The Opportunity Zone Expo Podcast

Jonathan Talansky - This "Two-Handed Lawyer” Who Gets the Joke

August 06, 2019 Jonathan Talansky Season 2 Episode 16
The Opportunity Zone Expo Podcast
Jonathan Talansky - This "Two-Handed Lawyer” Who Gets the Joke
Show Notes Transcript

You wouldn't expect to hear a discussion of Immanuel Kant and his Categorical Imperative from a tax attorney. But Jon Talansky is no typical tax attorney. His broad education and deep experience reveal a humanity, expertise and wisdom that's rare in the cut-and-dried world of tax law, especially the Opportunity Zone. Jon Talansky of King & Spalding is my guest on this episode of The OZExpo Podcast.

Host: Jack Heald
Guest: Jon Talansky

Jon Talansky:

Taxpayers , real estate developers, entrepreneurs, investors, advisors , et Cetera , are starting to get more comfortable with the rules. And with that perhaps starting to get a little bit more ambitious with their investment in planning. Do I want to go into this kind of career, that kind of career. And I thought economics and philosophy was a it's an interesting combination to maybe expose me to the idea that really ran the gamut from one end of the spectrum to the other.

Jack Heald:

Welcome back everyone. It's the OZExpo podcast. I'm your host Jack Heald . And joining me today is Jon Talansky who is a partner at the law firm of King and Spalding. John , welcome to the OZExpo podcast.

Jon Talansky:

Thank you Jack. Good to be here.

Jack Heald:

So real quickly, when I did my research I discovered that King and Spalding is a pretty good size organization. I've never heard of it. Tell us a little bit about King and Spalding and your role there.

Jon Talansky:

Sure. King and Spalding is a large corporate and litigation focused law firm. We're over a hundred years old. Our first office was open , then Atlanta, Georgia, ah , before the turn of the 20th century. In fact with some, originally some Atlanta based southeast based clients such as Coca-Cola . and I guess for the better part of the last century and a half or so , we've grown too something in the ballpark of 1100 lawyers. We have offices and many countries throughout the United States on both coasts, Chicago, Houston, DC. and I sit in the New York office. I'm a partner in our tax group. One of the things I focus on is real estate. And we have over 200 lawyers in our firm focused on the real estate industry. Okay . Well all parts of the life cycle of the real estate industry, private equity, fundraising, dirt transactions, 10 31 transactions, a real estate finance. And now I'd say since the advent of tax reform, we've developed a sub-specialty and opportunity zones, which really, really , really coalesces a lot of the expertise areas that we, that were really good with. So that's, that's a bit about King and Spalding.

Jack Heald:

How long have you been with the company?

Jon Talansky:

I've been with the company almost four years now.

Jack Heald:

Okay. And it looks like you got your JD at Harvard and a BA at Columbia in economics and philosophy. I'm going to circle around later on and ask you some questions about that, because those are two things that I'm interested in. But we're not going to do that right now. So let's, let's talk about opportunities zone s work specifically as a lawyer. You're going to be the guy who clients ask about where are the hurdles, where are the speed bumps, where are the tar pits that we have to avoid. What's some of the tough questions that have arisen with this new legislation?

Jon Talansky:

I think that's , that's a perfect place to start. I think as from my vantage point speaking tool and working with a lot of clients and working over upwards of, yeah , 25, 30 transactions all over the u s right now, I think tax payers , real estate developers, entrepreneurs, investors, advisors , et Cetera , are starting to get more comfortable with the rules. And with that perhaps starting to get a little bit more ambitious with their investment planning. And I think as we progress in this first generation of opportunities on deals, I think both from a real estate perspective and an operating business perspective. People are starting to find challenges in some of these interpretive questions that have arisen under the rule.

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So I'll pick one from each of the broad categories. I like to think of the Opportunity Zone marketplace as first real estate development, which is obviously I think too many , the first area that really hit the ground running after the Opportunity Zone rules were promulgated. The fixed location nature of real estate and the fact that the rules seem to lend themselves quite well towards real estate development projects, I think is largely a explains why real estate was the first industry to really pick up on these rules. And in that. In that sense, I think early on we saw a lot of deals that were more finite, more limited people try to give an opportunities on overlay to projects that they were working on already or deals that they had circled.

