Navigating the Multifamily Market, Opportunity Zones, and Economic Uncertainties with Nick Rosenthal
Nick Rosenthal, Co-CEO of Griffin Capital shares his thoughts about the affordable housing crisis in the United States with a focus on the multifamily sector. The conversation includes the origin of the housing issue, challenges in single-family home production, the shift towards renting, and the impact of factors like increased home prices and stagnant wages. Nick discusses the current state of the multifamily market, discussing the high number of deliveries in 2023 and 2024, challenges in the credit environment, and the importance of timing in real estate development. We talk about the Opportunity Zones program as a potential solution for tax mitigation and its benefits, including gain deferral, tax-free growth, and tax-free income generation while also touching on the pitfalls of OZs, emphasizing the need for due diligence in selecting projects and managers. The conversation wraps up with speculating how the Federal Reserve's role and the uncertainty surrounding future interest rate cuts factor in.
RECORDED JANUARY 27, 2024
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Fat Pitch Ep 17 - AUDIO
Wed, Feb 14, 2024 10:22AM • 37:25
SUMMARY KEYWORDS
market, clint, multifamily, fund, opportunity, capital gains, nick, tax, today, housing, years, investor, access, investment, supply, capital, effectively, grow, business, large
SPEAKERS
Paul Barausky, Clint Sorenson, Nick Rosenthal
Paul Barausky 00:00
Hey everybody, this is Paul Baurasky, one of your hosts of the Fat Pitch podcast. As always, I'm joined by Clint Sorenson. Good morning, Clint.
Clint Sorenson 00:11
Hey, how are you, Paul?
Paul Barausky 00:12
I'm wonderful. Thanks back in action finally with two eyes instead of one. And today we're joined by a good friend of mine, Nick Rosenthal from Griffin. Nick, it's great to have you with us on the Fat Pitch today.
Nick Rosenthal 00:23
Great to be on the podcast. I'm a fan and great to be a guest.
Paul Barausky 00:27
Well, we're happy we're rolling again, Nick, and what better way to get cranked up in January than to talk about, you know, multifamily. Beds. I always work in the other half, sheds right now. But I came from the bedside. And certainly over the last five years, if you were involved in industrial multifamily, it had had a heck of a run. So I just had a chance to talk to the Chair of Cushman and Wakefield the other day about the sector that I work in. And I know Clint’s excited to talk about the sector you’re in. Before we get there, though, how about a little origin story, your background, that's where we'd like to start?
Nick Rosenthal 01:02
Sure, so I would be remiss if I didn't say I grew up in Boston, you can't leave Boston and then pretend like you're not from there. So I grew up in Boston, I went to school in Washington, DC, and then I moved west. So I'm now in Newport Beach, California, but really, from sort of a young point in my life, all of the people that I was around that had really accumulated wealth, and in my view, as a young person, success were in the real estate space. And so I always felt like that was something that I wanted to do. So when I graduated from George Washington University, I had an opportunity to work for a developer and we were developing an industrial park, actually, your world now in Jiangsu Province, China. So as back and forth between LA and China, that was a formative experience, I learned a lot over those couple of years. And then I went to work on the acquisition side of the business, doing deal structure work. So we were buying multifamily, multi tenant, office and industrial. And then I had an opportunity to move over to the capital formation side of the business, which was totally new to me, didn't know really had existed, it was the GFC. And sort of a mentor in the business said, We want you to come over to this side of the business and help us raise capital. So I did that. And then in 2015, as Griffin Capital was launching our registered fund business, which was really a standalone business that we were standing up to offer investors an opportunity to get into what at the time was a different investment vehicle structure to get sort of the return characteristics that they were looking for. In a more operational, I would say, easy way to gain access to 99. Access to large institutional funds. You guys know this space well. I joined that effort, we raised about six and a half billion dollars in that space. And then in May of 2022, we sold that to Apollo. So the business that we're focused on today, I'm a co-CEO, that businesses all sort of the original DNA of the firm, which is the direct real estate business. And inside of that business, we're exclusively focused on the multifamily sector today.
