Kevin Kim
The Opportunity Zone Expo Podcast
Kevin Kim: Master of OZ Regulatory Hurdles
Transcription
Jack Heald: Well, welcome back everybody to the OZExpo Podcast. I'm your host, Jack Heald. And we're here today with Kevin Kim, who is a partner with Geraci Law Firm. Kevin, welcome to the OZExpo Podcast.
Kevin Kim: Thank you for having me.
Jack Heald: It's good to have ya. Well, before we dig into this Opportunity Zone stuff, let's find out about you. Who is Kevin Kim? Where'd you come from? How'd you get into this business?
Kevin Kim: Oh, absolutely. So, I'm a partner at Geraci Law Firm. I've been here five years, been an attorney for 10, graduated from Loyola Law School in downtown L.A. Undergrad, from Cal Berkeley. And I've been in the real estate business my entire career. Prior to law school I was a commercial loan officer for a regional bank and, third generation banker. And so real estate's kind of in my blood, investing has been in my blood. My grandfather was an investment banker in Korea. I joined Geraci Law firm five years back, took over the securities practice, four years ago now. And I've been running it ever since. And we focus almost exclusively in real estate and real estate finance in the private sector and it's just been a blast, you know, seeing all these great programs come. We've been involved in the EB5 program. We've been involved in the QOZ program. We’re doing a lot of real estate syndications for crowdfunding, so it's great to see the market where is that today.
Jack Heald: Oh, I want to put a pin in that about crowdfunding. Yeah, absolutely. I'm not going to get there yet. The noise you hear is me making a note to ask you about crowdfunding.
Kevin Kim: Okay, sounds good.
Jack Heald: Now I'm doing a little, I was a music major, so my math might be bad. But if you've been a lawyer for 10 years, that takes us back to 2009.
Kevin Kim: Yes sir, it does.
Jack Heald: And you were a banker prior to that.
Kevin Kim: Yes sir. I was.
Jack Heald: So, you were there, you were in the mortgage business in 2008.
Kevin Kim: Yes sir. I was a banker. I was a commercial loan officer, so I was doing a lot of asset, commercial real estate purchase, multifamily, you know, mixed use. I wasn't doing residential mortgages back then and so it was, I wasn't part of that world, but the meltdown happened the same way. And you know, I left the banking world in 2006. Went to law school. Yeah. And when I graduated, our Dean, when we got sworn in as attorneys, that's when we passed the bar essentially told us he's sorry.
Jack Heald: That's awesome.
Kevin Kim: And it was a rough time. You know massive layoffs throughout the industry. But I found my way back into the real estate world once again. I had a passion for it and started doing litigation at first and then found my way into a corporate and securities practice. Okay, five years ago, six years ago, actually found my way to Geraci. So. It’s an interesting kind of a world we're living in now compared to the last cycle because we're seeing a lot of growth in commercial this time and it's booming. And so it's a very interesting time right now in the market.
Jack Heald: So, it's almost like the aftermath of a forest fire.
Kevin Kim: Yeah.
Jack Heald: Massive destruction wiped everything out. But now we're far enough past it that we're starting to see, these wide-open areas that are, that are available for growth.
Kevin Kim: Oh, significant growth.
Jack Heald: I see it here in Phoenix. You know, we went through I guess like pretty well everywhere we went through. Just an awful trough. But just over the last, I'd say 18 months, it's just driving around town. It's very obvious. Things have changed significantly.
Kevin Kim: Oh Yeah.
Jack Heald: So, when I did a little research as I was done a little research on you, I stumbled onto, something along the lines of expert in compliance.
Kevin Kim: MmHmm.
Jack Heald: Um, now I will confess to you that that compliance is one of those words that is very painful for me. But I would like to hear, and I know our listeners would as well.
Kevin Kim: Right.
Jack Heald: What kind of compliance issues are most likely to trip up a QOZ investor?
Kevin Kim: Yeah. So in the compliance services I offer it is primarily in a securities and corporate compliance. And so a lot of our clients are raising capital from investors, right? High net worth investors. They're not public companies, they're not on Nasdaq, or they aren't traded on Wall Street, but they're private companies. They raised significant amounts of cash and therefore the SEC regulations do apply in a limited fashion. So, making sure they navigate those waters carefully.
And it's not as simple as, are you selling securities in the right way? It's selling security to the investment advisory. It's the Investment Company Act. It's are you licensed to make the loan that you're making in the state that you are? All types of transactional issues come up. Yeah. And not every state is the same. And so there are significant state-level and federal-level, regulatory compliance concerns even after investment vehicles launch.
Right. And so, where we shine as a law firm has been what I call a fun design so to speak, we'll help a client start their investment vehicle and launch it and continue to operate it. In operations, one of the things that we offer is continued compliance services. And so, we'll we'll notify them of their filing obligations, the local regulators or the federal regulators as applicable.
We'll help them obtain the necessary licenses to transact and the ways they want. So, if they are a real estate developer, oftentimes it's just an investment portion of things. If they're a real estate lender, then it becomes a very different topic. And so in our world, compliance is something that we've found that we can differentiate ourselves because we operate in such, complex areas of business that there are a lot of regulatory speed bumps and so really can provide value there.
Jack Heald: I know one of the attractive elements of the program has been the opportunity to simply declare yourself an Opportunity Zone Fund.
Kevin Kim: Right.
Jack Heald: Now, are the compliance and regulatory hurdles higher if you're a debt lender rather than equity giver?
Kevin Kim: Sure. So, in, in the world of QOZ, Opportunity Zones lending is really more of an ancillary service on the sidelines of the programs that are raising money to invest in these zones will need, right? So, a simple example would be, I'm a real estate developer. I have a project that's located in an Opportunity Zone or multiple projects and I want to create a Qualified Opportunity Fund, to develop these projects.
I will need financing unless they want to pursue, you know, 100% equity in their capital stack. And so the lenders out there are looking at this as a boom to development, which means more deal flow for them as lenders. The developers are going to come in and create these QOFs and establish their funds and you know, in the zones and they'll be reaching out to the lenders to get financing.
