[ Kamil Homsi ]

Kamil Homsi

Kamil Homsi talks about investing in Opportunity Zones from a global investors perspective.

EPISODE #002

Intro

Exclusive interviews with the world’s most influential market leaders and rising entrepreneurs. This is the Rocco Forino Show on The Business Connection Network. Today, on the Rocco Forino Show:

Kamil Homsi:

All the taxes that you pay, we end up paying less. So is it worth it to sell and to wait 10 years for an exclusion?

Rocco Forino:

So you were talking about self-certification.

Kamil Homsi:

Self-certification concerns me because you’re the investor…let’s say you own over 100 thousand dollars from a capital gain that is qualified. I don’t think we need to go into that because the guideline for what is qualified and what is not has been clarified by the IRS since the first rate relation that came out last October.

Rocco Forino:

Right.

Kamil Homsi:

As we both know, there was so far two guidance releases. There was one last October and one last February, and now we’re waiting for a third one. Hopefully, will clarify most if not all the major issues. There will be more to discuss but we still have time. Now, back to the self-certification. If you are an investor and you own over 100 thousand dollars, and this is only a portion of your wealth and you have a core business or a core job to run and a life and a family, you are not going to call your fund manager every day to make sure that they are in compliance with the 90 percent and then with the second year 70 percent and with the 50 percent of the business income generated inside ______ 00:02:02.

So let’s assume that the fund manager will goof, will for some reason commit a mistake, intentional or unintentional. Because of that, the auditor, when they file this…every 180 days they are supposed to report to the IRS the state of the fund, twice a year. So let’s say the IRS comes back and say you did not comply and because of that you are decertified. Great. You are decertified, does that mean all your investors lose the benefits and they no longer qualify? And if there’s an opportunity for you as a fund manager to be certified again, what has to be done? And in between, what is the penalty? How is it calculated? And how is it submitted, how is it collected? None of that anybody knows anything about.

Rocco Forino:

Do you think that’ll be in the next meeting?

 

Kamil Homsi:

I hope so because there was a proposal for the penalty to be five percent of the total. They said five percent a month until you are back in compliance. The language remains ambiguous. Five percent of the total investment in the fund or five percent of whatever is the shortage that caused the decertification. But I sat at the panel at KPMG earlier in March. There were three senior partners from KPMG, and I don’t have to describe who is KPMG to the world. I mean one of the senior accountants who is the one who runs the offices of Washington DC, he stopped me. He said Kamil, are you in love with the people who wrote articles, I said come on. I’m not a Washington person, but I am on the side of the investors and I like this to be clarified. Me, the investor, I mean I’m innocent. I’m not a bad boy. The bad boy is the fund manager but when the fund manager faults I’m going to faults with him because he is managing my money. So this is one.

Now, I’m going to take you to a separate point, which is when you are a technology company or you are a pharmaceutical research or any other healthcare company that is a startup that is dreaming of becoming a unicorn. Normally, those companies, Rocco, do not add any revenue. The first five years, sometimes in pharmaceutical companies I know from my engagements the first 15 years they do not make money. Pfizer worked over 22 years to reach a product called Viagra. I mean imagine if they did not have any other products that are supporting their revenue generation. They would be out of business.

Now, that particular company that opened in an opportunity zone, they owned property or they just came and leased property and opened an opportunity zoned business, which is the second tier of our discussion. They don’t have revenue. On December 31, 2026, they have to pay the capital gain, correct?

Rocco Forino:

Correct.

Kamil Homsi:

They never generated any money so they hold money on the side from the beginning equal to whatever their obligation will be seven years later or are they eligible to borrow and how is that long considered in their taxes?Is it part of their investment that qualifies at the end of 10 years if they stay for 10 years? Or if they decide after they take the 15 percent step up and they want to sell, how is the leverage considered? This is not clear yet.

Rocco Forino:

Well we know that when you hold the investment for seven years you get the 15 percent step up. Now, you’re saying that when you receive the 15 percent step up it should be coming from the profits from the business, correct? So when the taxes due.

