Opportunity Zones, originally devised by the Economic Innovation Group (EIG), were established by Congress in the Tax Cuts and Jobs Act of 2017 to encourage long-term investments in low-income urban and rural communities nationwide. The program is meant to support existing businesses, grow new businesses and finance much needed real estate projects in low-income communities still recovering from the great recession. There are now over 8,700 Opportunity Zones in every state and territory.
Along with Neil Faden, Partner, Manatt, Phelps & Phillips, LLP, Joe Ollis, Founder and COO, SmartCap Group and Ken Cruse, CEO, Alpha Wave Investors, CrowdStreet hosted a webinar to better explain what Opportunity Zones are, how they differ from traditional commercial real estate offerings and what investors need to know about this new form of investment.
Here are a few key takeaways:
1. Not all Opportunity Zones are created equal. There are roughly 8,700 Opportunity Zones across the US, many of which are located in rural areas while others may reside in the Core commercial real estate investments are the least risky offering. They are often fully leased to quality tenets, have stabilized returns and require little to no major renovations. These properties are often in highly desirable locations in major markets and have long term leases in place with high credit tenants. These buildings are well-kept and require little to no improvements... More of a major city.
2. Investors only have 180 days from the sale of an asset to invest their capital gains in a Qualified Opportunity Fund in order to defer federal taxes.
3. To maximize the tax benefit of an investment in an Opportunity Zone, investors should contribute only capital gains. Investors can invest non-capital gains into a Qualified Opportunity Fund, but only investments made with capital gains receive the tax benefits.
4. Investors should evaluate the merits of the underlying investment in a Qualified Opportunity Fund as they would with any other commercial real estate investment.
5. Exiting a Qualified Opportunity Fund is different than exiting a traditional commercial real estate private equity investment. In commercial real estate, the sponsor is an individual or company in charge of finding, acquiring and managing the real estate property on behalf of the partnership. The sponsor is usually expected to invest anywhere from 5-20% of the total required equity capital. They are then responsible for raising the remaining funds and acquiring and managing the investment property’s day-to-day... More and investors must sell their interests in the Qualified Opportunity Fund and not the underlying asset(s) to maximize tax benefits.
6. Qualified Opportunity Fund investments are a long-term play. The most attractive tax benefit isn’t the 2019 deferred capital gains tax – it’s the forgiveness of capital gains on the appreciation of the investment.
Why invest in Opportunity Zones?
Quite frankly, Opportunity Zones represent one of the best tax planning opportunities of our lifetime. It doesn’t matter where your capital gains came from – stocks, the sale of a business, other real estate projects, etc. – the Tax Act of 2017 allows you to take your capital gains and defer them for up to six years by investing them in a Qualified Opportunity Fund.
However, the deferral of gains is only one of the benefits. For any investment that is held in a Qualified Opportunity Fund for at least 10 years, any capital gains that would otherwise be incurred over that time span are completely forgiven. For a real estate development investment within a Qualified Opportunity Fund, this could translate into almost $.50 of every dollar invested into a Qualified Opportunity Fund retained by the investor rather than pay to the government ten years down the road.
We’ve never seen an opportunity quite like this before.
EIG reported early last year that there is over $6 trillion in unrealized capital gains. Opportunity Zones are a chance for that money to finally be unlocked.