Paul Barausky 03:12
That's fantastic. And by the way, I'd be remiss if I didn't tell you, I'm having dinner with your former Portfolio Manager in Orlando next month, so I'll be sure to send your regards. {Nick: please do} You betcha. So, Clint, what do you have for Nick here today?
Clint Sorenson 03:27
Yeah, Nick. So you know, one of the things we always hear about is this affordable housing crisis in the United States. And, you know, we've seen all the charts I'm sure you guys have, where it's better to rent now than to buy just due to the cost of capital, due to the way prices have increased, especially post COVID. Really a hockey stick. How do you view that? Or how do you view that right now? And then how are you trying to solve that? Or how do you think multifamily plays a role in potentially solving that crisis?
Nick Rosenthal 03:55
Sure. So I think the best place to start is sort of the origin of this issue, and then we can kind of work our way through to what's going on right now because this is something that has been systemically–no pun intended–building for a long time. So in 90% of counties in the US, it is more affordable to rent than it is to own, which is obviously problematic. And this is primarily driven by a couple of different things. But I would trace the origin, really, to the financial crisis when homebuilding effectively just stopped. And homebuilding, as you can imagine, takes time. It's a production business. And so when we stopped the production line, it sets you back several years. But effectively coming out of the GFC, builders never recovered the volume of single family home production that they were producing prior to the GFC. And it was a very, very slow recovery through 2009, really through about 2017. And during that time, a lot of skilled labor left the market, labor costs increased. And so the production that was taking place wasn't on the affordable sort of entry level home side of the spectrum, if you think about entry level homes that are 1400 square feet or less, really allows somebody to get into the single family market, start building equity, and then eventually, they're going to potentially trade up out of that. That type of product just wasn't getting built, it didn't make sense for home builders. So if you look back into the 80s, about 40%, of home production was in that segment. Today, it's about eight. And at the same time, as you have this sort of this pipeline challenge on the single family side, from home builders, you had a situation where home prices went up, and most pronounced during the pandemic, but home prices went up. And at the same time, wages did not grow at parity. So now we have a real challenge in terms of accessing the single family market for a larger segment of the country. So every population cohort that we track is increasing their propensity to rent today. As home prices went up, a couple of things happened, I would tell you, the first thing that happened is obviously the downpayment required to acquire that home has gone up at the same time, personal savings rates are going down. So that's challenging. And then the monthly cash flow component has increased pretty dramatically as not only the size of that mortgage has increased, but mortgage rates have gone up. So that becomes a gating issue. And after the financial crisis, we put in some more stringent lending standards, so it's harder for people to get credit. So the confluence of all of these things puts us in a position today where most pundits will tell you we're somewhere between three and a half million and 4 million homes short. And housing is a binary choice. If you're lucky enough to choose to own, then you can potentially own, but most people don't have that choice. So they rent or if they're lucky enough, they can live at home. But effectively, we have a massive housing challenge in this country. And part of this is also driven by nimbyism. So as you can imagine, people don't want a lot of new housing production in their backyard, it's not great for their values, in terms of their homes and those people. So you know, we hear a lot about the need for housing. And we see a lot of inaction in terms of creating housing. It actually takes more time now to get housing built than it has before. Even though everybody acknowledges that we need more supply.
Paul Barausky 07:29
you know, you talk about the confluence of events, you add to all that that higher interest rate effect is lowered inventory because people are going to choose to stay put versus move. Some of those people are the newer homeowner that just bought that would have been aspirational before, to go from 1400 feet to maybe 2200, 2400 to get the second story. And now they said, due to rates, I can't move, which on a personal basis, Clint you and I've talked about and I completely missed the homebuilder stocks thinking, Okay, they're gonna keep going because the choice will be build new. And there's still a shortage there even when two by fours were nine bucks at peak inflation. So I'm curious, with this commodity supercycle lending curious costs of land, labor and commodities, as well as entitlement being difficult, is that further exacerbating the supply of multifamily? And if so, where and what type?