 

 

Kamil Homsi:

because the taxes due at the end of seven years, correct?

Rocco Forino:

Correct.

Kamil Homsi:

Which is December 31, 2026. But you did not generate any money and you already burned your 100 thousand dollars that you came in with, which is fair because a lot of people never…until now it still ambiguous. I mean you know the company RSM Accounting?

Rocco Forino:

I heard of them, yeah.

Kamil Homsi:

Yeah. One of the largest and their powerful in New York. They sponsored that event the day before yesterday at the University Club, the organizer asked me to be a speaker. I didn’t want to because I enjoy more being a part of the audience and being able to grill the speakers. So there was this gentlemen who’s probably in his late-70s and it’s called the Kidd Corporation. They serve multifamily office. I asked him several questions about opportunity zone at the end. During his presentation he was overly confident and with a little bit of arrogance that the audience did not appreciate. But after I asked him several questions consecutive, he said, sir, I haven’t met you before but I think you should take my seat and I should go back to the audience because obviously I am not answering the questions.

So imagine in an earlier conversation on a stage in a different venue the senior director was a very, very nice Italian gentleman from New York. He is the senior partner who heads the group at RSM of the opportunity zone. I will be moderating and he was one of two panelists hand during the conversation he said, Kamil, do me a favor. Your questions are way above my pay grade. Imagine, this is a senior partner. He said, maybe you ask me and you answer for me and people were laughing. I feel it’s a duty. You saw me on stage. I feel I owe the audience and the opportunity zone until now has a lot of ambiguity, and it is not for everybody. I always say it’s not for the real estate people, that’s one. Because the 1031 exchangehas more advantages. You keep differing as many as you want.

The other thing that I point out to people, I tell them, look, today the capital gain is 20 percent, correct?

Rocco Forino:

Correct.

Kamil Homsi:

So let’s assume in 2020, we have an administration who says that the reduction of the corporate tax had reduced the revenues for the IRS by18 percent. That’s what they’re saying now. And the government needs money in order to keep paying all those programs of medical medic care, Social Security, and all the other social programs . Because of that, we’re going to increase the capital gain back to 27 percent. That means all those who came in, in 2019, in 2026 there going to pay 27 percent versus 20 percent. No one is telling this to the people. If it doesn’t happen in 2020, it could happen in 2024.

Rocco Forino:

If we need money. If the government needs money.

Kamil Homsi:

Exactly. So that’s on the table. We aren’t investors. We always think in order to manage risk we put all our options on the table. You can’t say, oh, this will never happen. It will never rain tomorrow. No, as a wealth manager you cannot predict the weather because that’s not your job. Your job is to reduce the risk of having bad weather. So we have here two possible administrations, 2020, 2024. I know President Trump, if he is reelected, he’s not going to do that.  Let’s assume there is another administration that binded through whatever majority, whatever the deal that they propose the capital gain has to increase in order to offset other shortages of revenues that the IRS is not collecting for the national budget. So that means all those investors who invested in the opportunity zone, they will be subject to that regardless of how high does it increase.

Does it increase to 24 percent, 27. It used to be 27 percent during George Bush, I believe. Or before George Bush, during the last Clinton term and then George Bush proposed a reduction. Then they created the 15 and 20, depends on your income, if you are single or you’re married. You remember all that. All that succession of changes but today it’s 20. The attorneys, the IRS, the accountants, and you and I, we ought to tell this to the investors to let them be aware that this could happen. Just like in the footnotes they always write tax bracket is not a guarantee of future results, correct?

Rocco Forino:

Correct.

Kamil Homsi:

We have to tell them that. The last thing I want to say, this play was not created to benefit the wealthy. This play was created to ultimately benefit the residents of the opportunity zone census because when every governor of every state and territory was asked to designate those census, the census were relied upon. In selecting them, everyone relied on the census of 2010. A lot of those areas in the last nine years have changed dramatically and that includes Queens, Brooklyn, Manhattan, Staten Island, the Bronx, and many others all over the country where it’s not fair that you designate them as opportunity zones. But all that set aside, no one discussed the qualifier of the zone.