Jon Talansky:

But as we've moved forward, I think a lot of the real estate investors that I speak to, as I said, are getting a little bit more ambitious and are trying to raise capital and develop longer term, multi-phase master plan projects around the opportunities on roles . And I think one of the challenges that they're finding is that it's really not clear when you look at the rules and all of their, all of their nuances, whether these rules really fit perfectly with a longterm - and when I say longterm , I'm talking about let's say a multi-phase project that might have up to a year or two of entitlement work to be done, plans to be drawn up. And then a long build period that might take you out let's say even as much as four or five years from the time of the initial equity raise for reasons that might be deliberate and might just be accidental. The rules do contemplate a degree of business activity and degree of you know, quote unquote unit delivery by the end of a let's say two and a half year runway, this 30 or 31 month period and sweet spot that a lot of people think of or , or are aware of when they, when they look at the rules. And I think the question is what about projects that might have a little bit of a longer lifespan ? Raises, I think policy questions and then just legal questions. I think that's on the real estate side. One of the challenges that people are focused on on the, what I'd call the operating business side, more operating business focused entrepreneurs who clearly are also in the the sweet spot of these rules and certainly were what the policy makers were thinking of when they thought about moving jobs to these low income areas. I'm in need of investment. I think the struggle that they're having is in the new economy. There's so many businesses that are nimble and that are not asset heavy but that rely on intellectual property and software and other types of innovative business models. And it's not perfectly clear when you read the rules that they're perfectly suited or at least so easily applied when it comes to those types of businesses. So as I get phone calls from the real estate developers who are thinking large scale big projects and the entrepreneurs who might have a software idea or might have a patent that they're looking to license, I think that's where the biggest challenges are coming now. under these rules.

Jack Heald:

Yeah . Let's go back to the real estate development. These long term projects with a three year build out. How are you - and I'm not asking you to give away free legal advice here - but how are you addressing that with your clients? What's your opinion and perspective on this?

Jon Talansky:

Well, I start almost all discussions with, with my clients with okay. No prefatory comments to make sure that the client, this is a unique area. Normally I don't care that my clients understand or don't understand the policy behind the particular rule or tax structure that we're pursuing. This area is somewhat unique in that I think clients ought to understand that, that the purpose behind these rules, okay , is what it is. And the , the purpose itself is somewhat, it's somewhat elusive. It's not perfectly clear. It's not really articulated anywhere in any sort of discreet , concise manner. However, I think it's important that clients and taxpayers understand that ultimately if a project is going to be audited and it's going to be looked at by the tax authorities, by the IRS, the one of the policies clearly animating these roles is to bring commercial activity and for development and move jobs into these neighborhoods. So I think it's important that clients understand that because there's an anti abuse rule in the reg. So even if you can check every box and run every trap and meet all the requirements that are there in black and white and the rule, I think it's important for people to understand that as long as you are working with all deliberate speed towards some goal that can ultimately demonstrate moving economic activity into a neighborhood, it might be in a better place. In terms of the specific questions, what I'm telling clients is that it's important to consider tweaking a business plan, perhaps introducing a certain commercial elements to a development plan. No building access roads, pre-leasing activities things like that that you might not otherwise do if there were no tax restrictions. But given that it's important to demonstrate at some time within let's say the two to three year period, some degree of economic activity to try to see if those types of revenue generating activities or commercial activities can actually be introduced into the process at some point before the end, before it gets too late. That's , that's really how I'm handling it. And then obviously every project presents its own facts and challenges. So it's really a case by case basis.

Jack Heald:

Yeah, that makes sense. What about the problem with intellectual property, I know that the April Regs, the second round of regulations that came out in April helped in that regard a little bit, but I'd appreciate it if you'd talk a little bit more about how that second set of regulations clarified these operating businesses that might not necessarily be like a manufacturing business. It's got equipment and capital equipment and, and lots of people sitting in a particular location all the time.

Jon Talansky:

Sure. I think in many respects, the April regulations were extremely helpful and obviously embodied a general the general approach of liberalizing the rules. And making it easier as opposed to harder for businesses to take advantage and potentially move their , their core people on their core assets into the zones. So for example, the gross income requirement, which we don't have to go through at chapter and verse, but basically the gross income requirement requires 50% of the income of the business to be generated from, from, from a trade or business and active conduct of that business. And in the opportunities on in that area, the IRS and the regulations promulgated three very helpful safe harbors that I think have been, have been well publicized and written about and discussed in many, in many forum . and there's also after the three safe harbors, there's a general facts and circumstances test. So I think if you apply the safe harbor as the most businesses, a lot of business owners and entrepreneurs and venture capital investors can get comfortable with respect to the intellectual property.