And like you said it's not as simple as simply stating, “Oh, I've got a property in the zone, I'm a QOF now.” There are a lot of regulatory hurdles to go through. The first thing you have to consider is the actual program itself part of the IRS code, right? And so, this tax law, so you're going to have to have a CPA, you're going to have to understand that your project needs to qualify for the program.
You have to be able to build it in a certain period of time. You have to meet certain substantial improvement requirements. You know, it's a pretty substantial, you know, list of requirements to qualify on top of that. Because it's an investment base program, right? It's a method for investors to defer their capital gains and earn new ways to earn and reduce their tax liability.
It has to do with investments and when and when we hear investments there's always securities laws. That's where my expertise is in, creating and advising on private securities offerings. And we've done it in real estate for 10 years. And all types, especially in this, the ideal product for this program, you know, as soon as significant rehabilitation or ground up construction is that a lot of those projects almost always requires some type of compliance with SEC guidelines.
And best practices. And so typically speaking, we're making sure that the client has a very well-drafted private placement memorandum. We're going to have, very well-drafted corporate documentation. We're going to negotiate the loan transactions for them. All of this is because the regulations are very strict and so you have to make sure that you're complying with them. But also there's a lot of risks out there in these investments and so you want to make sure that you're disclosing those risks to the investor to make sure that you've met your fiduciary duty as the sponsor of the project.
Jack Heald: Right?
Kevin Kim: Yup.
Jack Heald: know the bulk of activity in the OZ space right now appears to be real estate.
Kevin Kim: Absolutely.
Jack Heald: However, I know that from a, from a philosophical standpoint, the idea of the OZ program is to, is to increase the overall wealth base in these underserved zones and that requires building businesses. So, I have a noncompliance related question.
Kevin Kim: Sure.
Jack Heald: Are you seeing business investment?
Kevin Kim: Yes.
Jack Heald: Or is it still almost exclusively real estate?
Kevin Kim: No, we are seeing business investment. It's actually very interesting. We're seeing a lot of people thinking of expanding their business, moving their businesses, creating new businesses in zones. One good examples: We had person call us and they had sold the business previously. They had a capital gain bill. Their partner had a capital gain bill. They want set up a new business, invest in a zone. And the program was not real estate-related. I believe it with a trucking company, actually. And you know, it's a question of the assets then. Right. And you know, original use and all that.
Jack Heald: Right.
Kevin Kim: Work to comply with the program. But it's definitely a boon. And I think what we'll see is after the dust settles and there's supreme clarity from the regulatory bodies out there -- theTreasury Department and IRS -- we're going to see this used in Silicon Valley and the startup world significantly because you're already seeing a of movement, in the tech world moving into these cities that are underserved, right?
That example. Yes. Pittsburgh, Pennsylvania, right? Pittsburgh, Pennsylvania is starting to attract a lot of startups and the city is granting a lot of opportunities to them from a tax perspective, to reduce the tax exposure as a company. But there's a lot of pockets there that are qualified, in the zone and Opportunity Zone program. So, there's different ways that new tech startups and just startups in general could use this program.
And I think it's ingenious because it definitely is not meant to be solely or real estate, but because of that substantial improvement or original use requirements, it lends itself to real estate. And of course a lot of the capital gains out there are sourced from real estate, right? That is where the attention and the returns are higher. And so the tension goes that way. But I can almost be certain that in the next year or so we're going to start seeing a glut of this being used in the startup world. And I encourage it.
Jack Heald: I've been paying attention to the developments in the power generation world.
Kevin Kim: Mmmhmm
Jack Heald: Specifically, fourth generation nuclear, and it seems to me, given the nature of nuclear power all by itself and this new OZ program, it seems like some of these opportunities zones in the more remote areas, which we have a lot of here in Arizona, would be perfect locations for fourth generation nuclear. My goodness. It seems like it would be…
Kevin Kim: Yeah. If you look at the same opportunity, with EB5 when it first came out, it was almost exclusively used for real estate. But as it developed as it matured, you saw green energy programs get involved, you saw manufacturers get involved. And I think it's the same thing if this is a new program designed for capital injection to reinvigorate, you know, low-income communities. Right. And so to that degree, I think that we will definitely see, both a smart grid and green energy technology companies take advantage of it.
Jack Heald: I want to ask you to speculate just a little bit here.
Kevin Kim: Sure.
Jack Heald: I'm almost certain there is no regulation, but you talked about for example, Pittsburgh where folks are being moved in and the locality is offering tax incentives. Any sense of how these layered tax incentives might be treated with the Opportunity Zone?
Kevin Kim: Right. Good question. So, I'm, first of all, I want to start, I'm an attorney, not a CPA. I am by no means a tax expert. But I do know a lot of real estate projects are actually stacking these different programs as well because the local governments are giving the benefits on their local taxes, right? They're breaks and local taxes, whether it be property tax or sales tax or some kind of break like that. And then you have this program for the investors that's allowing them to defer their further capital gains.
So, you have a dual layer of tax benefits. Both at the sponsor level, at the business level. You're saving on whatever it is, your property taxes that'll increase returns to the investor. You're saving on, you know, a sales tax or whatever it may be. And that's the local incentive given by the city.
You know, we hear a lot about Amazon's new campus and a lot of that has to go with vying for different tax benefits. On top of that, you have this federal program, right? And so this is a federal program that is designed for the investors themselves to defer their capital gains. And so, you have this mismatch on all of that.
Even in the real estate side, we see sponsors stacking different programs on top of each other. And I would imagine that as this program begins to mature and stabilize, some of these manufacturers and some of these research companies will start combining, for example, the RND tax credit with this program.
Jack Heald: Mmmhmm. Right.
Kevin Kim: At the company level, you have the RND tax credit and at the investor level you have the QOZ tax credits. And so it's a lot of different ways to mix and match here, provided everything qualifies and you'll definitely need a strong tax team to do that.
Jack Heald: That leads me to ask quite naturally: how do you expect the Opportunity Zone program to change over time?