Nick Rosenthal 08:23
Yeah, let me go back to real quick, sort of your comment about mobility within the housing market, because I think that's an important one. Last year, we sold fewer houses in this country than any time since 1995. And the reason why, as you articulated is not just the affordability issue, which creates a deeper and stickier rental pool because people are gated, but there's no mobility within the single family market because people are locked in below current market rates. So do I want to effectively change out my three and a half percent cost of capital for six and a half or seven and a half percent? And the answer is sort of resoundingly No. And so when you actually look at sort of what Millennials are saying, they're saying the house that I expect to buy, I'm going to stay in for the next 15 to 20 years, that was never the situation as you articulated before. You know, there's just not enough of these entry level homes for people to get into, and there's massively gating issues to get into them. And then within the single family mark, the challenges to build, I think we should take a step back at what's happening in the multifamily market today as well. And that's you have a tremendous amount of deliveries in 2023 and 2024, little over 400,000 deliveries in ‘23, over 600,000 deliveries coming in in 2024. And these pipelines are very transparent. You know, it's very easy to track this stuff. Now, the census data differs a little bit from sort of the forecasters that we think are more accurate but effectively those are the numbers. So if you look back three years or four years, because that's when the shovels went into the ground to start those developments, we were in a very different credit environment than we're in today. Obviously, very accommodative Fed for a variety of reasons trying to stimulate a post pandemic economy, we saw a access to capital at a very low cost that we had never seen before. And as a function of that not only were larger investors very active because they see the tailwinds for rental demand. But the country club circuit was very active as well. And when I talked about the country club circuit, I'm talking about the folks that would finance 70 or 80% of the cost of a development, maybe they started off with eight units, or 12 units, or 40 units, and now they're building 150 units, all of a sudden, they can finance that with a regional bank loan at 70 or 80% of the cost, they can pass the hat at the country club to their house. And that was a very easy way to get deals capitalized. That market has since reversed dramatically. So tighter credit environment, only large market participants have access to capital. Just anecdotally, we financed 10 deals last year, about 650 million of total loan proceeds. So we have access to capital, which is phenomenal for our business. But a lot of the market participants that we talked to, they don't have the capital markets, relationships, they can't put in 50 to 60% of the equity to finance a deal. And so they're totally sidelined. So the small and mid sized developers that are out of the market. So the stuff you're seeing delivered today is stuff that started three and four years ago. Our view is really that if you can lean into the market right now, when other people can't get things capitalized, then you're going to have a very advantageous leasing cycle as you get out until late ‘25, ‘26 and ‘27. And developing is a lot like the business I would say of the cliff divers in Acapulco. Right, those guys are standing up 115 feet, and they're diving into the water as the tide is going out knowing that when they land, the tide is coming in. In development you really want to be most active when other people can't get stuff capitalized. Because if you look out three to four years, you know you're going to be delivering into an environment.
Paul Barausky 12:16
Absolutely. I mentioned, Clint, not to steal your thunder, there's a lot of let's call it bifurcation, across a lot of sectors, multifamily included, you know, how do you view markets? How do you view garden versus, you know, luxury condo type finishes? Can you educate us and our audience?
Nick Rosenthal 12:37
Sure. The part of the market where we're most active is really the belly of the market where you have the largest potential tenant demographics. So I think of incomes of 60,000 to 120,000. So if it's in a urban environment, it's mid wrap or podium, if it's suburban, first or second ring, it's garden style. Our view of luxury, high rise housing is that it's phenomenal when it works, but when it doesn't work, you've got large challenges. And you're really marketing to a very small segment of the market. And that part of the market is generally renting by choice. And so, you know, they might like a community because it's the hot new community in that market. And it's opening up to a lot of fanfare, and so they stay for a year or two years, then they move to the next one potentially, or they buy their home.
