Markets About To Experience An Inflation Epiphany
The bearish sentiment that has permeated both equity and real estate markets for the past year has found little solace as the mantra of “don’t fight the Fed” continues to play out pretty much to the historical script. Against a backdrop of persistently higher short-term interest rates and 40-year highs in the rate of inflation, major stock indexes experienced material declines in 2022 and both sales and prices of residential and commercial real estate experienced a downturn.
There’s another saying: “it’s always darkest before the dawn”, and I think this week, there’s reason for sentiment to start shifting toward that more optimistic tone, if not toward outright bullishness. Princeton economics and public affairs professor and former Vice Chairman of the Fed, Alan Blinder, wrote in the Wall Street Journal last Friday that:
“Over the past five months (June to November 2022), inflation has slowed to a crawl. Whether measured by the consumer-price index, or CPI, which most people watch, or the price index for personal consumption expenditures, or PCE, which the Federal Reserve prefers, the annualized inflation rate has been around 2.5% over these five months.[However, t]he CPI inflation rate over the past 12 months has been an alarming 7.1%. But the U.S. economy got there by averaging an appalling 10.6% annualized inflation rate over the first seven months and a mere 2.5% over the last five. The PCE price index tells a similar story, though a somewhat less dramatic one. The 5.5% inflation rate over the past 12 months came from a 7.8% rate over the first seven months followed by a 2.4% rate over the last five.”
I think that this makes for a powerful argument that the Fed’s 2.0% inflation target has been nearly reached and that further confirmation in the upcoming inflation data could be a green light for proponents of a soft-landing for the economy. This change in tone seemed to be reflected in the 700-point rally in the Dow on January 6. This week’s CPI data showed overall inflation easing to 6.5% further confirming the downward trend, and, in my opinion, giving the Fed some wiggle room to dial back the hawkish rhetoric.
In my opinion, it stands to reason that further data showing inflation is on a steady decline should bring about a broad change in the outlook for both stocks and real estate. Meaning that while interest rates may stay elevated for a period of time, so as to satisfy the Fed’s playbook of whipping inflation now and for sure, I think that declining inflation sends a signal to markets that rates will begin to fall in the not-too-distant future.
Under this premise, it should be noted that CBRE reported Class A multi-family real estate in many of the most desirable markets has experienced a slight in increase in cap rates over the past six months as real estate valuations have come down. Cap rates are calculated by dividing a property’s net operating income by its current market value. As explained by J.P. Morgan’s Commercial Real Estate group “the cap rate is an assessment of the yield of a property over one year. For example, a property worth $14 million generating $600,000 of NOI would have a cap rate of 4.3%.”
In my opinion, the more optimistic outlook for lower inflation implies an improving scenario for prospective buyers of multi-family properties that have cash and strong banking relationships. It can also put investors in an opportune position to buy into a Qualified Opportunity Fund (“QOF”), like Belpointe PREP, LLC (NYSE American: “OZ”), which was sitting on approximately $139MM in cash as of September 30, 2022, and which announced receipt of loan receivables totaling approximately $35MM on December 16, 2022. If all goes according to plan with the scenario laid out by Mr. Blinder in the Wall Street Journal, and investors wake up to the notion that market conditions have a better probability of improving in the months ahead, then I would propose those sitting on the sideline for a turn should consider their options by evaluating how investing in a QOF could help them to defer capital gains while providing an opportunity for future growth and income.
Coming into 2023, Belpointe PREP’s (“Belpointe OZ’s”) portfolio of properties and property interests consists of 15 holdings at varying stages of full-on buildout, development, redevelopment, demolition, architectural conception and permitting. Belpointe OZ’s management team is focused on high job and population growth markets in the South, Southeast and Mid-Atlantic markets, with five properties in Sarasota, Florida, three in St. Petersburg, Florida, five in Nashville, Tennessee, and two in Connecticut. What’s more, in my view having plenty of dry powder provides Belpointe OZ’s management team with a solid advantage to acquire prime properties at targeted valuations in a timely manner. Once the market senses the Fed is done with the tightening cycle and a recession can be averted, one could argue that multi-family commercial property valuations can resume their long-term uptrend.
The strategy at Belpointe OZ is simple: continue to build out full-featured Class-A apartment projects while also looking to acquire seasoned and stabilized assets that can generate income and long-term appreciation on underlying properties.
And for those investors considering, or who may even be in the throes of, a 1031 like-kind exchange, and who may be struggling to find a replacement property that qualifies as “like kind,” or struggling to arrange for attractive financing, or who may have had a transaction fall apart, or even who may have mistakenly bypassed using a qualified intermediary and taken possession of the sale proceeds themselves, opting into a QOF structure instead—like Belpointe PREP, LLC (NYSE: American “OZ”)—might just make for a smart and timely alternative. Some sellers of real estate may simply be forgoing the 1031 exchange route altogether for a variety of reasons, and, here too, it may make sense to shelter capital gains from taxes through December 31, 2026.
We spell out how this alternative can work for you in our updated white paper. Follow this link to request the Publicly Traded Opportunity Zone Investing White Paper.
Want more information? There’s a wealth of detail on our website at investors.belpointeoz.com where investors and advisors alike can learn about Belpointe OZ and some of its key features.
Have questions? For immediate assistance you can call today and I’ll take the time to answer as many of your questions about Belpointe OZ and how reinvesting capital gains into a QOF can be utilized to offset capital gains tax obligations as I can. My direct number is (203) 883-1944.