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There's a separate requirement that the government in one respect helped us on, but in another respect stayed silent on. And that is that the, under the statute, the requirement is that a substantial portion of the intellectual of the intangible property of the business, which in many cases will take the form of IP and other intangible assets be used in the business. What the April regulations did was defined substantial portion for those purposes as 40%, which you might think is a generous kind of low bar to meet. The problem is that locating the, the, the, the, the locus really of intellectual property or other intangible assets itself is an elusive concept. We have other areas in the tax law where we have specific rules that tell us how to determine where the location of intangible property is or more precisely where the source of income is that that is generated by the intellectual property.

Jon Talansky:

In the OpZone space, there's no specific rules in that regard. So even though we've had, we have this helpful standard that says that 40% of your intangible assets have to be used in the business and the zone. Of course when you apply that to a lot of the modern day businesses, which might have a good chunk of intangible assets such as patents, licenses, goodwill other IP. It can be difficult to , to, to advise clients with absolute certainty that they'll be able to pay to meet the test. So I think it would be nice if , if future guidance or when the regs are finalized or in some other form, we have a little bit more meat on the bone in terms of how taxpayers should be thinking about that requirement. Especially because so many of the businesses in the new economy no rely heavy on as opposed to relying heavily on core tangible assets. a good bulk of their value is in intangible property.

Jack Heald:

Yeah . Let's take a slight turn here. I've see on - what was it Monday? Monday the SEC issued a statement addressing compliance for qualified opportunity funds. Can you explain that to us?

Jon Talansky:

Well, I am a tax lawyer and not a securities lawyer. I think my colleagues and I did look at that statement that was put out by the SEC. And I think above all the takeaway from that guidance , anybody who's listening or tax payers out there certainly consult with their local securities law expert , whether it be a King and Spalding or somewhere else. But I think the takeaway from there is that the SEC and the other regulators are definitely, definitely seem to be very focused on Opportunity Zones as a fundraising strategy, precisely because the nature of the investors here is overwhelmingly likely to be your two legged retail, potentially high net worth. And to a lesser degree institutional investors. And I think it's been a long standing tradition with the SEC to look with a little bit more scrutiny at fundraising when it comes to retail type investors or being pitched fund raising ideas and strategies on a large scale basis. So I think what the key takeaway from the SEC statement, it was just that the IRS is not going to apply any special exceptions or rules to fundraising or SEC registration requirements or exemptions when it comes to qualified opportunity fund fundraising and that advisors should be aware of that and should keep those rules handy and close by when advising clients on how to go raise money under one of these strategies.

Jack Heald:

All right . Very good. I appreciate that. I also noticed that you seem to have a good deal of interest in the renewable energy sector. I know there's lots of tax mitigation opportunities in that sector. Are there specific opportunities for OZ investors with renewable energy?

Jon Talansky:

I think yes and no. Renewable energy is an area that I think financing it has always been really the key hurdle and the key challenge. And I think that's why you see it's so commonplace in the market, whether it be renewable or traditional electricity and power. All kinds of tax equity and tax credit structures. Because I think oftentimes the regular way fundraising and financing of these projects won't necessarily get a project sponsor developer to where they need to get to. And that's why tax equity and tax credit structures have been so prominent.

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I think therefore the Opportunity Zone rules are somewhat unique in that they do potentially offer these sponsors and developers an alternative or a new way to raise capital. It wouldn't be in lieu of the traditional types of renewable energy investors. I think it could however, take up a portion of the capital stack that might otherwise have been reserved for other , perhaps more, perhaps less exotic types of financing. The other thing I'd note as well as that the nature of these types of projects typically are such that building a project in an area, for example, in a rural environment or rural neighborhood or rural area might be easier than somebody who might have some other type of retailer mixed use strategy that wouldn't necessarily be amenable to obviously building the project just anywhere. You need to build it in the strategic place or neighborhood that provides some of these advantages. Whereas renewable energy as a self contained electricity or power producing enterprise might be a little bit more flexible in terms of selecting the location of such a plant and therefore a place based tax incentive like this, which might, if you look at a map, cover urban areas, suburban areas and swaths of land in rural America might offer interesting opportunities for renewable energy developers that might be fewer and farther between for more typical traditional multifamily or hotel or a retail developers. So I think in those ways we're still trying to figure it out. We're still trying to figure out if the economics of these deals works from an opportunity zone perspective and if there's enough tax incentive out there to attract these investors. But I think there are certain potential advantages out there that we are likely to see.