Kevin Kim: Oh, we're still not at its completion. So, when I say maturity, there is a lot to be decided still. And a lot of us are waiting with bated breath for a lot of things that will really make our jobs easier. I think we'll have some concrete results by the end of this year at least. The final regulations will come out and we'll have final guidance given and all that. And I think it'll mimic a lot like EB5. I was doing another presentation on this the other day, with my friend Zach over at George Smith and we were talking about this. And it's similar to EB5 in a lot of respects because you have two federal regulators that are not specialists in investment. Okay. And they're going to regulate in broad strokes. And the difference here is, the current administration has created a committee that is very well-versed in investing. And so you're getting ahead of it, unlike EB5. And so I think we're going to have, a significant maturity and sophistication when it comes to making these small tweaks. Maybe your making it more concrete long-term.
Jack Heald: That's what I'm asking.
Kevin Kim: Yeah.
Jack Heald: I'm trying to nail you down. I know you're a lawyer and I know that's challenging.
Kevin Kim: Yeah.
Jack Heald: What changes? If you were a betting man, what changes would you expect to see specifically?
Kevin Kim: Well, one of the big things that we want to see, and we hope to see as a little bit of specificity given associated with zones themselves. One of the things that we would love to see is certain areas that need, you know, need it or scenarios that could definitely use the petition for it. Right?
Jack Heald: Over and above the 8,700 that are already defined. Okay.
Kevin Kim: Right, right. And in my state alone, California, there are some counties that kind of missed the mark on it. You can't really build anything there, right? And so part of that was because they were rushing, right? It was a new program.
They're rushing. They got that in, but it just wasn't quite, so having the ability and having the clear guidance and rubric to to petition for reallocation of zones based on census tracts is going to be important and we're coming up soon for next year there's going to be a census.
So, I think that's gonna be step one. Another thing that I would love to see is very clear guidance on how these programs can interact with other types of investment vehicles that are part of the tax program. A different type of tax program.
Jack Heald: Such as?
Kevin Kim: A real estate investment trust.
Jack Heald: I was going to ask you about them.
Kevin Kim: I would love to see how this kind of program can play into REITs. A lot of REITs that I work with are really looking at this, but they're wondering, “Well, we get a lot of tax benefits as it is and this type of investment, we're not quite clear how it interacts with us as a real estate investment trust.” So, that kind of stuff would be some clear guidance there. And then finally, I think one of the biggest things that we really need to have supreme clarity on is the viability of the program. So to speak, right?
Jack Heald: What do you mean?
Kevin Kim: It's not like EB5, where it's a pilot program, but a lot of the investors that I speak with are very reticent. Like, this is part of this new legislation. What happens if it gets torpedoed?
Jack Heald: Ah
Kevin Kim: And there's some indication that I know of that Treasury is never gonna wanna get rid of this program. It's bipartisan supported. There's no reason to eliminate it. However, there is something to say about tax laws being changed. So, I guess a concrete aspect of the program, whether it requires an amendment or not, but that would be nice. Because, like in EB5, we're always, every month, every three months, we're just sitting and wondering what's gonna happen to the program.
Jack Heald: Right. Are you seeing a slow down in EB5 activity with Opportunity Zone?
Kevin Kim: We are, it has nothing to do with Opportunity Zones. I think EB5 is just because the program is consistently being, you know, either Canada's being kicked for renewal or now it's at OMB for new legislation. And then you have the practicalities of the long lines coming from the two major countries, China and India, the lines are starting to get really long.
Jack Heald: Right.
Kevin Kim: The average wait time for visa through EB5 in China is what now, 15 years or something like that. That's kind of chilling the program. This is a new alternative for the developers that were using ED5. Because you know it has very similar, I guess aspects, right?
Jack Heald: Sure
Kevin Kim: So, it allows for a lower cost of capital. It attracts investors that are high net worth. It attracts investors for an incentive, right? So, in EB5 the green card and, and in this program it's for capital gain deferment and tax waiver after 10 years. And then the other aspect of it is, of course, it benefits low income communities, right? TEAs combined with and this one Opportunity Zones. And so I think this is a great alternative because EB5 kind of calmed down and there's a lot of chilling in the market because of the factors we discussed. I think QOZ is a great alternative for those programs. For those developers. And I see a lot of familiar faces at the conferences, and so it's great because they get distilled pursue their business model and no longer are they going to have to play a guessing game. Uh, whether the law they're relying on is I'm going to be torpedoed. So…
Jack Heald: I guess this is a good time to talk about crowdfunding.
Kevin Kim: Okay.
Jack Heald: Let's dive into that, because you are literally the first person I've talked to who's talked about crowdfunding ...
Kevin Kim: Mmmhmm.
Jack Heald:...as it relates to the Opportunity Zones. And I'm fascinated with that dive into that for us.
Kevin Kim: Well, so, you know, Opportunity Zones are still private investments. I don't think there are any publicly-traded QOZ funds, right?
Jack Heald: Not that I know of.
Kevin Kim: They're all offering under regulation D. Right? And Regulation D was amended in 2013 when the Jobs Act created rule 506C as in cat. And that kinda was the first step toward crowdfunding. So, it allows for advertising. A lot of our clients who have like an online offering, who are public, who are advertising their investment online or through a crowdfunding platform are looking at this because they've been doing it for real estate syndications or their own funds. This will allow them to attract the new investor class and they can take the same logic, right?
And they can market the program and they can market that. And the crowdfunding aspect of it is really the online marketplace, so to speak, of accredited investors. What I'm interested to see is the reg A portion of this regulation A came out in 2000, I want to say it '14 or '13, and that was truly a crowdfunding model, right?
It allows you to raise, tier two is $50 million every 12 months. And the interesting part was when this and A allows you to advertise, you can have as many accredited or nonaccredited investors.
So, you can truly raise money from the crowd. The interesting part is when QOZ was the first announced, one of the most well-known crowdfunding organizations out there in DC went and created their own crowdfunding plus QOZ program and they're currently out there operating. And so it is definitely on the table because it's not just high net worth investors that have capital gains bills.
Jack Heald: Sure.
Kevin Kim: You know, and so the exemption portion of it, the way you raise the money, is what we call crowdfunding. Right? There are two or three regulations out there you can use. Then QOZ program is really a cherry on top of a great investment. And that's how we're viewing it. That’s what we're doing right now. And so we're, a lot of our clients are going either if 506C or they're contemplating a regulation A.
