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1 Real Estate Investing in American Opportunity Zones: A Once-in-a-Lifetime Opportunity to Invest in High-Return Real Estate, Minimize Taxes, and Grow Wealth Presented by Belpointe REIT, Inc. Chetan Jindal, Head of Alternative Investments February 2019 ABSTRACT In this paper, we discuss the U.S. real estate market as a complement to stocks and bonds, particularly in the context of Opportunity Zone investing as legislated through the Tax Cuts and Jobs Act of 2017 (“TCJA”). We believe that U.S. real estate should be a core part of every investment portfolio, particularly at this juncture of the investment cycle for stocks and bonds. We list specific sections of the U.S. real estate market that we believe constitute attractive investment opportunities today. We then go on to describe the Opportunity Zone provisions of the TCJA and why both individual and institutional investors should have Opportunity Zone investments in their portfolios. Finally, we highlight the criticality of choosing the right investment structure for investing in Opportunity Zones, concluding that an SEC-registered Real Estate Investment Trust (“REIT”) structure is optimal. In closing, we introduce the Belpointe REIT, Inc., currently America’s first and only Opportunity Zone REIT, and describe how it can play a central role in investment portfolios. INVESTMENT ASSET CLASSES: STOCKS, BONDS, AND BEYOND Individual and Institutional investors have a wide variety of investment choices available to them. A traditional combination of stocks and bonds has long been the central pillar of most portfolios, and continues to account for the vast majority of client assets today. However, given elevated valuation levels as we discuss in the appendix section at the end of this paper, we believe that the expected return on both stocks and bonds is likely to be muted for the next several years. Therefore, investors need assets that can deliver higher and more predictable returns than stocks and bonds. In this context, real estate has historically been the perfect “alternative” asset class for U.S. investors. Over multi-decade time periods, real estate has historically delivered stronger returns than U.S. equities. In addition, real estate has exhibited lower volatility than U.S. equities. We believe that U.S. real estate should inherently be a core part of every individual and institutional investment portfolio.

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Page 1: Real Estate Investing in American Opportunity Zones: A ... · Real Estate Investing in American Opportunity Zones: A Once-in-a-Lifetime Opportunity to Invest in High-Return Real Estate,

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Real Estate Investing in American Opportunity Zones:

A Once-in-a-Lifetime Opportunity to Invest in High-Return Real Estate, Minimize Taxes, and Grow Wealth

Presented by Belpointe REIT, Inc.

Chetan Jindal, Head of Alternative Investments

February 2019

ABSTRACT

In this paper, we discuss the U.S. real estate market as a complement to stocks and bonds, particularly

in the context of Opportunity Zone investing as legislated through the Tax Cuts and Jobs Act of 2017

(“TCJA”).

We believe that U.S. real estate should be a core part of every investment portfolio, particularly at this

juncture of the investment cycle for stocks and bonds. We list specific sections of the U.S. real estate

market that we believe constitute attractive investment opportunities today.

We then go on to describe the Opportunity Zone provisions of the TCJA and why both individual and

institutional investors should have Opportunity Zone investments in their portfolios.

Finally, we highlight the criticality of choosing the right investment structure for investing in

Opportunity Zones, concluding that an SEC-registered Real Estate Investment Trust (“REIT”) structure

is optimal.

In closing, we introduce the Belpointe REIT, Inc., currently America’s first and only Opportunity Zone

REIT, and describe how it can play a central role in investment portfolios.

INVESTMENT ASSET CLASSES: STOCKS, BONDS, AND BEYOND

Individual and Institutional investors have a wide variety of investment choices available to them. A

traditional combination of stocks and bonds has long been the central pillar of most portfolios, and

continues to account for the vast majority of client assets today.

However, given elevated valuation levels as we discuss in the appendix section at the end of this paper,

we believe that the expected return on both stocks and bonds is likely to be muted for the next

several years. Therefore, investors need assets that can deliver higher and more predictable returns

than stocks and bonds.