Jack Heald:

You used a phrase that I have not heard before that I would like you to explain. In the context of talking about tax credit as part of the finance stack, use the term "tax equity." What does that mean?

Jon Talansky:

So tax equity is really a term of art. It's not a new concept. Tax Equity essentially relates or refers to investors in projects that generate, due to certain statutory tax credit regimes, the ability to tax credits as reductions or offsets to what otherwise would be a tax liability. Traditionally sponsors of projects like this wouldn't necessarily have the appetite or the capacity to utilize those tax credits that the project is generating as much as say an insurance company or some other institutional investor that, for example, has a lot of income that can absorb these tax credits would have it.

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So it's been a rather l ongstanding structure. Would t hese developers go out and go out to a select number of tax equity, quote unquote tax equity investors to invest in the projects? A good chunk of the return, the rate of return that in a normal project would take the form of just a cash on cash return and a traditional IRR, in these types of projects, a good chunk of the return actually is delivered to these investors through an allocation of tax credits.

Jack Heald:

Okay. That makes sense. So basically the developer is exchanging his tax credit for equity in the company, correct?

Jon Talansky:

Correct. I mean, they can be inordinately complicated. The IRS has put out guidance over the years with guardrails around how easy it is to allocate tax credits to investors who might not otherwise participate in or own otherwise the economics i n the project. Developers and sponsors a nd their a dvisors have gotten pretty good at staying within the four corners of that guidance and running permissible tax equity investment projects to deliver these tax credit- b ased returns to the investors and I think they've been successful in doing so.

Jack Heald:

All right . I understand. I just hadn't heard the phrase tax equity used. I've actually interviewed three different folks involved in opportunity zones, specifically in Puerto Rico, a couple of the folks in the government and they've all talked about that type of opportunity where there's tax credits that are available that can be swapped for investment in the project. Okay. I get the idea. I just hadn't heard the phrase used to describe it before, which may have something to do with the fact that I don't do this a lot.

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Okay. Well I appreciate it. This is some really good stuff. I want to find out a little bit more now about Jon Talansky the man and particularly this economics and philosophy BA from Columbia . Now I'm going to tell you where my bias is, so you know what you're walking into. I have a bias. I have a bias towards the value of the old fashioned BA where folks were actually kind of learning about who we are as a people. And that's kind of what a BA was. And I know Columbia at least used to be one of those places where you really could get that kind of liberal arts education. So with that in mind: economics and philosophy. Got a favorite economist and a favorite philosopher?

Jon Talansky:

Good question. Well I did pursue the Columbia degree for many of the reasons that you're enumerating. I thought it was at the time, important to pursue a good grounding and a good understanding of who we are and what we come from. And some of the reading about some of the great thinkers and philosophers that have really informed Western thought. I also was a college student who was trying to figure out do I want to go into this kind of career, that kind of career. And I thought economics and philosophy was an interesting combination to maybe expose me to ideas that really ran the gamut from one end of the spectrum to the other. I had classes with the the MBA types folks who were clearly headed towards some sort of career in investment banking. And then the philosophy classes with the more cerebral types who maybe were already with the plaid vest heading to the professoriate . I did enjoy my philosophy classes there. I think I had a class called moral philosophy where we really went through all the moral philosophers in the great traditions in that area. I think philosophers like Kant and David Hume are two that stick out as philosophers whose general worldview really piqued my interest and got me interested in philosophy for some temporary period of time. I think since then, tax law has really taken up most of my time. I don't really have much time to read philosophy on the side anymore.

Jack Heald:

Okay . So you've kind of gone more the Kantian direction than the Humian direction.

Jon Talansky:

Yes. I guess I call myself a Kantian which yes, I use the term very loosely. I probably know less about Kant than anyone else who deems themselves a Kantian. But yes.

Jack Heald:

Well, I mean, almost by definition if you're involved in something as objectively, theoretically objective as tax law. That's not David Hume's gig. That's, that's definitely Kantian.

Jon Talansky:

More categorical imperative. Yeah .

Jack Heald:

Yeah. So what about what about the economic side?

Jon Talansky:

Economic side.

Jack Heald:

We can get you excited there still.?