Rocco, the qualifiers of the zone are three indicators. One is for the income to be less than 80 percent of the area median income, the AMI. That’s one. Second is for the property rate to be above 20 percent. Third is for the unemployment rate to be greater than 1.69 or almost 1.7 percent above the local, the state, and the national unemployment rate. No one discusses this. Now, if they start a conversation by discussing this people will start to understand that this was created to help the people who live there. So for those who say I am Blackstone or I am Brookfield, I am raising four billion dollars. Anthony Scaramucci…three billion dollars and many others. Okay, what are you going to build there? Oh, we’re going to build five star hotels. So what’s going to happen to the people who live there?

Rocco Forino:

They’re going to get pushed out.

Kamil Homsi:

Gentrification is scary. You know, I want to tell you that the total census that were designated, they totaled 12 percent of the landmass of the United States.

Rocco Forino:

And that’s probably not even all of the poverty that exists.

Kamil Homsi:

No. No. And the total population that live into those 87 hundred parcels or census is 31 million people and those numbers are interesting because many, many leaders meaning congressmen, governors, are saying that the total population that live in those designated zones can’t exceed 50 million. So this is not designated for the rich to be richer. This is an opportunity for the rich to sell your Apple stock or to sell whatever unicorns you made a lot of money, including Bitcoin, and eliminate the fear that you have. If I sell how much taxes I will pay. We can give you an opportunity to reduce the taxes or to exclude completely the taxes but in return benefitting those people who live in those zones.

So in the core of it, it is an impact investing but for those who want to come in and people pitch to me in…you know, every day I am pitched deals during the day or at dinners or investment cocktail parties and they show me pictures of what they are proposing to build, apartments that will attract the students, will attract this and that. I said so you’re going to build in this zone to bring people from the outside. How is that going to benefit the people who are inside?

It’s all about creating jobs so really the second tier of the fund, which is the fund business is really the main dynamo that is going to benefit the locals who live in the zone. But if you’re going to build apartments…I raised the question not too long ago to a big shot developer. I said to him, based on the supply chain of today, the cost of the building material, combined by the shortage of labor that the construction business is complaining about especially in the Sun Belt in the United States because of the not permitting the illegals to work and for a lot of pressure also from the unions.

How do you think the cost of whatever you’re going to build going to be? Is it going to be 700 thousand square foot? Is it going to be 300 thousand square foot? Now, whatever the number, can the people who live there that are already earning less than 80 percent of their neighbors and the unemployment within those communities is greater than 1.7 percent. I said 1.7 times so who’s going to live in those apartments?

Rocco Forino:

It’s 700 dollars a square foot. Even 400, even 200 that’s still above most people’s income.

Kamil Homsi:

Absolutely. Absolutely I ask builders if I want to build the standards of what we call in the business we call it Home Depot standard, meaning basics. You know, frame, aluminum siding, no brick siding, the lowest grade of Anderson windows, regular hollow doors, sheet rock, basic insulation, what should I expect to take per square foot. In today’s pricing most of them say, Kamil, between 125 to 135. Two, three years ago it used to be 100. But the real numbers…I mean you call everything basic. What we call the Home Depot basic, 135. How could those people afford it. Right now they hardly can afford the rent.

Rocco Forino:

Correct. I was talking to…did you ever hear of a company called Square Roots?

Kamil Homsi:

Yeah. I see their ads I think.

Rocco Forino:

It’s amazing. It’s down in Brooklyn. So they’re basically training urban farmers. So what they’ll do is they’ll grow like 75 acres of produce and herbs in a shipping container. They do it all vertically. They take this thing that looks like a gutter on your house and then they hang it vertically and they plant vegetables and herbs. Mostly it’s basil and stuff like that right now. They can grow up to 75 acres of produce in a single shipping container. My intention is to bring the impact side of it, is to invest in companies like that that can bring farming to urban communities, give people jobs, and then you can build a business ecosystem around that type of a business.