Paul Barausky 13:28
The next concession, too.
Nick Rosenthal 13:30
Yeah, yeah. When the economy contracts, I want to have a tenant when the economy expands, I want to have a tenant. I want to be in the largest part of the market, because that's the most resilient part of the market. And so that's why we build the type of product that I articulated, which is wrap or podium in an urban environment or garden garden historically has been just a phenomenal performer. Very consistent, very resilient, you know, takes a lot of land; you want to be in the right location, but obviously close to a major employment knows but the way we think about markets are educated workforces, markets where you have both a local and a state government that are pro growth that are tracking industries trying to attract specific industries to those markets to obviously catalyze job creation. You need to have transportation infrastructure north, south, east, west proximity to other major metro markets, and then employers that are moving into those markets. So yeah, I think about the growth markets in the Sunbelt, which are seeing the most supply today. They're also seeing the most demand. And so if you have sustainable growth, that's a place where you want to be an investor, short term growth. I look at some of the markets that saw kind of a post COVID Boom, that are now seeing a fizzle, right? Those were small, secondary, tertiary markets that are going to be secondary and tertiary markets. But there's new primary markets that have been created just by population migration, relative affordability, and good planning from local and state government. So I think about markets like Tampa, Florida, where are you just where I think, Paul–
Paul Barausky 15:11
–The Cranes, downtown. It's bananas.
Nick Rosenthal 15:13
I think about a Nashville, right? We have markets in Texas, I think about that Tempe Mesa corridor in Arizona. I think about a market like Denver. In our view, these are sustainable growth markets. People want to live in these places. The amenity base is now there. It's a much better cost of living proposition than some of the coastal markets and the jobs have moved there.
Paul Barausky 15:33
Yeah. Yeah. I mean, you look at Nashville, and you look at the financial services jobs that have moved there you look at–isn't Larry Ellison building a huge campus, Clint in East Nashville?
Clint Sorenson 15:44
Yeah, great migration. We've seen this great migration, which has been pretty amazing. And I think Nicky nailed it when he said it was kind of spurred by COVID. But you did kind of get this fast forward out of major traditional city center marketplaces into more of the national or is a city center now, but one of my questions, Nick, is are you seeing still the growth in you mentioned secondary, tertiary markets, very still seeing growth and like suburban marketplaces, and provide and supply and demand growth in those areas where you have? That was really a big COVID move with the work at home and remote work opportunities? Are you still seeing that kind of play out? Because I felt like that was a huge gap in the marketplace.
Nick Rosenthal 16:25
Yeah, I mean, you have a lot of supply coming online, still, because this stuff was started four years ago, but you have less migration, because the jobs are not growing at the same rate. Right? I think one of the things that you are also seeing, which is kind of interesting about the housing market is everything that I've talked about, and intuitively you would think that the rental market does well when it's very hard to get into the single family market. And the data actually shows that when people are buying homes, because there's a lot of household formation that's also good for the rental market. So what you don't see in periods like we're going through right now is sort of the elevated household formation that you saw post COVID. Just because people are worried about the broader economy, there's pressures when consumer debt is growing, delinquencies are growing across almost all major categories. But you're starting to see some layoffs as people realize ‘24 is probably gonna be slower than ‘23. So as a function of that just migration slows in general. But a market like Nashville is the perfect example where you've got north, south, east, west good infrastructure, you're close to Dallas, you're close to Atlanta, a local government and state government that very friendly tracking industries, particularly high tech, trying to get those large companies to invest in large scale projects and being successful at it. So markets like that, you know, in our view, will continue to grow. I think about a market like Boise, where a lot of people move to as a market that is slowing down.