Because they know that, and even not accredited investors will have a capital gains bill. And for those clients who want to limit themselves to high net worth only -- which is totally respectable because bigger checks and bigger dollars and bigger and better capital stacks -- can stick to, 506C and still do an online offering. Still use a platform and raise money from high net worth investors compliantly and, still use this QOZ program. And so it marries very well with the QOZ program.
Jack Heald: Kevin Kim, outside of compliance issues, which like I said, make my head hurt. Just ask my mom. What are you best at? What really makes you? What really gets you up in the morning, gets you excited to be doing what you do?
Kevin Kim: You know, I'm always been someone who likes to make things. And -- I'm a serial hobbyist – and right now my hobby is to bake bread.
Jack Heald: Ahhh.
Kevin Kim: And so, I like to make things. And so in my work, what gets me up in the morning, what gets me really passionate, I'm an integral part of helping build this business Geraci Law Firm, but also my clients, I can serve them and help them create the most effective investment vehicle for them. And then in doing so, after we've created the vehicle, we were also there to add value, right.
Because helping them build a foundation is what I will do. And on top of that, they're going to have to go out and operate it and raise the money. So, what I am trying always to do is add value. And I think that’s what I really enjoy is to build things that add value to my clients. And that's what gets me up in the morning. It's been fantastic, the past five years have been amazing in doing so here. And we love, love doing that for clients.
Jack Heald: So, I am going to jump back to the bread though real quick.
Kevin Kim: Alright, go for it.
Jack Heald: What's your favorite bread you make right now?
Kevin Kim: I'm only making one type of bread and its sourdough bread.
Jack Heald: Oh wow.
Kevin Kim: And it's something that is a really random fact. If you've ever meet me in person, you would never expect me, you know, 6'2", 245-pound Korean man to bake bread. And so, but I do, I thought about why I do it. And I think the reason why I love doing it is because it allows me to make something that adds value to my family. Right? And we get to eat very, very nutritious food. I make right from scratch, you know?
Jack Heald: How old is your starter?
Kevin Kim: My starter is only a year old. It's a splinter of my friends starter, which is five years old now. I got started from a friend of mine and she bakes for fun and took classes. She told me that I'd love it and I do. And it's been a great, time. You know, I have a very busy schedule. I have an opportunity a day or two, that's what I am doing.
Jack Heald: My Belgian son-in-law bakes bread as well. He's a finance guy.
Kevin Kim: Yeah see?
Jack Heald: He comes home on the weekends and bakes bread.
Kevin Kim: There you go, see?
Jack Heald: Maybe it's just the actual and the metaphorical bread that draws you together.
Kevin Kim: It is.
Jack Heald: Bad, bad, I'm sorry. I apologize
Kevin Kim: I like it.
Jack Heald: I try to avoid punning. Ok, so, let's go the other direction.
Kevin Kim: Okay.
Jack Heald: And this is always my favorite question. What drives you out of your mind?
Kevin Kim: What drives me out of my mind? I mean there's a lot that will drive me crazy, but I think the biggest thing is I guess a lack of integrity. I work in real estate, I work in investments and it drives me crazy to see programs that are just completely disingenuous. They just never tried to follow, they don't even try to follow through with what they say they're going to do.
Jack Heald: Wow.
Kevin Kim: And it drives me insane as an attorney because I look at those programs, I see who is attached to the file and it just drives me nuts. And you know, having to represent some investors who are facing those challenges. It can be a very difficult task because I'm also, primarily on the deal side and we structure deals for a living, and it is just mind blowing to see, and it gets me so angry because, you know, one of the things that I was taught when I first started doing banking was you treat your investors’ money like it was your mom's money.
And so I think what really makes me mad is I see a lot of that out there. And unfortunately, you know, a lot of them get away with it. Fortunately the SEC is very vigilant and state regulators are as well. And so sometimes they get their comeuppance. And so.
Jack Heald: How do you deal with the anger?
Kevin Kim: It's not a nuclear rage that you can imagine. It's more, it's a passion for my client. it's a very much of a feeling of dissatisfaction. And the best way I can feel like I'm resolving that anger, so to speak, is try to make a difference. And adding value to where I can. And that goes to also making a difference and also education. And a lot of times our clients will need a refresher course, so we teach classes for different trade organizations that we’re part of, we do trainings for our clients privately. We'll, audit their company, like mock audit their company. And, and that gives me a feeling that at least I know that I'm doing what I can to prevent a lot of these bad actions. And a lot of times when, when the client had made a mistake, it's okay. I rarely see my clients ever intentionally do this stuff. But you know, when I'm defending it sometimes it oftentimes gets you a little bit upset because you're wondering what was going through your head. And I wish you would have taken the class that we were teaching six months ago, you know?
Jack Heald: Yeah, it's kind of the same issue that a parent has with a child.
Kevin Kim: Exactly.
Jack Heald: What in the world were you thinking?
Kevin Kim: What were you thinking? Right? If you just listened to what I had told you or you had taken the class or you know, asked for a phone call, I would have done free of charge and I would happily given you guidance. You know, cause it's oftentimes just a little bit of prevention, you know? So…
Jack Heald: Absolutely. Well, Kevin, how can, how can our listeners get ahold of you? What's the best way to contact you and, or, follow you?
Kevin Kim: Sure. Yeah. So, you can find me on our geracillp.com. Or you can email me at k.kim@geracillp.com. You know, if you searched Kevin Kim Geraci, you'll find me online. And also I'm always here at the office, so if you want to come by and pay us a visit, we're next to the QOZ guys. Actually, the QOZ Expo guys, their offices are, I believe, 96th Discovery and we're 94th.
Jack Heald: Ok. Since this is a podcast, we could have people listening that live all over the world. So, that is Irvine, California,
Kevin Kim: Irvine, California. Come down, say hi. Happy to talk.
Jack Heald: And head to the beach. Not Too far away.
Kevin Kim: Yes sir. We're about 10 minutes from the beach.
Jack Heald: Very good. Well, I'll remind our listeners all of his contact information is also available on our podcast website. Kevin Kim, any last words to add before we sign off?
Kevin Kim: Well, we're going to be a, at the OZ Expo in Las Vegas. We're really excited to be there and we'll have a booth. So, if you're going to be in attendance, please stop by our booth and say hi.
