Investing in Opportunity
|Through the Tax Cut and Jobs Act of 2017 (TCJA) and Opportunity Zone Program, significant tax and economic benefits for investors, real estate developers and fund sponsors were created. Qualified Opportunity Zones (QOZs) were designed to spur long-term growth and economic development in economically distressed communities through unique tax incentives. Investors will have the ability to defer, reduce and eliminate capital gains taxes by investing in Qualified Opportunity Zones. A report from Real Capital Analytics states that Opportunity Zones account for 10% of the investable land sites, which have averaged $50 billion in annual acquisition volume in recent years.|
Underserved communities require capital to create opportunity. Many of these communities are opportune areas that have become victim to mass migration. More than 70% of Qualified Opportunity Zones are located near metropolitan areas, many within transit hubs. These are communities that simply lack resources.
One of the primary impacts that Opportunity Zone investments address in low-income communities is the potential for job creation, especially for employment that provides sufficient professional training and livable wages. Businesses and Real Estate developments are ideal investments to create and stimulate sustainable jobs. Creating jobs in developing regions can reduce poverty and increase GDP growth.
“We wanted to get investments in areas that were struggling at a certain level” Senator Cory Booker
Making a difference
Opportunity Zone investments allow investors to provide capital to communities that lack resources and need institutional assistance, providing the ability for investors to earn a double bottom line. Investing in tertiary markets can create new jobs, as well as boost the local economy and GDP per Zone. The objective is to deliver prosperity in these Zones, so that Zone Residents do not have to experience a lower standard of living.
How Zones are determined
In 2018, mayors of every U.S. state were asked to identify low-income census tracts to be nominated as Qualified Opportunity Zones (QOZs). Every state or territory has designated up to 25 percent of its census tracts that meet qualification requirements as Opportunity Zones.
Low-income community census tracts are the basis for determining eligibility. The definition is the same as the New Markets Tax Credit Program. A low-income community census tract has an individual poverty rate of at least 20 percent and median family income up to 80 percent of the area median [Section 45D(e)].
Up to 5 percent of census tracts that do not meet the definition of a low-income community can be designated under an exemption. Exempt census tracts must be contiguous with low-income community census tracts that are designated as Opportunity Zones, and the median family income of the exempt tract must not exceed 125 percent of the median family income of the designated low-income community census tract.
“Innovative new tools like the Opportunity Zone program are the catalysts New Jersey needs to bring new investment to our communities in need” – Jose Lozano, CEO and president of Choose New Jersey
Investing for the long-term
More than 8,700 tracts were chosen with the intent to improve underserved communities. Nearly 80 percent of the QOZs are in urban and rural communities.
By investing in Qualified Opportunity Zones, investors can defer realized capital gains from prior investments. Tax benefits include the reduction, deferral and elimination of capital gain taxes.
With the right structure, investors can compound wealth tax-free until 2047. Past gains can come from public and private investments.
Opportunity Zone Investor
How you can invest
If a tax payer invests capital gains from the sale or exchange of property with an unrelated person in a Qualified Opportunity Fund within the 180-day period, beginning on the date of the sale or exchange, the investor can elect to defer the gain from the sale or exchange.
Investor’s basis in a Qualified Opportunity Fund is initially zero but will be increased by: (a) 10% of the deferred gain if the investment is held for five years by December 31, 2026, (b) an additional 5% of the deferred gain if the investment is held for seven years by December 31, 2026.
Proposed regulations confirm the following investors can defer gains:
- Corporations (S)
Qualified settlement funds, Disputed ownership funds and Designated settlement funds are also eligible.
Any capital gain from the sale or exchange of property by a U.S. taxpayer that is invested in a Qualified Opportunity Fund within 180 days of sale of such property is excluded from gross income until earlier of the date when the Qualified Opportunity Fund is sold or December 31, 2026.
The rules provide that only the gain can be reinvested into the Qualified Opportunity Fund and be entitled to tax benefits. The gain deferred can be any capital gain, including:
- Collectible gains
- Short-term capital gains
- Long-term capital gains
- Net section 1231 gains
- Gains from sales of securities
- Unrecaptured Section 1250 gains
- Capital gain net income from IRC Sec. 1256 contracts
Qualified Opportunity Funds
Opportunity Zone investments must be made through investment vehicles called Qualified Opportunity Funds (QOFs). A QOF is a self-certified investment vehicle organized as a partnership or corporation to invest in a single or multiple eligible asset(s) in an QOZ.
