OPPORTUNITY ZONE

Our Approach
Endeavor seeks to provide superior risk-adjusted returns to investors through tax-advantaged value-add and opportunistic investments projects throughout the Northeast and Mid-Atlantic regions. Thinking long-term through a value-driven lens while also diversifying asset allocation in a tax-incentivized manner are direct unavoidable outcomes from leveraging the historic Opportunity Zone Program. Critical to success with Opportunity Zone investments is prudent conservative underwriting without regard to the Opportunity Zone tax incentives first confirming that the underlying real estate transaction makes good economic sense and therefore the Opportunity Zone tax incentives simply serve to make the investment returns even more attractive.

Program Overview
To summarize, the newly created federal program is historic given that it creates an exchange vehicle mechanism that allows investors to unlock capital gains from any asset class to achieve significant tax incentives through reinvesting in new investments located in designated Opportunity Zones. Investors may reinvest capital gains tax-deferred from the sale of any existing investments (stocks, bonds, real estate, operating businesses, art, collectables, etc.) into an Opportunity Zone Fund (“OZ Fund”). In addition to deferring upfront capital gains, investors can potentially reduce the deferred capital gains taxes based on the holding period of the new investment. For example, after the new exchange investment is held for 5 years, investors can achieve a 10% reduction on the capital gains taxes from the original investment, and after 7 years, investors can receive a 15% reduction. While deferred taxes from the original investment are reduced, they are still due to the government by 12/31/2026. We believe that while deferring and reducing taxes is meaningful, what is most significant about the program is that after 10-years, investors pay zero federal taxes on the new gains earned through the OZ Fund investment, which is extremely attractive to any investor with a longer-term time horizon.

The OZ Program forces investors to think long-term, diversify, and sell appreciated liquid assets at what we believe to be an ideal time in the present market cycle. Diversifying away from paper assets is a structural view of ours, favoring quality, income-producing hard assets in our portfolio for the long-term for a variety of fundamental, technical and macro reasons. The debate for portfolio asset allocation of traditional assets versus alternatives is not a new one, but we would argue that the game recently has changed dramatically. Diversification to include alternative investments such as real estate has long been a broadly accepted investment principal. Post the OZ legislation diversification makes even greater sense for investors.

The financial math for the OZ Program is undeniable and shocking given that we calculate that the tax-incentives alone result in a $441,281 (44.1%) out performance on a $1 million capital gain invested in an OZ Fund earning the same 7% annualized return as a taxable Standard Portfolio. Returns explode to the upside when factoring in actual real estate projected OZ returns which outperforms the taxed Standard Portfolio earning 7% annually by ~50- 80%. Finally, when considering a tax break-even when quantifying the power of the tax-deferment incentive, it takes approximately 5-years earning 7% annually for the taxable Standard Portfolio to recoup the capital gains taxes paid upfront to grow proceeds back to the initial $1 million in capital gains.

Conclusion
The time is now for investors to get serious and get educated on the Opportunity Zone Program due to the impact that the historic incentives can have on long-term wealth creation. In this day of age, it’s not common practice for the federal government to create a bi-partisan supported plan that is mutually beneficial for the government, investors and local economies who are primed for the injection of investment capital. Timing is everything, and we believe that there is a notable first mover advantage for investors who act early and deploy capital. This is especially true given that the 8,762 OZ tracts are already designated and will only get more competitive as the rush for the most attractive deals ensues. It’s also critical to note that while OZ tax incentives are substantial, we believe that prudent risk managers must respect that the OZ Program will not make a bad deal successful. Our goal is to provide investors with investment opportunities that are fundamentally and technically sound on a standalone basis without tax incentives. As the deals perform, the OZ tax incentives will then provide additional alpha and substantial upside on the back end on an after-tax basis. We applaud the federal government for creating a mechanism to focus and incentivize investors to take a serious look at their portfolios and take gains on assets that are held for tax- basis reasons alone as opposed to fundamental investment views. We are very quick to say that we would choose luck over intelligence and careful planning every day of the week although there are clear benefits to utilizing intelligence and careful planning since luck is rare and fleeting. It is often said that “Luck is where preparation meets opportunity.” We believe this thought is a great one to live by as preparation and hard work do pay off when people put themselves in a more likely position to be lucky. However, we believe that sometimes true blind luck does exist in a world of randomness. When reflecting on the OZ Program and the daily reoccurring conversations that we have with investors drawing the response that, “This sounds too go to be true. What an amazing stroke of luck.” In our view, it does sound too good to be true, but lucky for us, it happens to be a reality.