Jack Heald: Very good. Well, Kevin, I appreciate it. I'm Jack Heald for the OZExpo Podcast. We will talk to you next time.
Kevin Kim: Thank you for having me.
Jack Heald: It's good to have ya. Well, before we dig into this Opportunity Zone stuff, let's find out about you. Who is Kevin Kim? Where'd you come from? How'd you get into this business?
Kevin Kim: Oh, absolutely. So, I'm a partner at Geraci Law Firm. I've been here five years, been an attorney for 10, graduated from Loyola Law School in downtown L.A. Undergrad, from Cal Berkeley. And I've been in the real estate business my entire career. Prior to law school I was a commercial loan officer for a regional bank and, third generation banker. And so real estate's kind of in my blood, investing has been in my blood. My grandfather was an investment banker in Korea. I joined Geraci Law firm five years back, took over the securities practice, four years ago now. And I've been running it ever since. And we focus almost exclusively in real estate and real estate finance in the private sector and it's just been a blast, you know, seeing all these great programs come. We've been involved in the EB5 program. We've been involved in the QOZ program. We’re doing a lot of real estate syndications for crowdfunding, so it's great to see the market where is that today.
Jack Heald: Oh, I want to put a pin in that about crowdfunding. Yeah, absolutely. I'm not going to get there yet. The noise you hear is me making a note to ask you about crowdfunding.
Kevin Kim: Okay, sounds good.
Jack Heald: Now I'm doing a little, I was a music major, so my math might be bad. But if you've been a lawyer for 10 years, that takes us back to 2009.
Kevin Kim: Yes sir, it does.
Jack Heald: And you were a banker prior to that.
Kevin Kim: Yes sir. I was.
Jack Heald: So, you were there, you were in the mortgage business in 2008.
Kevin Kim: Yes sir. I was a banker. I was a commercial loan officer, so I was doing a lot of asset, commercial real estate purchase, multifamily, you know, mixed use. I wasn't doing residential mortgages back then and so it was, I wasn't part of that world, but the meltdown happened the same way. And you know, I left the banking world in 2006. Went to law school. Yeah. And when I graduated, our Dean, when we got sworn in as attorneys, that's when we passed the bar essentially told us he's sorry.
Jack Heald: That's awesome.
Kevin Kim: And it was a rough time. You know massive layoffs throughout the industry. But I found my way back into the real estate world once again. I had a passion for it and started doing litigation at first and then found my way into a corporate and securities practice. Okay, five years ago, six years ago, actually found my way to Geraci. So. It’s an interesting kind of a world we're living in now compared to the last cycle because we're seeing a lot of growth in commercial this time and it's booming. And so it's a very interesting time right now in the market.
Jack Heald: So, it's almost like the aftermath of a forest fire.
Kevin Kim: Yeah.
Jack Heald: Massive destruction wiped everything out. But now we're far enough past it that we're starting to see, these wide-open areas that are, that are available for growth.
Kevin Kim: Oh, significant growth.
Jack Heald: I see it here in Phoenix. You know, we went through I guess like pretty well everywhere we went through. Just an awful trough. But just over the last, I'd say 18 months, it's just driving around town. It's very obvious. Things have changed significantly.
Kevin Kim: Oh Yeah.
Jack Heald: So, when I did a little research as I was done a little research on you, I stumbled onto, something along the lines of expert in compliance.
Kevin Kim: MmHmm.
Jack Heald: Um, now I will confess to you that that compliance is one of those words that is very painful for me. But I would like to hear, and I know our listeners would as well.
Kevin Kim: Right.
Jack Heald: What kind of compliance issues are most likely to trip up a QOZ investor?
Kevin Kim: Yeah. So in the compliance services I offer it is primarily in a securities and corporate compliance. And so a lot of our clients are raising capital from investors, right? High net worth investors. They're not public companies, they're not on Nasdaq, or they aren't traded on Wall Street, but they're private companies. They raised significant amounts of cash and therefore the SEC regulations do apply in a limited fashion. So, making sure they navigate those waters carefully.
And it's not as simple as, are you selling securities in the right way? It's selling security to the investment advisory. It's the Investment Company Act. It's are you licensed to make the loan that you're making in the state that you are? All types of transactional issues come up. Yeah. And not every state is the same. And so there are significant state-level and federal-level, regulatory compliance concerns even after investment vehicles launch.
Right. And so, where we shine as a law firm has been what I call a fun design so to speak, we'll help a client start their investment vehicle and launch it and continue to operate it. In operations, one of the things that we offer is continued compliance services. And so, we'll we'll notify them of their filing obligations, the local regulators or the federal regulators as applicable.
We'll help them obtain the necessary licenses to transact and the ways they want. So, if they are a real estate developer, oftentimes it's just an investment portion of things. If they're a real estate lender, then it becomes a very different topic. And so in our world, compliance is something that we've found that we can differentiate ourselves because we operate in such, complex areas of business that there are a lot of regulatory speed bumps and so really can provide value there.
Jack Heald: I know one of the attractive elements of the program has been the opportunity to simply declare yourself an Opportunity Zone Fund.
Kevin Kim: Right.
Jack Heald: Now, are the compliance and regulatory hurdles higher if you're a debt lender rather than equity giver?
Kevin Kim: Sure. So, in, in the world of QOZ, Opportunity Zones lending is really more of an ancillary service on the sidelines of the programs that are raising money to invest in these zones will need, right? So, a simple example would be, I'm a real estate developer. I have a project that's located in an Opportunity Zone or multiple projects and I want to create a Qualified Opportunity Fund, to develop these projects.
I will need financing unless they want to pursue, you know, 100% equity in their capital stack. And so the lenders out there are looking at this as a boom to development, which means more deal flow for them as lenders. The developers are going to come in and create these QOFs and establish their funds and you know, in the zones and they'll be reaching out to the lenders to get financing.
And like you said it's not as simple as simply stating, “Oh, I've got a property in the zone, I'm a QOF now.” There are a lot of regulatory hurdles to go through. The first thing you have to consider is the actual program itself part of the IRS code, right? And so, this tax law, so you're going to have to have a CPA, you're going to have to understand that your project needs to qualify for the program.
