal itself, the demographics and the deal structure, all have to make sense before we’ll commit. Investor-centric programs with above average return potential that meet advantageous demographics and demand for the asset type are first and foremost.  After that, the opportunity zone benefits only heighten the attractiveness of this type of investment. Your focus is primarily socially responsible investments. Why?

Genovese: We are focusing on programs that create a positive social impact. Of the almost half a billion in assets and projects we manage now, 75-80 percent of these investments fit the criteria of either socially responsible or would be considered impact investments.

First and foremost, we’re focused on our ability to provide a deal that delivers a positive social impact to the region we develop in. These investments tend to fall under the umbrella of ESG – environmental, social and governance in many cases. Then there are socially responsible investments, which means there’s a general focus toward being a benefit to the society at-large and having a positive social impact and a balance of all of this with the environment. What are some of the other types of investment programs that appeal to you?

Genovese: The platform structures that we plan to use will be project-specific funds as I stated earlier. The Reg D structure meets our needs the best right now. Opportunity zones can be put into basically any structure – Reg D, Reg A, or even a non-traded REIT to name a few. Will opportunity zones have staying power?

Genovese: The opportunity zones were built to maximize and incentivize the social impacts of these areas. It’s very rare for the federal government to initiate a long-term, tax-advantaged program of this significance, so we believe this will be a long-term program, perhaps in perpetuity. How can investors defer their taxes?

Genovese: An investor can take their gains from the sale of an asset and put it into an opportunity zone fund while deferring 100 percent of their capital gains tax. One of the most powerful benefits of the program is that the investor only has to invest their gains.  They are not obligated to invest the original principal. Under the regulations of the opportunity zone section of the Tax Act, if an investor holds an OZ fund for five years and then sells out, they will pay their capital gains tax on their OZ fund investment, but they will receive a 10 percent step-up in basis on the original invested gain.

Likewise, if an OZ fund is held for seven years, and the investor sells out, investors will receive an additional 5 percent step-up in basis, to 15%, on the original invested gain. Can investors eliminate taxes altogether?

Genovese: Yes. If an OZ fund is held for 10 years, and the investor sells out, the investor will receive the 15 percent step-up in basis on their original invested gain, but also, most and importantly, they will receive a permanent exclusion of OZ fund gains from taxes. This is now one of the most powerful tax advantaged programs in history. Is real estate a good investment right now? How important is the area and demographics?

Genovese: Sound West Realty Capital has a family of funds. We also have a 1031 exchange DST platform and other opportunity funds. As interest rates continue to climb in small increments, and in general terms, we are at the peak of valuations, it’s important to consider that not all real estate or demographics are the same. What’s more, not all real estate is in the same valuation cycle nationwide. There are always good places to invest in real estate and there are always good ways to invest in real estate. Where you invest is much trickier today than it was between 2012-2016. Strong demographics with a strong upside potential for valuation and property prices are key. It’s always a good time to be in the market if you do your homework and are project-oriented, it’s even better when you can go in with a scalpel, using strong analysis to select where you want to invest in today’s environment.