Kamil Homsi:

Are they using hydroponic irrigation?

Rocco Forino:

Yeah. It looks like…it’s hydroponic but it’s very little water.

Kamil Homsi:

That’s it. Hydroponic is very little water. Let me ask you this. Two things I would recommend. One, look into the potential of contamination because shipping containers are made out of sheet metal. Second is if you can obtain a video of that operation, post it on LinkedIn and get a sense of the reaction from the readers and the viewers, especially on the environmental impact and on possible contamination due to the rusting and corrosion of the sheet metal. That I would worry because I have experience in this. We converted those into housing for people in need of housing in Africa. That was a concern. Sothe IMF at the time, among the engineering company, among the engineering company that worked on creating the feasibility study is to insulate and put plywood on the inside with a special treatment that will not affect the quality of the oxygen breathed by the elderly and the children and also the adults. So it is something for you to look into.

Sometimes, we rush into certain ideas. Creating housing by using shipping containers has been an idea for some time but also it has its setbacks because of the environmental impact. I mean at that point someone will say someone living under the umbrella, you’re giving him a shipping container to live in that has partitions and doors and bathroom and possibility electricity and some of them have skylights. I mean I’ve seen all kind of designs in my travel in my engagements. Still, there’s always an environmentalist who will come across contrarian. So I would suggest if you have access to a video from Square Root and you want to post it on LinkedIn and open the comments for people in general to comment for it and repost it like two, three times in two, three weeks. People will see it when they pop the LinkedIn open. That will help your study and help your writing for authenticity and for direct understanding of it.

Hydroponic is a great technology in the Middle East due to the shortage of water in the desert countries, which is the Gulf states. We import soil and the trees that you see in the streets, they are all irrigated by hydroponic. There is a drip 24/7 and the water is desalinated. But over there money is not an issue.

Rocco Forino:

I’m sure that’s expensive. Isn’t that the most expensive way to…

Kamil Homsi:

Right. But you see, over there money is not an issue to make such projects. Not like here because also the population there is small and the bank account is huge. Over here it’s the other way around. Now we are pushing 320 million and we still want to open for unregulated immigration and I don’t know how they’re going to create jobs while the government is investing into AI and into robotics. I just don’t understand that logic but God bless them. Let them do what thy want. You know, you invest into robotics and into artificial intelligence you must look forward to unemployment that will go…

Rocco Forino:

Through the roof.

Kamil Homsi:

Yes. I don’t want to predict numbers but I would say that it is counterintuitive to do this without a sense of planning, projection, pivot, timeline, preparing people for the transition. The various generations, I mean Generation X, which is today between let’s say 37 and 50, 10 yeas from now to rehabilitate, to retrain its not as simple as training someone who’s 25 years old.

Rocco Forino:

A quick few questions for you. Let’s say you’re a foreign investor, you’re interested in investing opportunity zones. You’re clear that if you own American assets you get the tax step up and if you hold it for the whole term you get the full write off. The question is, for example, if a company in Dubai was able to move a subsidiary or a startup to the United States into an opportunity zone then investors in Dubai who have American assets that are taxable could avoid capital gains by investing in that business would you think that’d be a good idea.

Kamil Homsi:

Yeah. So far, I did not recommend it. I spoke at two events since then and I’m speaking there at an event on the second week of September, a big event. There will be a lot of global investors and many they are already asking if I’m going to be there they’re going to register. Even here in the States I say to people wait. They say what shall we do? We don’t want to miss the boat. I say great. Go put a contract on the census, on the parcel, on the building, on the company and don’t do anything. But it on the economics of it. Buy it and look for the economics of it as if there was no opportunity zone incentive and wait for the final regulation. When everything is clear then you can move on. You want to raise capital now and wait? Okay. But remember, in your agreement with the investors if you do not use the money for a certain period of time the norm today is 12 months. You have to return the money plus pay interest on the money and all the expenses you will have to bear it by yourself.