You have to be able to build it in a certain period of time. You have to meet certain substantial improvement requirements. You know, it's a pretty substantial, you know, list of requirements to qualify on top of that. Because it's an investment base program, right? It's a method for investors to defer their capital gains and earn new ways to earn and reduce their tax liability.
It has to do with investments and when and when we hear investments there's always securities laws. That's where my expertise is in, creating and advising on private securities offerings. And we've done it in real estate for 10 years. And all types, especially in this, the ideal product for this program, you know, as soon as significant rehabilitation or ground up construction is that a lot of those projects almost always requires some type of compliance with SEC guidelines.
And best practices. And so typically speaking, we're making sure that the client has a very well-drafted private placement memorandum. We're going to have, very well-drafted corporate documentation. We're going to negotiate the loan transactions for them. All of this is because the regulations are very strict and so you have to make sure that you're complying with them. But also there's a lot of risks out there in these investments and so you want to make sure that you're disclosing those risks to the investor to make sure that you've met your fiduciary duty as the sponsor of the project.
Jack Heald: Right?
Kevin Kim: Yup.
Jack Heald: know the bulk of activity in the OZ space right now appears to be real estate.
Kevin Kim: Absolutely.
Jack Heald: However, I know that from a, from a philosophical standpoint, the idea of the OZ program is to, is to increase the overall wealth base in these underserved zones and that requires building businesses. So, I have a noncompliance related question.
Kevin Kim: Sure.
Jack Heald: Are you seeing business investment?
Kevin Kim: Yes.
Jack Heald: Or is it still almost exclusively real estate?
Kevin Kim: No, we are seeing business investment. It's actually very interesting. We're seeing a lot of people thinking of expanding their business, moving their businesses, creating new businesses in zones. One good examples: We had person call us and they had sold the business previously. They had a capital gain bill. Their partner had a capital gain bill. They want set up a new business, invest in a zone. And the program was not real estate-related. I believe it with a trucking company, actually. And you know, it's a question of the assets then. Right. And you know, original use and all that.
Jack Heald: Right.
Kevin Kim: Work to comply with the program. But it's definitely a boon. And I think what we'll see is after the dust settles and there's supreme clarity from the regulatory bodies out there -- theTreasury Department and IRS -- we're going to see this used in Silicon Valley and the startup world significantly because you're already seeing a of movement, in the tech world moving into these cities that are underserved, right?
That example. Yes. Pittsburgh, Pennsylvania, right? Pittsburgh, Pennsylvania is starting to attract a lot of startups and the city is granting a lot of opportunities to them from a tax perspective, to reduce the tax exposure as a company. But there's a lot of pockets there that are qualified, in the zone and Opportunity Zone program. So, there's different ways that new tech startups and just startups in general could use this program.
And I think it's ingenious because it definitely is not meant to be solely or real estate, but because of that substantial improvement or original use requirements, it lends itself to real estate. And of course a lot of the capital gains out there are sourced from real estate, right? That is where the attention and the returns are higher. And so the tension goes that way. But I can almost be certain that in the next year or so we're going to start seeing a glut of this being used in the startup world. And I encourage it.
Jack Heald: I've been paying attention to the developments in the power generation world.
Kevin Kim: Mmmhmm
Jack Heald: Specifically, fourth generation nuclear, and it seems to me, given the nature of nuclear power all by itself and this new OZ program, it seems like some of these opportunities zones in the more remote areas, which we have a lot of here in Arizona, would be perfect locations for fourth generation nuclear. My goodness. It seems like it would be…
Kevin Kim: Yeah. If you look at the same opportunity, with EB5 when it first came out, it was almost exclusively used for real estate. But as it developed as it matured, you saw green energy programs get involved, you saw manufacturers get involved. And I think it's the same thing if this is a new program designed for capital injection to reinvigorate, you know, low-income communities. Right. And so to that degree, I think that we will definitely see, both a smart grid and green energy technology companies take advantage of it.
Jack Heald: I want to ask you to speculate just a little bit here.
Kevin Kim: Sure.
Jack Heald: I'm almost certain there is no regulation, but you talked about for example, Pittsburgh where folks are being moved in and the locality is offering tax incentives. Any sense of how these layered tax incentives might be treated with the Opportunity Zone?
Kevin Kim: Right. Good question. So, I'm, first of all, I want to start, I'm an attorney, not a CPA. I am by no means a tax expert. But I do know a lot of real estate projects are actually stacking these different programs as well because the local governments are giving the benefits on their local taxes, right? They're breaks and local taxes, whether it be property tax or sales tax or some kind of break like that. And then you have this program for the investors that's allowing them to defer their further capital gains.
So, you have a dual layer of tax benefits. Both at the sponsor level, at the business level. You're saving on whatever it is, your property taxes that'll increase returns to the investor. You're saving on, you know, a sales tax or whatever it may be. And that's the local incentive given by the city.
You know, we hear a lot about Amazon's new campus and a lot of that has to go with vying for different tax benefits. On top of that, you have this federal program, right? And so this is a federal program that is designed for the investors themselves to defer their capital gains. And so, you have this mismatch on all of that.
Even in the real estate side, we see sponsors stacking different programs on top of each other. And I would imagine that as this program begins to mature and stabilize, some of these manufacturers and some of these research companies will start combining, for example, the RND tax credit with this program.
Jack Heald: Mmmhmm. Right.
Kevin Kim: At the company level, you have the RND tax credit and at the investor level you have the QOZ tax credits. And so it's a lot of different ways to mix and match here, provided everything qualifies and you'll definitely need a strong tax team to do that.
Jack Heald: That leads me to ask quite naturally: how do you expect the Opportunity Zone program to change over time?
Kevin Kim: Oh, we're still not at its completion. So, when I say maturity, there is a lot to be decided still. And a lot of us are waiting with bated breath for a lot of things that will really make our jobs easier. I think we'll have some concrete results by the end of this year at least. The final regulations will come out and we'll have final guidance given and all that. And I think it'll mimic a lot like EB5. I was doing another presentation on this the other day, with my friend Zach over at George Smith and we were talking about this. And it's similar to EB5 in a lot of respects because you have two federal regulators that are not specialists in investment. Okay. And they're going to regulate in broad strokes. And the difference here is, the current administration has created a committee that is very well-versed in investing. And so you're getting ahead of it, unlike EB5. And so I think we're going to have, a significant maturity and sophistication when it comes to making these small tweaks. Maybe your making it more concrete long-term.