Paul Barausky 18:02
It’s unbelievable, you said it, I was gonna say not to pick on him. But I remembered the journal, you remember, Boise suddenly was–it must have had a good PR agent. It was hot, you're hearing about build and move there. And I'm like, this isn't sustainable. There's just not enough big business that's gonna fight getting into the mountains in the snow and get into major hubs. On the other hand, everybody can use San Francisco. You look at service providers, and you look at people fleeing downtown where it used to be the hottest rental market going, right, and going to Marin County and the East Bay and down south, that's probably a perfect example of Clint’s question, I would assume.
Nick Rosenthal 18:43
I think it's also in a market like that driven by policy, right. And folks saying, you know, there's certain reasons I don't want to live here anymore, which is different than affordability, although San Francisco was unaffordable ann continues to be challenged, but a lot of business has left that market where as we think about where we want to be investing, we want to be investing where job creation is taking place. And our view is the growth markets that are sustainable growth markets, even if they're seeing short term stocks and supply, that supply is really being driven by a credit environment that we're probably not going to see again anytime soon.
Paul Barausky 19:23
Yeah, not so bad. So let's shift gears. Clint, you want to talk about opportunity zones? Right. We have an expert with both we are both most certainly not.
Clint Sorenson 19:34
Sure. Yeah. You know, we always get a lot of questions about opportunity zones, a lot of folks that are looking for tax mitigation strategies, tax management being a big, important piece of wealth management, overall wealth management So a lot of people I work with on the day to day or financial advisors, we get a lot of questions on how it works. A lot of people kind of, I think, probably believe something that's not true believe the myth that maybe the benefits are gone. So walk us through maybe a hypothetical example of how an opportunity zone works, got a hypothetical family, they sell a business or property or whatever, they have this potential tax liability, how would they leverage opportunities to benefit them?
Nick Rosenthal 20:13
The first thing I'll say is, this is a really exciting part of the market for us. It's sort of the intersection of where capital formation and social good collide. So we're excited about it, we've raised about a billion five of equity in this space for our investors. And we've got about three and a half billion dollars of project costs across various vintage investment vehicles all developing multifamily. Here's the way it works, it was ushered into the tax code under the Tax Cuts and Jobs Act, great, bicameral, bipartisan support. It is now subchapter Z of the tax code. And it was written really in a way that focused on investors with capital gains of any kind, short or long term from the sale of anything. So, incredibly versatile in that regard. And the benefit that you get as an opportunity zone fund investor is you can take a capital gain, and you can take part of the capital gain, which is important for liquidity planning, because most folks that have capital gains events want to take some of that capital and have it in a liquid way for lifestyle, but the portion that they put into the opportunity zone fund, they get to defer recognition of the gain on until the end of 2026. So effectively, you're saying, Yeah, I realized a gain today, but I'm going to defer recognizing that game for tax purposes until 12-31-26. It's going to be due in April of 2027. So that's the first benefit, which is deferral. And I think the way to think about that is twofold. One, you can spread tax liability over multiple periods. So you can take some of your medicine today, you can invest part of the gain into the opportunity zone fund and take some of your medicine in tax group 2026. Because the opportunity zone fund investment is going to be just a portion of the portfolio, I think the other big benefit here is now you're buying yourself time to plan for that future liability you know is going to happen in tax period 2026. So today, I've got tax period 2024, 25, and 26 to accumulate losses in my core portfolio, which I can then carry forward so that when I recognize this gain in 2026, I can minimize it. So I think that's really beneficial as well for somebody who's thinking holistically about planning. The biggest benefit of this structure by far is that as long as you hold your interest in that opportunity zone fund for 10 years, when you exit, you get a full fair market value basis step up. So effectively, you eliminate the capital gain on the investment in the opportunity zone fund itself. So you're funding a bucket of capital that's going to grow long term, tax free to which you're actually going to have access to and be able to reposition.
Paul Barausky 22:53
I want to clarify, because you get a lot of misinformation about the seven. Clint you know what I'm talking about seven years, ten years. Has any of that changed? Or is that still, you know, I bet you get these questions all the time.