You have to return them the full amount that they invested with you plus interest. So that’s something to be aware of. If a fund is created by a Dubai company that has investments in the US, it can take investors from anywhere, not only from Dubai. I mean national investors, American investors, anybody. Would I recommend it for an investor from Dubai to do that? Well, you will have to back track to what other regulations give of incentives to the foreign investor. So the foreign investor is not always subject to all the taxes that you pay. We end up paying less. So is it worth it to sell and to wait 10 years for an exclusion? Based on the numbers and on calculation, the annual growth of capital, so far I don’t see it’s feasible. I don’t see it feasible because if I’m going to save five, six, seven percent I mean wait for the 50 percent of 20 percent.

If the capital gain is 20 so I’m going to be paying 18-and-a-half, for example, or 17-and-a-half percent. Is it worth locking all that money for 10 years? Am I going to live for 10 years? Meaning don’t we always, you and I, when someone wants to invest money with us we say how old are you? What’s your objective? How long do you want to stay in the game? How many people are with you? Well, I have 100 thousand dollars from my mom and dad. We’re going to invest this to increase their retirement income. How old is mom and dad? Okay. Based on that you will either create a basket where you will diversify between utility and dividends like blue chip companies or multifamily. So it all depends on the age, the situation, the size of the AUM. So for foreign investors they will be interested in preservation definitely.

So the 10 years should be no problem providing that that business is a business that is desirable and will be high probability of growth. Otherwise, I put my money into a building or a I put my money into a company that is out of the zone that’s existing already that is profitable been in business for more than 15 years. Just like a lot of the A&M that we do. I mean the merger and acquisition that we do. The return is a lot more generous. You probably heard me, during that last conversation I recommended someone asked me, Kamil, what do you invest in? So I said besides our core I like to invest in real estate debt. Real estate debt for a foreign investor is a lucrative investment because of many tax provisions that really minimize the tax obligation to almost, it’s a joke, nothing.

I mean especially there is a program that many people are not aware of. I mean I measure it on stage and I wish someone would come to me as I get off stage to say, Kamil, what was that? Which is the one that’s called portfolio interest? After today, go online, look into the IRS code for the portfolio interest. In a nutshell, the portfolio interest allow a foreign investor, non-bank and non-partner in the deal to finance the deal and not be subject to capital gain on the interest profit that he generated. How many people are aware of this? I sit in the law firm including KPMG and out of 100 accountants there will be two of them that understand it.

Rocco Forino:

That must be deep in the IRS code.

Kamil Homsi:

Exactly, but how would you know that when you are a successful advisor that you do the global advisory, that you engage. When I am on asked on stage, Kamil, how do you structure a global deal? I say you have to exercise a lot of prudence because you have to totally understand the local tax of the host country and the incentives available for you as a foreign investor. At that point, you can create tax efficiency and also a successful engagement and successful exit later on at the end of the term. Otherwise, your advice is really valueless.

If I would invest money for my investors into US and don’t understand the local laws of the US as we’ve been discussing now since the inception of this call and also what is available for the foreign investor. At that point, you make a recommendation, okay, if it’s feasible to invest in Germany but not in England, feasible to invest and France but not in Holland. Every once and awhile, especially when I’m in Europe, there is always someone in the audience who tries to quiz me with this. They know that they’re going to get the right answer because otherwise you I mean anybody can say I work for global investments. I say, oh, you do? Okay, where? We were at Richard Wilson in Miami. Did you attend thing summit?

 

Rocco Forino:

No, I didn’t have a chance to.

Kamil Homsi:

Next time you should.

Rocco Forino:

I think I’m definitely going to the one in December. Is that when it usually is?

Kamil Homsi:

Good, because that is his best event. In this past December, in two-days event we had 18 panels. I moderated two and I sat as a panelist on two. So in one of the conversations when I was a panelist I said something I repeat sometimes every once and a while. Like you saw on the video when I say I close deals on every continent, and I do it for people to challenge me, honestly. So one of the audience said, in a heavy Australian accent, have you closed a deal in Australia? I looked at him and I said, yes. He said, well, where? So when I started talking about the deal the guy stood up and he came closer to the stage. I started smiling. I said do you want to come up on stage? He said, no, this is amazing. He said, I read about it but the way…you are in it. He said, I was trying to quiz you to put you on the spot. I said I don’t mind. I don’t mind.