Investing in Belpointe OZ (NYSE American: “OZ”) is as simple as buying any other publicly traded equity. If you purchase Belpointe OZ’s Class A units in the open market, there is no subscription agreement or investor certification required; you can simply purchase Class A units through any brokerage account. Belpointe OZ offers the same Opportunity Zone benefits as any private structure. To properly defer your reinvested capital gains, your accountant will need to file IRS Forms 8949 and 8997 with your tax returns. You will need Belpointe OZ’s EIN which can be found here: Belpointe OZ EIN
To perhaps help facilitate the decision-making process, I want to note some features that are common to all QOFs, and some that are specific to Belpointe OZ, which I have included in bold type:
- QOFs provide for pass-through income, thereby avoiding double taxation for investors;
- QOFs provide for pass-through depreciation, with no depreciation recapture if an investment is held for 10 years, up to December 31, 2047;
- QOFs require annual distributions of at least 90% of taxable income;
- QOFs provide for up to a 20% reduction on taxable distributions via Internal Revenue Code Section 199A;
- Belpointe OZ provides for asset diversification;
- Belpointe OZ provides investors with greater control over their exit timing and amount;
- Belpointe OZ offers low minimums for investor access;
- Belpointe OZ unitholders will not be asked to add additional capital for any type of improvements or problems with investment properties;
- Belpointe OZ provides investors with better reporting, transparency, and oversight;
- Belpointe OZ provides investors with the opportunity for daily liquidity;
- Belpointe OZ allows both accredited and non-accredited investors to access the investment class; and
- Belpointe OZ simplifies the investment purchase process.
Further, in its effort to disrupt the U.S. real estate industry, Belpointe OZ is charging among the lowest fees in the market:
- No investors servicing fees;
- No disposition fees;
- 75% annual management fee; and
- 5% carried interest.
Have questions about how Belpointe OZ (NYSE American: “OZ”) can provide opportunities for investment appreciation and income and help you or your clients to defer or eliminate capital gains tax obligations?
Call me, Cody Laidlaw, at (203) 883-1944. I can answer your questions and direct you to resources that will provide you with information about the nuts and bolts of QOFs and opportunity zone investing, so you can start planning today.
Cody H. Laidlaw
255 Glenville Road
Greenwich, CT 06831
T: (203) 883-1944
Disclosure: Cody H. Laidlaw is the Chief Investor Relations Officer. Cody is also an investment advisor representative with Seaside Advisory Services, Inc. (d/b/a Seaside Financial & Insurance Services), a SEC registered investment adviser offering advisory accounts and services, and holds a long position in Belpointe PREP, LLC’s Class A units.
Important Information and Qualifications
Belpointe PREP, LLC (“Belpointe PREP”) has filed a registration statement (including a prospectus) with the U.S. Securities and Exchange Commission (SEC) for the offer and sale of up to $750,000,000 of Class A units representing limited liability interests in Belpointe PREP. You should read Belpointe PREP’s most recent prospectus and the other documents that it has filed with the SEC for more complete information about Belpointe PREP and the offering
Investing in Belpointe PREP’s Class A units involves a high degree of risk, including a complete loss of investment. Prior to making an investment decision, you should carefully consider Belpointe PREP’s investment objectives and strategy, risk factors, fees and expenses and any tax consequences that may results from an investment in Belpointe PREP’s Class A units. To view Belpointe PREP’s most recent prospectus containing this and other important information visit sec.gov or belpointeoz.com. Alternatively, you may request Belpointe PREP send you the prospectus by calling (203) 883-1944 or emailing firstname.lastname@example.org. Read the prospectus in its entirety before making an investment decision.
This communication, including any links embedded herein, may not be distributed in any jurisdiction where it is unlawful to do so. Nothing in this communication is or should be construed as an offer to sell or solicitation of an offer to buy Belpointe PREP’s Class A units in any jurisdiction where it is unlawful to do so.
Neither Belpointe PREP nor any of its affiliates provide investment or tax advice and do not represent in any manner that the outcomes described herein will result in any particular tax consequence. Prospective investors should consult their own investment and tax advisers concerning the U.S. federal, state and local income tax consequences, as well as any tax consequences under the laws of any other taxing jurisdiction, in relation to their personal tax circumstances, which may vary for prospective investors in different tax situations.
This communication may contain estimates, projections and other forward-looking statements, typically identified by words and phrases such as “anticipate,” “estimate,” “believe,” “continue,” “could,” “intend,” “may,” “plan,” “potential,” “predict,” “seek,” “should,” “will,” “would,” “expect,” “objective,” “projection,” “forecast,” “goal,” “guidance,” “outlook,” “effort,” “target” or the negative of such words and other comparable terminology. However, the absence of these words does not mean that a statement is not forward-looking. Any forward-looking statements expressing an expectation or belief as to future events is expressed in good faith and believed to be reasonable at the time such forward-looking statement is made. However, these statements are not guarantees of future events and involve risks, uncertainties and other factors beyond Belpointe PREP’s control. Therefore, we caution you against relying on any of these forward-looking statements. Actual outcomes and results may differ materially from what is expressed in any forward-looking statement. Except as required by applicable law, including federal securities laws, Belpointe PREP does not intend to update any of the forward-looking statements to conform them to actual results or revised expectations.
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