Jack Heald: That's what I'm asking.
Kevin Kim: Yeah.
Jack Heald: I'm trying to nail you down. I know you're a lawyer and I know that's challenging.
Kevin Kim: Yeah.
Jack Heald: What changes? If you were a betting man, what changes would you expect to see specifically?
Kevin Kim: Well, one of the big things that we want to see, and we hope to see as a little bit of specificity given associated with zones themselves. One of the things that we would love to see is certain areas that need, you know, need it or scenarios that could definitely use the petition for it. Right?
Jack Heald: Over and above the 8,700 that are already defined. Okay.
Kevin Kim: Right, right. And in my state alone, California, there are some counties that kind of missed the mark on it. You can't really build anything there, right? And so part of that was because they were rushing, right? It was a new program.
They're rushing. They got that in, but it just wasn't quite, so having the ability and having the clear guidance and rubric to to petition for reallocation of zones based on census tracts is going to be important and we're coming up soon for next year there's going to be a census.
So, I think that's gonna be step one. Another thing that I would love to see is very clear guidance on how these programs can interact with other types of investment vehicles that are part of the tax program. A different type of tax program.
Jack Heald: Such as?
Kevin Kim: A real estate investment trust.
Jack Heald: I was going to ask you about them.
Kevin Kim: I would love to see how this kind of program can play into REITs. A lot of REITs that I work with are really looking at this, but they're wondering, “Well, we get a lot of tax benefits as it is and this type of investment, we're not quite clear how it interacts with us as a real estate investment trust.” So, that kind of stuff would be some clear guidance there. And then finally, I think one of the biggest things that we really need to have supreme clarity on is the viability of the program. So to speak, right?
Jack Heald: What do you mean?
Kevin Kim: It's not like EB5, where it's a pilot program, but a lot of the investors that I speak with are very reticent. Like, this is part of this new legislation. What happens if it gets torpedoed?
Jack Heald: Ah
Kevin Kim: And there's some indication that I know of that Treasury is never gonna wanna get rid of this program. It's bipartisan supported. There's no reason to eliminate it. However, there is something to say about tax laws being changed. So, I guess a concrete aspect of the program, whether it requires an amendment or not, but that would be nice. Because, like in EB5, we're always, every month, every three months, we're just sitting and wondering what's gonna happen to the program.
Jack Heald: Right. Are you seeing a slow down in EB5 activity with Opportunity Zone?
Kevin Kim: We are, it has nothing to do with Opportunity Zones. I think EB5 is just because the program is consistently being, you know, either Canada's being kicked for renewal or now it's at OMB for new legislation. And then you have the practicalities of the long lines coming from the two major countries, China and India, the lines are starting to get really long.
Jack Heald: Right.
Kevin Kim: The average wait time for visa through EB5 in China is what now, 15 years or something like that. That's kind of chilling the program. This is a new alternative for the developers that were using ED5. Because you know it has very similar, I guess aspects, right?
Jack Heald: Sure
Kevin Kim: So, it allows for a lower cost of capital. It attracts investors that are high net worth. It attracts investors for an incentive, right? So, in EB5 the green card and, and in this program it's for capital gain deferment and tax waiver after 10 years. And then the other aspect of it is, of course, it benefits low income communities, right? TEAs combined with and this one Opportunity Zones. And so I think this is a great alternative because EB5 kind of calmed down and there's a lot of chilling in the market because of the factors we discussed. I think QOZ is a great alternative for those programs. For those developers. And I see a lot of familiar faces at the conferences, and so it's great because they get distilled pursue their business model and no longer are they going to have to play a guessing game. Uh, whether the law they're relying on is I'm going to be torpedoed. So…
Jack Heald: I guess this is a good time to talk about crowdfunding.
Kevin Kim: Okay.
Jack Heald: Let's dive into that, because you are literally the first person I've talked to who's talked about crowdfunding ...
Kevin Kim: Mmmhmm.
Jack Heald:...as it relates to the Opportunity Zones. And I'm fascinated with that dive into that for us.
Kevin Kim: Well, so, you know, Opportunity Zones are still private investments. I don't think there are any publicly-traded QOZ funds, right?
Jack Heald: Not that I know of.
Kevin Kim: They're all offering under regulation D. Right? And Regulation D was amended in 2013 when the Jobs Act created rule 506C as in cat. And that kinda was the first step toward crowdfunding. So, it allows for advertising. A lot of our clients who have like an online offering, who are public, who are advertising their investment online or through a crowdfunding platform are looking at this because they've been doing it for real estate syndications or their own funds. This will allow them to attract the new investor class and they can take the same logic, right?
And they can market the program and they can market that. And the crowdfunding aspect of it is really the online marketplace, so to speak, of accredited investors. What I'm interested to see is the reg A portion of this regulation A came out in 2000, I want to say it '14 or '13, and that was truly a crowdfunding model, right?
It allows you to raise, tier two is $50 million every 12 months. And the interesting part was when this and A allows you to advertise, you can have as many accredited or nonaccredited investors.
So, you can truly raise money from the crowd. The interesting part is when QOZ was the first announced, one of the most well-known crowdfunding organizations out there in DC went and created their own crowdfunding plus QOZ program and they're currently out there operating. And so it is definitely on the table because it's not just high net worth investors that have capital gains bills.
Jack Heald: Sure.
Kevin Kim: You know, and so the exemption portion of it, the way you raise the money, is what we call crowdfunding. Right? There are two or three regulations out there you can use. Then QOZ program is really a cherry on top of a great investment. And that's how we're viewing it. That’s what we're doing right now. And so we're, a lot of our clients are going either if 506C or they're contemplating a regulation A.
Because they know that, and even not accredited investors will have a capital gains bill. And for those clients who want to limit themselves to high net worth only -- which is totally respectable because bigger checks and bigger dollars and bigger and better capital stacks -- can stick to, 506C and still do an online offering. Still use a platform and raise money from high net worth investors compliantly and, still use this QOZ program. And so it marries very well with the QOZ program.