We structured a deal through the United Arab Emirates as an equity investor to build seven cities for the indigenous people in Northwest Australia. It is the region that now produce the iron ore that China buys, 100 percent of it, and also oil and gas. But those people, they still live like you see them in National Geographic. I’ve seen them. So the government decided to build cities for them. For those who travel from the Southeast where Melbourne, Sydney, Canberra, they travel there to work and then they come back on the weekend, which is creating a lot of negative social impact on their society. A lot of divorces, a lot of high school dropouts because daddy is not home from Monday to Friday or mom.

Rocco Forino:

So they travel quite far.

Kamil Homsi:

Exactly. Or in many cases mom and dad. If mom is a pharmacist and dad is an engineer and they leave on Monday, they come back on Friday. They kids are on their own at home. You know what that can create.

Rocco Forino:

Right.

Kamil Homsi:

So the government invested into infrastructure to improve the infrastructure in seven existing cities but when you talk Australia, Australia today is 27 million people so when you say cities, I mean the cities for me look like Dodge City of the time of Clint Eastwood and John Wayne and maybe like 300 homes, 700 houses. This is what they call a city. So the government provided the major investment into the infrastructure. Not only sewage, electricity, internet, gas, also airports. The major ports are there in the west. That’s where the iron ore and oil are exported. But they needed to improve the airports or brand new airports, and they also needed housing. This guy was fascinated. He said so you are the equity investor. I said, yes. So to invest in Australia it took several trips and it took a lot of reading and a lot of advice that we paid for to sit down with the best accountants, with the best lawyers before I would make a recommendation to the investment committee to say write the check for this investment. It is feasible. The term and the internal rate of return at exit is favorable for all of us.

You can’t just say, you know what, I’m going to do business with the guy in Denmark. Why? You know when someone, Rocco, doesn’t have a full grasp of the subject will become confused to an extent. Look for you, when you reached out to me it was there are some ambiguities that you are not seeing solved. They need to be solved otherwise I will say to investors don’t do it. I see many experts on stage talking about they call themselves experts but at the end of the day they’re all self-serving themselves when they say we already established an opportunity zone fund. Rocco, you and I tomorrow morning can go online and establish an LLC. The box that says what is going to be the day in, day out practice of your LLC we’re going to tell the government that we are going to be investing into an opportunity zone. Okay. So now we are legal and we spent 30 or 50 dollar fees for it.

Then we can go on stage and say we like to raise 50 million dollars for it so that makes you some authority. But then when I take them on the side and engage them in conversation they try to cop out or just look at the watch or the phone and say, Kamil, I’m sorry. I say, you’re sorry. Go. Go. If I see you on stage and I am there it’s not going to be a good experience.

Rocco Forino:

You’re going to get grilled.

Kamil Homsi:

More than grilled because it’s not fair. It’s not fair. I think they are misleading people because they are making it sound as it is the rich man play and this is not a rich an play.

Rocco Forino:

Do you think people with less than 100 thousand dollars should invest or people who might invest in, say, Fund Rise where it’s like…

Kamil Homsi:

If that person is my client, Rocco, I would tell them to invest with reputable crowd funding funds that invest in commercial real estate in gateway cities, all of the above. There are few reputable that invest into commercial real estate in New York City, in Chicago, in Boston, in Washington DC, in Atlanta and others. If they invest with them it is a safer play than to invest into the opportunities in what’s the 15 percent step up. It’s not a big deal.

Rocco Forino:

Exactly.

Kamil Homsi:

You’ve got 100 thousand dollars, you’re supposed to make 20 thousand dollars. So after seven years you pay 17-and-a-half.

Rocco Forino:

Exactly. And you have to wait that long, too.

Kamil Homsi:

Let’s go back with one example. You said you’re going to go in December to Miami to attend the summit. If you give