Nick Rosenthal 23:04
No. It's 10 years from the date of investment once you exit after that point between that point and 2047. So you could continue to grow tax free if you wanted to. But after 10 years of having your interest in the fund, when you exit, you get a full fair market value basis step up election at your discretion. So the benefits here are deferral and tax free growth. But there's a third benefit, which I think is important in this structure, which is that these funds have to do development or substantial redevelopment. So as you think about sort of the cycle here, you're building an asset, you're recapitalizing it, and now you have a core asset that's producing cash flow or in our case portfolio. So now you're generating income, kind of your four, four and a half forward. That income is going to be sheltered by depreciation pass through just like any other real estate investment. The difference here is that when you exit because you get a fair market value basis, step up, there's no recapture of your depreciated bases, so the income is tax free. So as we think about this, Paul, I want to ask you three questions, because I know you have capital gains all the time, I'm sure. So you sell something and you realize, again, it's a large gain. Would you like the idea of being able to defer part of it working with your financial professional over the next several years to minimize it? {Well, of course} Would you like the opportunity to grow more of your capital tax free long term, but have the ability to reposition it down the road? {Another winning idea} And then would you like to generate tax free income from that part of the portfolio?
Paul Barausky 24:32
Absolutely. So that's what I was gonna get at. You're using that tax free income currently also that we all enjoy in most of our real estate programs through AM and depreciation, amortization, so you don't get it recaptured at the end, which coming off of cost basis is something a lot of experienced investors still forget about, you know that 6% or 5%, or 4 or whatever you got for last seven years, the tax man's comin for it. Now, you've normally converted, right, ordinary income to long term gains if you're in a successful program. But now to mitigate that recapture at the end, Clint, that's a powerful statement when planning a portfolio. I guess, Nick, the pitfalls would be who you’re giving your money to and what kind of project is it going into? Because going back to when we were all much younger men, we all knew about failed partnerships for the tax tail, we heard stories about we were too young to be in the business where the tax tail wag the investment dog, so as an expert, you know, what do you see as the things to watch out for? Because you are talking about a longer term vehicle if you're going to actualize all of its benefits.
Nick Rosenthal 25:40
Yeah. So let me make a couple statements. The first is that I think one of the misconceptions is that opportunity zones themselves are places where you would not want to invest capital. And I think the framework for that thought process is that, in order to qualify as an opportunity zone census tract, that census tract had to manifest a couple characteristics: poverty rate greater than 20%, median household income, 80% of that, or lower than the metropolitan areas. And then they could, governors of their respective states could select up to 5% of adjacent census tract to census tracts that manifested those characteristics to drive, effectively investment into the path of these zones. And so the governor's in the summer of 2018 designated the census tracts in their states as opportunity zones using that framework. The last census that had been done prior to the summer of 2018, was 2010, coming out of the financial crisis. So governors that were thoughtful about wanting to get private sector capital formation to their state were, I would say, creative in their thought process in terms of which census tracts they designated. And so we see a lot of census tracts that also have institutional investment that are not getting the benefit of this tax structure to invest in those markets. So that's first and foremost.
Secondarily, the investment strategy has to make sense. I mean, why grow your capital tax free if it's not going to grow? Right. So, you know, this is a tax structure that allows you a lot of financial planning and tax mitigation benefit. But the biggest benefit here is long term tax free growth. So if your money is not going to grow, you shouldn't be thinking about it. So the investment strategy has to make sense. And so to me, this is typical investment, due diligence that you would do on any other investment. Is the manager aligned? Is the structure, the investment vehicle, you know, does it make sense? Does the underlying strategy make sense? Does the manager have experience executing that strategy? You know, are they going to be around long term, are they well capitalized, I mean, these are 10 plus year commitments, so you need to have a manager that's there. So I would tell you sort of the top of the market is dominated by three or four large fund managers, and we're fortunate enough to be one of them. But we do see a lot of things that come our way from prospective investors on projects that they're looking at. And you know, to your earlier point, that there's a potential high risk of failure or just outsize of risk that they're taking, based on sort of the underlying manager, the investment strategy, the lack of diversification in the vehicle, the assumptions that are being made. So in our view, 10 plus years, I want to be the most resilient part of the market, the least cyclical part of the market, that's rental housing, I want to build, as I mentioned, to the middle of the market, which is the widest potential tenant demographic, and I want to be diversified, because different markets are going to behave differently at different times. And by building a diversified portfolio. I'm effectively coming out of the ground, recapitalizing assets having to access the capital markets have crossed sort of a different 24 month period across my portfolio. And that's certainly important when you have capital markets disruptions and you go through economic cycles. So it's all about risk mitigation.