In this context, real estate has historically been the perfect “alternative” asset class for U.S. investors.

Over multi-decade time periods, real estate has historically delivered stronger returns than U.S. equities.

In addition, real estate has exhibited lower volatility than U.S. equities. We believe that U.S. real estate

should inherently be a core part of every individual and institutional investment portfolio.

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AMERICAN REAL ESTATE AS AN ASSET CLASS TODAY

The historical evidence is in favor of real estate as a complement to stocks and bonds. However, what

is the state of U.S. real estate as an asset class today, and how does it compare to the mediocre outlook

for stocks and bonds? We examine this issue below.

U.S. real estate in aggregate today, like stocks and bonds, is also at elevated valuation levels. Vacancy

rates are at close to decade lows, and cap rates, which have been on a steady downward trajectory

since 2009, are also close to decade lows1.

In other words, property NOI (“net operating income”) and property values are both at historically

high levels2.

1 Source: National Council of Real Estate Investment Fiduciaries (“NCREIF”). 2 Source: NCREIF.

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Therefore, while real estate should certainly be a core part of investment portfolios, as we argue above,

we believe that generic broad-based exposure to U.S. real estate is not ideal at this time. Instead,

investors should seek targeted value-added exposure to select real estate assets, which have the

highest potential for investment returns.

WHERE TO INVEST IN U.S. REAL ESTATE

We believe that disaggregating the U.S. real estate market by geography and property-type reveals

specific pockets of opportunity for stronger investment returns.

Firstly, we believe that multifamily is the most attractive segment of the real estate market. As seen in

the chart above on vacancy rates, multifamily as represented by “apartments” is the most economically

resilient segment of the market. In fact, a case can be made that apartment vacancies are counter-

cyclical, since families are less able to purchase a home during a recession, and therefore they choose to

rent instead.

Secondly, we believe that some of the greatest opportunity today lies in areas of the United States

that are still underdeveloped. Cap rates in the major metros are already at expensive levels. For

instance, the New York metro area currently has a cap rate below 4%3.

3 Source: NCREIF.

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By contrast, there are other parts of the United States with very favorable economic and demographic

characteristics (such as wage growth and population growth), where real estate can still be purchased or

developed at cap rates north of 6%4. We believe that such areas should be the prime targets for

investment in the current environment.

SWEETENING THE DEAL WITH OPPORTUNITY ZONES

Quite serendipitously, while underdeveloped parts of the United States are attractive investment

targets to begin with, the Trump administration has further sweetened the deal for real estate investors

through the legislation of the Tax Cuts and Jobs Act of 2017 (“TCJA”).

Through the TCJA, investors who invest in underdeveloped parts of the country, so called Opportunity

Zones (“OZ”), can avail themselves of several tax advantages that significantly improve the after-tax

returns on their investments. These tax incentives have been specifically designed to direct the flow of

capital into areas of the United States that need it the most.

What are Opportunity Zones?

In collaboration with State and Local governments, the U.S. Treasury has certified 8,761 communities in

all 50 states, the District of Columbia, and five U.S. territories as Opportunity Zones. Quoting the

Treasury, “nearly 35 million Americans live in areas designated as Opportunity Zones. These

communities present both the need for investment and significant investment opportunities.5”

Such communities display economic characteristics that identify them as “distressed”. Again quoting

from the Treasury, “based on data from the 2011-2015 American Community Survey, the designated

regions had an average poverty rate of over 32 percent, compared with the 17 percent national average.

4 Source: Belpointe REIT. 5 Source: U.S. Department of the Treasury. https://home.treasury.gov/news/press-releases/sm530

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The median family income of the designated tracts were on average 37 percent below the area or state

median, and had an unemployment rate of nearly 1.6 times higher than the national average.”

What are the tax benefits of investing in Opportunity Zones?

