Opportunity Zone Investment Fraud – Sometimes It’s Better To Just Pay Taxes
The announcement by the United States Attorney’s Office for the Southern District of New York City that Joshua Burrell has been charged with securities fraud, wire fraud and aggravated identity theft is very sad. Joshua Burrell was a proponent of ensuring that investments in the Opportunity Zone serve social purposes while providing superior returns to investors. His concept seemed to have a certain level of plausibility. We still don’t know how things went wrong. Burell’s attorney, Todd A Spodek, declined to comment at this time.
Recently, Rob Rowan of the CFA Society of New York interviewed Josh Burrell – Real Estate for Charitable and Investing Purposes, with Josh Burrell, Activated Capital,
Burrell was interviewed by Eddie Cullen who identifies Burrell as one of the leading investment professionals in New York. I reached out to Cullen for comment. The video was taken down before I finished this story.
This is Burrell with Armstrong Williams
During the interviews, we learn about the “double bottom line”. The idea is that companies should be evaluated for the positive social impact they create. The kind of win, win, win Burrell was talking about was rehabilitating residences in depressed markets and then renting them out with some kind of rent to own them. The advantage of the refurbishment model was that it would be able to distribute cash flow 8% faster, while on the double bottom line side, tenants would sort of get equity.
In his interviews, Burrell talks about deals across the country, virtually everywhere except California, New York and Massachusetts. The only concrete location that appears on the Activated Capital website is Coatesville PA. There is coverage from 2020 of the creation of the Coatesville Impact Fund. Burrell is quoted
We plan to deploy $ 25 million through the fund in Coatesville and surrounding areas focused on single and multi-family residential properties and small commercial properties. Activated is also looking to invest in local businesses aligned with the values inherent in the Impact Fund. We look forward to working closely with hard-working entrepreneurs who are currently developing business in Coatesville, as well as individuals and businesses looking to relocate to Coatesville.
I was not lucky enough to get more information on what really happened in Coatesville. I spoke with someone who had explored a partnership with Burrell in Activated Capital, but who was disheartened by what he perceived to be “bait and change” tactics, as the signing deals differed from what he saw as “bait and change” tactics. had been discussed.
My source claimed he put Burrell on the notion of rehab, where 8% returns were quite achievable. As far as he could tell, however, what was going on in Coatesville right now was the development of a velodrome. Now you and I both know that the velodrome is an indoor cycle track, but you have to take other readers into account.
It seems that there has been approval from the city council for a sale of land around this project. It will be interesting to see how much the project depended on Burrell’s activated capital.
The SEC complaint
On November 15, the Securities and Exchange Commission filed a lawsuit against Burrell and Activated Capital LLC. The complaint alleges that Burrell via Activated defrauded fourteen investors who invested $ 6.3 million in Activated funds. Almost everything went into Activated Capital Opportunity Zone II, LLC (Fund II). My source told me that Burrell had the idea of calling it “Fund II” to hide the fact that there was no Fund I.
The Fund documents indicated that distributions would be made out of operating income. Instead, the distributions were partially funded by contributions from investors and borrowings from the acquired property. Thirteen properties were acquired in Chester County (the county that includes Coatesville) for $ 1.7 million.
The complaint also alleges that Burrell embezzled $ 100,000 for himself, characterizing the disbursements as real estate improvements.
The indictment further strengthens the structure of the fund. It indicates that the assets of the funds have been mixed. The indictment reiterates the Ponzi-like activity that the SEC complaint said was taking place. It is also no longer a question of inflating the fund’s assets. Burrell, according to the indictment, told a $ 3 million investor that $ 7 million had already been raised, when in fact only $ 1,020,000 was. Another investor put in $ 250,000 after being told that “just under” $ 20 million had been raised.
The indictment also alleges that Burrell fabricated bank statements and real estate acquisition records in an attempt to convince a specialist investment firm to sell activated funds. He also mentions the embezzlement of funds for his personal use.
The government must of course prove its case and we have not heard from Burrell’s lawyers. Nonetheless, for the sake of analysis and lesson, let’s take their version of events at face value. On the bright side, we can be reassured about the financial system as a whole, given that Burrell didn’t go very far with his schemes. He only managed to raise $ 6 million, part of which was used to buy property and part returned to investors. The business was quickly nipped in the bud.
For victims, however, the lesson is contained in Reilly’s Second Tax Planning Law – Sometimes you better just pay the taxes.
There is an Investment tab on the Activated Capital website. This tab is dedicated to tax savings by investing in an opportunity area.
If you have a capital gain of $ 1 million from the sale of stocks, bonds, a business or a property. Instead of paying $ 238,000 in taxes, you invest $ 1 million in the Activated Capital Opportunity Zone fund which focuses on double bottom line returns. Let’s say that in 2028, the fund is earning almost $ 2 million, including the initial investment, given an 8% return on investment. No tax is due on the $ 1 million gain. You will only pay $ 202,300 in deferred capital gains on the first initial sale. Below is the comparison calculation that shows these scenarios
There is a step-by-step procedure for investing the “unrealized capital” included in the tab that ends with
The Fund will deploy capital in our fully approved and ready-to-go projects and in our projects distributing cash flow through a preferred return within 180 days.
When it comes to your decision-making process, it’s backwards. The OZ status of the investment makes it a bit cheaper. Imagine you were sitting down with the after-tax proceeds of your capital gain in hand. Would you invest them in that velodrome in Coatesville PA or whatever else Activated has prepared a shovel for you? Otherwise, you better pay taxes.
On TheRealDeal there is Manhattan investor charged with Opportunity Zone fraud.
The DI wire To Opportunity zone fund manager accused of securities fraud.
Mélanie Waddell from Think advise a SEC Charge Firm, Founder of Opportunity Zone Funds Scam.
Thomas O Gorman has filed an action with the SEC against the keeper. He notes:
Market professionals are currently at the center of the Commission’s enforcement actions. While this is the “guardian concentration” mentioned recently by President Gensler, it is not really new. The emphasis on wardens as a means of leveraging scarce resources dates back to the early days of the Enforcement Division. The theory is simple: if those who have access to clients – lawyers, accountants, and market professionals – comply with their professional obligations, it helps stem the many instances in which unsuspecting members of the public trust professionals only for their own purposes. strip