Paul Barausky 29:00
Clint, what else you got on this subject?
Clint Sorenson 29:03
I think that was about the perfect sum up from a fat pitch perspective, right?
Paul Barausky 29:07
That’s probably the most clear–you've done this before. That was about the most clear and concise explanation. I have a question that was asked to me and I said, I don't know. I don't do opportunities zones. Somebody said to me, Look, it's clear that if I fulfill my 10 year obligation, I've got no taxes to worry about. If I'm halfway through the deal, and I'm not excited about where I am, is there an opportunity to do a 1031 exchange from a QOZ to another QOZ.
Nick Rosenthal 29:37
You can’t do an exchange from a QOZ to a QOZ. So let me start there {I was asked that and I said don't know} What you have to do is you have to take your money out of the fund, which restarts your clock to invest in another fund. So when you take your money out of that fund, if you can, which in most cases you can't, { I figured that, too} effectively, you're recognizing that gain at that time, that becomes an inclusion event. So if you're past the end of 2026, and you've paid your tax on your original gain, and you exit the fund, you can exit the fund, but you're not gonna get the benefit of any tax free growth, which is, in theory, the reason why you really did this. So it's not advantageous. The things that we see are broken opportunities on fund investments where, you know, you had somebody that went out, pursued on their own, creating their own opportunities on fund and doing a deal, the deal is not working, they take their money out of the fund, and they come into a larger, more diversified vehicle like ours, and restart the clock.
There's one thing that I want to add, because I think this is something that people don't understand. And this is the retroactive tax planning benefits of this structure. So as an investor, you have 180 days from the date that you realize your gain to make your opportunity zone investment, and you can look back across calendar years. So you've got 180 days, the money is fungible, you don't have to use the gain itself to fund your investment. As I mentioned, you can just invest part of the gain, but it's 180 days if the gains are individual gains. When we see individual gains, it's the rebalancing of security portfolios. It's selling a concentrated position. It's a personal residence or it's an investment piece of real estate it’s held as a disregarded LLC, a single member LLC, which is a disregarded entity. So those are individual gains or sale of collectibles, like Paul, if you were ever to sell your wine collection {not happening}. So examples like that. But where it gets really interesting is if you recognize your gain in the past, which is where large capital gains events happen. So think about, you know, S corps, anything coming on a K1, if you recognize your gain in the past, you can start your 180 days from the date of gain recognition, just like individual gains, from the end of that partnerships tax year, or from the entity's tax filing date, which is usually March 15th of the following year, plus 180 days takes you all the way out to September. So think about this: if I own a piece of a business, as an S corp, that business gets sold. And let's just say that business got sold in early 2023. I could start my 180 day clock on 12-31 of ’23. Take me out to June or I could start my 180 day clock March 15. Take me all the way out to September of the following year. Most tax professionals aren't necessarily aware of that. So, you know, as we work with our clients in the private wealth space, we say look, do you work with M&A attorneys? Do you work with tax professionals, if you make them aware of that, generally, they're serving clients that did have capital gains from the sale of in the sale pass throughs in 2023, and they think there's nothing that they can do to help them, they actually have all the way out September of ‘24 to make an investment in an opportunity zone fund. So just tremendous flexibility in the structure to do some retroactive planning.