Under Section 1400Z of the Tax Cuts and Jobs Act of 2017, investors who elect to reinvest capital gains

into Opportunity Zones will receive multiple capital gains tax benefits.

1. Deferral of Capital Gains Taxes: Capital gains (short-term or long-term) from the sale of any

asset that are reinvested in Opportunity Zones within 180 days following the disposition of that

asset, shall be excluded from the investor’s gross income until the earlier of: December 31, 2026

or the date the investor sells his investment.

2. Reduction of Capital Gains Taxes: Investors in Opportunity Zones will receive a 10% step-up in

the basis of the capital gains that are reinvested in Opportunity Zones, if the investment is held

for 5 years, and an additional 5% step-up in basis if the investment is held for 7 years, thereby

excluding up to 15% of the original capital gains from taxation.

3. Elimination of Capital Gains Taxes for Investments in Opportunity Zones: Opportunity Zone

investors are exempt from federal taxation on capital gains derived from the appreciation of

their investment, if the investment is held for at least 10 years.

4. Possible State Income Tax Benefits under Federal Opportunity Zone Program: Dependent on

the State where the investor is domiciled and if that State conforms with Federal Opportunity

Zone regulations, that investor may be entitled to receive the same Federal Opportunity Zone

capital gains tax benefits (deferral, reduction, and elimination of capital gains taxes) on a State

income tax level.

How to invest in Opportunity Zones?

To take advantage of the tax benefits of investing in Opportunity Zones, investors must reinvest their

capital gains from a prior investment into a Qualified Opportunity Fund, within 180 days of the

recognized sale of that prior investment.

Capital gains in a wide array of asset classes, including but without limitation: stocks, bonds,

commodities, cryptocurrencies, artwork, automobiles, jewelry, and real estate, are all eligible to receive

tax benefits through reinvestment of capital gains into Qualified Opportunity Funds.

Only capital gains are eligible to receive the Opportunity Zone benefits, but the eligible capital gains can

be either short-term or long-term capital gains.

The principal/basis from a prior investment can also be invested into Qualified Opportunity Funds, but

the non-capital gains portion will not receive the tax benefits associated with Opportunity Zones.

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WHY INDIVIDUAL AND INSTITUTIONAL CLIENTS NEED OZ INVESTMENTS IN THEIR PORTFOLIOS

We believe that every investor, whether individual or institutional, needs Opportunity Zone investments

in their portfolio. If an investor is currently sitting on capital gains in his portfolio, he needs to consider

investing in a Qualified Opportunity Fund.

We would suggest that for an investor with capital gains, investing in an Opportunity Fund is almost akin

to getting a “free option”. We suggest this for the following reasons:

An investor with capital gains, for instance capital gains in the stock of a listed company such as

Apple, could sell that stock and then immediately rebuy that same stock. In this way, the

investor’s tax basis in the stock would increase to current price levels. The capital gains that the

investor thus records can then be reinvested into an Opportunity Zone Fund, and the tax on

these capital gains can be deferred until end-2026. In this way, the investor steps-up his stock

position to market value, while deferring taxes on associated capital gains for 8 years.

Not only can the capital gains taxes be deferred, but they can also be reduced. As mentioned

above, the investor can realize up to a 15% reduction in the taxes due if he reinvests the

capital gains into an Opportunity Zone Fund and holds for 7 years.

In addition, the appreciation that the investor realizes in the Opportunity Zone Fund is tax-

free, if the investor holds the fund for at least 10 years.

Lastly, if the investor invests in an Opportunity Fund today and then subsequently wishes to

withdraw his investment, he may be able to do so. However, this is generally not possible with

most structures. Only certain fund structures allow for this.

In this way, an investor with capital gains has the option to defer and reduce taxes on such capital gains

by reinvesting them into an Opportunity Fund. And even subsequent to his investment in an

Opportunity Fund, he might still have the option to withdraw his investment (possible only with certain

funds) – thus maintaining access to his capital, while gaining the option to reduce taxes.