Jack Heald: Kevin Kim, outside of compliance issues, which like I said, make my head hurt. Just ask my mom. What are you best at? What really makes you? What really gets you up in the morning, gets you excited to be doing what you do?
Kevin Kim: You know, I'm always been someone who likes to make things. And -- I'm a serial hobbyist – and right now my hobby is to bake bread.
Jack Heald: Ahhh.
Kevin Kim: And so, I like to make things. And so in my work, what gets me up in the morning, what gets me really passionate, I'm an integral part of helping build this business Geraci Law Firm, but also my clients, I can serve them and help them create the most effective investment vehicle for them. And then in doing so, after we've created the vehicle, we were also there to add value, right.
Because helping them build a foundation is what I will do. And on top of that, they're going to have to go out and operate it and raise the money. So, what I am trying always to do is add value. And I think that’s what I really enjoy is to build things that add value to my clients. And that's what gets me up in the morning. It's been fantastic, the past five years have been amazing in doing so here. And we love, love doing that for clients.
Jack Heald: So, I am going to jump back to the bread though real quick.
Kevin Kim: Alright, go for it.
Jack Heald: What's your favorite bread you make right now?
Kevin Kim: I'm only making one type of bread and its sourdough bread.
Jack Heald: Oh wow.
Kevin Kim: And it's something that is a really random fact. If you've ever meet me in person, you would never expect me, you know, 6'2", 245-pound Korean man to bake bread. And so, but I do, I thought about why I do it. And I think the reason why I love doing it is because it allows me to make something that adds value to my family. Right? And we get to eat very, very nutritious food. I make right from scratch, you know?
Jack Heald: How old is your starter?
Kevin Kim: My starter is only a year old. It's a splinter of my friends starter, which is five years old now. I got started from a friend of mine and she bakes for fun and took classes. She told me that I'd love it and I do. And it's been a great, time. You know, I have a very busy schedule. I have an opportunity a day or two, that's what I am doing.
Jack Heald: My Belgian son-in-law bakes bread as well. He's a finance guy.
Kevin Kim: Yeah see?
Jack Heald: He comes home on the weekends and bakes bread.
Kevin Kim: There you go, see?
Jack Heald: Maybe it's just the actual and the metaphorical bread that draws you together.
Kevin Kim: It is.
Jack Heald: Bad, bad, I'm sorry. I apologize
Kevin Kim: I like it.
Jack Heald: I try to avoid punning. Ok, so, let's go the other direction.
Kevin Kim: Okay.
Jack Heald: And this is always my favorite question. What drives you out of your mind?
Kevin Kim: What drives me out of my mind? I mean there's a lot that will drive me crazy, but I think the biggest thing is I guess a lack of integrity. I work in real estate, I work in investments and it drives me crazy to see programs that are just completely disingenuous. They just never tried to follow, they don't even try to follow through with what they say they're going to do.
Jack Heald: Wow.
Kevin Kim: And it drives me insane as an attorney because I look at those programs, I see who is attached to the file and it just drives me nuts. And you know, having to represent some investors who are facing those challenges. It can be a very difficult task because I'm also, primarily on the deal side and we structure deals for a living, and it is just mind blowing to see, and it gets me so angry because, you know, one of the things that I was taught when I first started doing banking was you treat your investors’ money like it was your mom's money.
And so I think what really makes me mad is I see a lot of that out there. And unfortunately, you know, a lot of them get away with it. Fortunately the SEC is very vigilant and state regulators are as well. And so sometimes they get their comeuppance. And so.
Jack Heald: How do you deal with the anger?
Kevin Kim: It's not a nuclear rage that you can imagine. It's more, it's a passion for my client. it's a very much of a feeling of dissatisfaction. And the best way I can feel like I'm resolving that anger, so to speak, is try to make a difference. And adding value to where I can. And that goes to also making a difference and also education. And a lot of times our clients will need a refresher course, so we teach classes for different trade organizations that we’re part of, we do trainings for our clients privately. We'll, audit their company, like mock audit their company. And, and that gives me a feeling that at least I know that I'm doing what I can to prevent a lot of these bad actions. And a lot of times when, when the client had made a mistake, it's okay. I rarely see my clients ever intentionally do this stuff. But you know, when I'm defending it sometimes it oftentimes gets you a little bit upset because you're wondering what was going through your head. And I wish you would have taken the class that we were teaching six months ago, you know?
Jack Heald: Yeah, it's kind of the same issue that a parent has with a child.
Kevin Kim: Exactly.
Jack Heald: What in the world were you thinking?
Kevin Kim: What were you thinking? Right? If you just listened to what I had told you or you had taken the class or you know, asked for a phone call, I would have done free of charge and I would happily given you guidance. You know, cause it's oftentimes just a little bit of prevention, you know? So…
Jack Heald: Absolutely. Well, Kevin, how can, how can our listeners get ahold of you? What's the best way to contact you and, or, follow you?
Kevin Kim: Sure. Yeah. So, you can find me on our geracillp.com. Or you can email me at k.kim@geracillp.com. You know, if you searched Kevin Kim Geraci, you'll find me online. And also I'm always here at the office, so if you want to come by and pay us a visit, we're next to the QOZ guys. Actually, the QOZ Expo guys, their offices are, I believe, 96th Discovery and we're 94th.
Jack Heald: Ok. Since this is a podcast, we could have people listening that live all over the world. So, that is Irvine, California,
Kevin Kim: Irvine, California. Come down, say hi. Happy to talk.
Jack Heald: And head to the beach. Not Too far away.
Kevin Kim: Yes sir. We're about 10 minutes from the beach.
Jack Heald: Very good. Well, I'll remind our listeners all of his contact information is also available on our podcast website. Kevin Kim, any last words to add before we sign off?
Kevin Kim: Well, we're going to be a, at the OZ Expo in Las Vegas. We're really excited to be there and we'll have a booth. So, if you're going to be in attendance, please stop by our booth and say hi.
Jack Heald: Very good. Well, Kevin, I appreciate it. I'm Jack Heald for the OZExpo Podcast. We will talk to you next time.
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