Paul Barausky 32:58
I know my co-hosts' wheels are spinning; I’ve been friends for a long time thinking about different applications and conversations that he'll start having. Am I wrong, Clint?
Clint Sorenson 33:09
You are not wrong. You're not wrong, Nick, expect some texts and phone calls.
Paul Barausky 33:15
As we bring it on home here, the title of our podcast is the Fat Pitch, as you know, Nick, and, you know, started with Ted Williams. I don't know how many–your’re a Boston guy–how many sections he said he divided the plate into, but there's a reason you know, he could pick where you want to hit it. And then the other day we were talking about–by the way, just a side note, was it with you, Clint, where you're talking about Maddox never even getting to three balls, of course until he faced Tony Gwynn, who hit everybody. But then Clint told us he lives by the Buffett Rule, which is live like Warren for five days and live like Jimmy on the weekend. So it's my favorite. But in your mind, in that big multifamily sector, what's the fat pitch do you think?
Nick Rosenthal 33:57
Look, I think the fat pitch here is the way to solve the housing issue in terms of affordability is to create more housing. But there are large barriers to do that. So if I as an investor can get things capitalized today, when others cannot, because the credit environment is what it is, I'm going to have cheaper construction costs, better access to prime sites, and I'm going to be delivering at a time two and a half three years from now when others are not. So our view is the opportunity from an investor's perspective is to get deals capitalized now, get deals in the ground now because when you're coming out it will be a very advantageous time because the demand is clearly going to be there. But to create more affordability in the housing market, you need more housing, you know policy has not done a good job of making that happen. It's not political, politically expedient, obviously to greenlight projects in people's backyards. But clearly, if you look at what's happening in markets where you see a lot of deliveries right now, housing’s getting more affordable. So if we can reduce the barriers to creating new supply, then we will be in a situation where housing becomes more affordable. But we've got a long way to go, because the credit markets are not going to be very accommodated very quickly.
Paul Barausky 35:14
Yeah, I don't think that March rate cut’s coming anytime soon, do you, gentlemen?
Clint Sorenson 35:17
I mean, I'll say who knows? Right? It's a 50 per–less than a 50% chance now, according to Fed Funds Futures. I think is it the higher NVIDIA goes, the more hawkish Powell has to be right, so?
Paul Barausky 35:29
He froze there, he’s probably working on bad WiFi out in the country.
Clint Sorenson 35:35
No I got started late.I got great Wi Fi.
Paul Barausky35:38
All right.
Nick Rosenthal 35:39
Let me give you one more thing to think about just quickly.
Paul Barausky 35:42
You give us one more thing, it's a perfect sign off for all of us. I know Nick very well, he's gonna get the last word. And no matter what format we're on.
Nick Rosenthal 35:50
If rates go down in the short term, I think single family home values go up. But building takes two and a half to three years for supply to come online. So the affordability crunch is probably going to get worse in the short term as rates go down.
Paul Barausky 36:07
I don't disagree with that at all. I mean, Clint and I look at three numbers behind inflation. I started working on this perfect storm presentation at peak inflation, summer of ‘22. And we broke it down and looked at CRB. We looked at home prices. And then we looked at labor costs, Non Farm Payroll and average hourly wages, and they all went through the roof and went nuts. You're right. Everything we talked about constraining supply on single family homes, all the other confluence of events. It makes a lot of sense what you're saying, Clint, any final thought today before we wrap up?
Clint Sorenson 36:42
No, Nick, thank you. This has been enlightening. Awesome, fat pitch in multifamily development. I can see it. And I appreciate all your wisdom in the space. Yeah, look forward to having you on in the future.
Paul Barausky 36:54
Let’s see where Bellicheck Belichick lines up, Nick. I know you're still a big Pats fan. But for Clint and Paul and our guest today Nick Rosenthal. Thanks, everybody for tuning in to the Fat Pitch podcast and we'll see you on the next episode.
Nick Rosenthal
Thanks for having me.