BRINGING IT ALL TOGETHER: THE RIGHT INVESTMENT STRUCTURE

For an investor to maximize his benefits from investing in Opportunity Zones, he needs the right

investment manager and the right investment structure. As we discuss above, an investment in

Opportunity Zones offers strong capital appreciation potential, as well as very substantial tax

advantages.

Most Qualified Opportunity Funds set up for the purpose of Opportunity Zone investing are structured

as private equity funds that are not registered with the U.S. SEC (“Securities and Exchange Commission”).

Typical real estate private equity funds have high fees, low transparency, and no liquidity before the

maturation of the fund which usually runs for 15 years. Therefore, we believe that a private equity

structure is far from ideal for Opportunity Zone investors.

We suggest that the optimal structure for investing in Opportunity Zones is a SEC-registered REIT

(“Real Estate Investment Trust”) structure.

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A REIT structure offers several advantages versus traditional private equity funds:

Simplified tax reporting (1099-DIV).

Pass-through income, avoiding double taxation for investors.

Low minimums for investor access.

Quarterly dividends.

Annual distributions of at least 90% of taxable income.

In addition, an SEC-registered REIT structure further enhances the above stated REIT benefits, as

follows:

Provides shareholders with better reporting, transparency, and oversight.

Public REITs have the ability to list their shares on a stock exchange (e.g. NYSE) when ready, in

order to provide shareholders with ultimate liquidity.

After listing on an exchange, shareholders can control their exit timing and amount.

Allows access to Non-Accredited investors (with some limitations).

Therefore, we strongly recommend an SEC-registered REIT structure as the de facto investment

vehicle for Opportunity Zone investors.

INTRODUCING: BELPOINTE REIT, INC.

We at Belpointe REIT have been working for the past twelve months to develop and register what we

believe is the absolute best structure for both individual and institutional investors in Opportunity

Zones.

The Belpointe REIT is an SEC-registered REIT with all the advantages we describe in the section above.

In fact, Belpointe REIT is the only SEC-registered REIT in the United States today.

In addition to the ideal fund structure, Belpointe REIT also has some of the best liquidity provisions of

any Opportunity Fund available today.

Further, in order to disrupt the U.S. real estate industry, Belpointe is charging among the lowest fees in

the industry.

Lastly, Belpointe REIT is backed by the in-house real estate development and construction expertise of

the Belpointe Real Estate Group based in Greenwich, Connecticut.

We summarize these advantages below:

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IN CONCLUSION: INCORPORATING THE BELPOINTE REIT INTO CLIENT PORTFOLIOS

In closing, we believe that real estate Opportunity Zone investing should be a fundamental part of every

client portfolio today. And that the Belpointe REIT is the best structure to put capital to work in

Opportunity Zones.

From the perspective of Financial Advisors, Chartered Accountants, and Tax Attorneys, who are advising

their clients on Opportunity Zone investing, we offer the Belpointe REIT as the ideal vehicle for the

following reasons:

Belpointe REIT is an SEC-registered REIT structure, which maximizes the tax benefits available

to both individual and institutional investors.

Belpointe REIT is open to Non-Accredited investors and can take investments as low as $10,000

(assuming Qualified Investor status as defined in the Belpointe REIT offering document).

Belpointe REIT has some of the best liquidity provisions in the industry, and investors can in

fact liquidate their investment in the REIT at their discretion (subject to limitations, as per the

Belpointe REIT offering document).

Belpointe REIT offers high quality, actively managed, and diversified real estate exposure,

through the in-house development and construction expertise of the Belpointe Real Estate

Group based in Greenwich, Connecticut.

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In these ways, we suggest that the Belpointe REIT is a unique investment product, targeting a once-in-

a-lifetime real estate investment opportunity. We believe that Opportunity Zone investments can

potentially generate strong investment returns, in a highly tax advantaged way.