Jon Talansky:

You know what, I actually I found my undergraduate economics degree a little bit too far into the clouds for my own liking. I guess I'm a hands on straight to the point person. I think the economics curriculum that, at least in the 90s, what you got when I was at Columbia, might not be what you'd get at a more business oriented undergraduate program, like a Wharton or a Chicago. The classes were certainly interesting and put into your head certain concepts of supply and demand, labor economics, things like that. But I can't really say that , um my interest for example in tax law was really piqued until I was in law school. Just really focusing on the way the markets work and just thinking more about practical theories about the economy as opposed to the more conceptual stuff. So I certainly enjoyed my time there, but I can't say I walked away hell bent on becoming some sort of economist with a passion towards a particular school of Economics.

Jack Heald:

Right. So how did you decide on tax law? Did you go to law school with that in mind or was that a decision that you made while...

Jon Talansky:

No, I made it in , I guess you could say made it in law school. I had a summer associate position at a firm in New York and tried my hand at t ax, did a little bit of litigation work and t here was something I really liked about tax a nd the fact that there's an answer to most questions. There's a right answer and a wrong answer. It's not always... I think my grandfather once made a joke, he said, when I look for a lawyer, I look for a one handed lawyer. I said, why? He said, because every lawyer I ever speak to says, well on the one hand this, and on the other hand that. And I said, you know what, that makes a lot of sense.

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And you know, that resonated with me and I think the rest is sort of history. But I think that's why when I originally got interested in tax low is because it's a statutory body of law, there's a steep learning curve, but as you build your knowledge I think you just become more versatile and more able to advise clients and think outside the box. But with the fact being that there's usually a structure that's most efficient that you can get to . And there's something about that that appealed to me and that continues to appeal to me, which I suppose is why still doing it this many years out.

Jack Heald:

Okay. That really makes a lot of sense to me. And you know, if you think about the world, and I apologize if we're getting too esoteric here, listeners, but this is stuff that I'm interested in. If you think about that there's about half of humanity views of the world through a Kantian lens and the other half through a Humian lens. If you are in fact the type of person who feels like Kantian... Actually, that's the wrong word. Who thinks like Kant rather than feels like Hume, then the particular kind of law you would guess you'd go into would be something like tax law. Where I would bet your Humians end up in defense, criminal defense.

Jon Talansky:

Jack, I think you've just made more sense of my trajectory from college to what I do today than anyone else, including myself has ever made of it. So I really thank you for that.

Jack Heald:

You're welcome. No charge. But maybe I can get some kind of credit in the future. Okay. Well, John, I appreciate the time. Your expertise is obvious. And frankly, as somebody who makes a living with words, I love how well you use the language. It's nice to hear.

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How do folks get a hold of you if they need or want to know a little bit more about your area of expertise, what's the best way to contact you or King & Spalding ?

Jon Talansky:

You certainly can reach out to me by email. It;s Jtalansky @kslaw.com . But you can find me on the King and Spalding website and then if you see a guy surrounded by five loony kids, it's me with my five kids surrounding me, pulling on every corner of me. So that might be another way to find me, although I can't promise that I'll have any attention to give to you.

Jack Heald:

You know, I had another interview earlier this morning with a guy who had 10 kids, has 10 kids. We've got 15 kids here in the interviews today. Awesome. That's cool.

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I appreciate it. Listeners, I will remind you that the contact information for John as well as for all of our guests will be available on the podcast website. So if for some reason you didn't manage to catch that, just go to the podcast website and you can pick it up. Any last words for us , John, before I let you go for the day?

Jon Talansky:

No, that's it. I hope everybody braves the heat here if you're in the northeast and otherwise I look forward to hearing from your listeners. And thanks for doing this.

Jack Heald:

How hot is it today?

Jon Talansky:

I dunno. Tomorrow we're supposed to have a real feel of 110. I'm here on Long Island. so I certainly will be a huddled up inside.

Jack Heald:

Yeah . What is, what is "real feel" translate into?

Jon Talansky:

Don't know, never understood real feel and wind chill, but I repeat it b ecause that's what I hear on 1010WIN, so it sounds better.

Jack Heald:

Okay. Well if you come to Phoenix, you will know exactly what 110 feels like. A

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ll right , well for Jon Talansky of King Spalding, I am Jack Heald for the OZExpo podcast. Thanks for listening. Please go ahead and press that subscribe button to get updated every time we drop a new interview. That happens multiple times a week. And we will talk to you next time.