Therefore, we view the Belpointe REIT as a powerful tool available to Financial Advisors, Chartered

Accountants, and other investment fiduciaries, to attract new clients to their practice and to help these

clients achieve their retirement goals – while at the same time contributing to the economic

revitalization of some of America’s most distressed communities.

Chetan Jindal

Head of Alternative Investments

Belpointe REIT, Inc.

Email: [email protected]

Phone: (203) 622-6000

Address: 125 Greenwich Avenue, 3rd Floor, Greenwich, CT 06830

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APPENDIX

IN DEPTH – INVESTMENT ASSET CLASSES: STOCKS, BONDS, AND BEYOND

Individual and Institutional investors have a wide variety of investment choices available to them. A

traditional combination of stocks and bonds has long been the central pillar of most portfolios, and

continues to account for the vast majority of client assets today.

However, bonds, both corporate and treasuries, are at a difficult juncture today.

The Federal Funds rate bottomed at just under 0.10% post the Great Financial Crisis and has now

increased back up to 2.5%. This seems like a sharp rise, but in historical context, the Fed Funds rate

remains low, since we have seen rates as high as 20% under Fed Chair Paul Volcker in the 1980s.

Under a data-dependent Federal Reserve, the trajectory of treasury and corporate yields going forward

will be a function of inflation and macroeconomic health. However, barring the reoccurrence of a major

financial crisis such as the one in 2009, it is unlikely that the Fed will lower rates significantly from

current levels. As a result, bond prices are unlikely to rise significantly. And of course, as noted above,

prevailing bond yields are underwhelming (2.5% Fed Funds rate, and U.S. Corporate BBB yields at 4.6%6).

Therefore, the total return for bonds is likely be in the mid-single digits from here on, at best.

Equities face a similar problem today, where the expected total return for stocks is likely to be muted

for the next several years.

The Shiller CAPE (cyclically adjusted P/E ratio), which is often used as a proxy for U.S. stock market

valuation levels, remains close to historic highs today7. While the ratio has indeed declined with the

stock market rout of 2H 2018, the ratio remains elevated and has only been exceeded in the technology

boom of 2000 and in the run-up to the Great Depression in 1929.

6 Source: Federal Reserve Bank of St. Louis. https://fred.stlouisfed.org/series/BAMLC0A4CBBBEY 7 Source: Dr. Robert Shiller, Yale University. http://www.econ.yale.edu/~shiller/data.htm

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In such an environment where both stocks and bonds are expected to demonstrate underwhelming

returns going forward, there is a great need for assets that can deliver higher and more predictable

performance.

It is in this context that real estate has historically been the perfect “alternative” asset class for U.S.

investors. Over multi-decade time periods, real estate has historically delivered stronger returns than

U.S. equities. In addition, real estate has exhibited lower volatility than U.S. equities.

Real estate has several other positive characteristics that recommend it for client portfolios:

Strong cash yield: Real estate assets in the United States typically yield 4.5% on a cash basis8.

This is significantly higher than the S&P 500’s current dividend yield of about 2.2%9. Therefore,

real estate provides robust recurring income for investors.

Inflation hedge: Real estate is an inflation-hedged asset class, since rents usually rise with

inflation. This is not true of bonds, where coupon payments are usually not inflation adjusted.

Economic resiliency: Real estate is generally more economically resilient than the economy

overall. This is particularly true of certain segments of the real estate market such as multifamily

apartments, which continue to see high occupancy levels during recessions10.

Hard-asset backing: Real estate investments are backed by tangible property, whereas stocks

and bonds are merely contractual claims on the cash flows of businesses.

Therefore, we believe that U.S. real estate should inherently be a core part of individual and

institutional investment portfolios.

8 Source: NCREIF. Reflects the trailing four-quarter income return of the NCREIF Property Index. 9 Source: S&P Dow Jones Indices. 10 Source: NCREIF.

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