A QOF must hold at least 90% of its assets in a QOZ property or business. Property is defined to include the following:
- Qualified Stock
- Qualified Business Property
- Qualified Partnership Interests
QOFs can own business property directly or indirectly through stock and partnership interests in QOZ businesses. A QOF must make substantial improvements equivalent to the property’s basis excluding land.
QOFs are assessed every six months for compliance with the 90% test.
Failure results in the QOF paying a monthly underpayment penalty. QOFs are limited to the following entity types:
- S Corporations
- Partnerships (GP, LP)
- Real estate investment trusts (REITs)
An individual, trust, estate or single-member LLC cannot be a QOF.
Setting up to invest
Deploying capital gains
QOFs must be created or organized within the 50 States, the District of Columbia, or U.S. possessions, and self-certify by completing and attaching Form 8996, “Qualified Opportunity Fund,” to its timely filed federal tax return (including extensions).
An eligible taxpayer self-certifies to become a certified QOF. No approval or action by the IRS is required. Taxpayers complete a form and attach the form to their federal income tax return for the taxable year. The form must be filed timely, taking extensions into account. A QOF may invest directly in projects or may invest indirectly through a corporate or partnership subsidiary. Property must be acquired from an unrelated person.
A direct investment structure would directly own partnership interest in a Qualified Opportunity Zone Business or Property and comply with all the requirements of a QOZ asset. 10 percent of the QOF’s assets may be held in cash or liquid investments. 10 percent of the assets may be intangible property and 90 percent must be invested in tangible property.
An indirect investment structure would directly own qualified stock or partnership interest of the subsidiary in a QOZ Partnership that will own a QOZ Business or Property. 5 percent plus ‘reasonable working capital’ of the QOF assets may be invested in cash or liquid investments. There is no limit on intangible assets, but the intangible property must be used in the active conduct of a trade or business. 50 percent of the gross income of a QOZ Business must be derived from the QOZ.
Taking advantage of capital gains
QOZs are economically distressed population census tracts where job growth and income have lagged national averages. There is a total of 8,762 zones throughout the United States. QOZ designations will remain in full effect until December 31, 2028. One of the key requirements to obtain the tax benefits of investing in QOFs is that qualifying property must be acquired by the QOF in one of the designated QOZs.
A main requirement for a QOF is that at least 90% of its assets must be QOZ Property. QOFs will need to consider the business approach, what assets to deploy capital gains into and how to properly apply the testing requirements.
Qualified Opportunity Zone Property
The QOZ Business Property is defined as:
- Located and acquired in a QOZ
- Qualified through original use or “Substantial Improvement”
- Substantially all of the use of subject property is in a QOZ for substantially all of the QOF holding period
- Tangible property used in a trade or business is acquired after 2017 from an unrelated party
The implied rule for building/land acquisition acquired by QOF:
- The physical land does not need to be substantially improved
- Substantial improvement test focuses on improvement only to the building
QOZ Stock and Partnership Interest
A QOZ Business requires that (1) “Substantially All” of the tangible property owned or leased is in a QOZ and (2) at least 50 percent of the business’ gross income is derived from the active conduct of a trade or business in a QOZ. Substantially all for this purpose means at least 70% of the tangible business property owned or leased must be QOZ Business Property. During substantially all the QOF’s holding period for QOF Stock/Partnership Interest, the Corporation/Partnership must qualify as a QOZ Business.
QOZ Business Property
QOZ Business Property, tangible property must be acquired after December 31, 2017, and be used in a trade or business in a QOZ. The original use of the property in the QOZ must commence with the QOF “Substantially Improving” the property. According to the regulations one way to qualify investments for tax benefits is by original use, which begins with the acquisition by the QOF.
The regulations do not fully clarify the meaning of “original use,” however, Revenue Ruling 2018-29 provides some guidance for build/land acquisitions:
- Pre-existing buildings cannot satisfy the original use test
- Land can never have its original use in a QOZ commencing with a QOF because of the permanent nature of land
- QOFs that acquire real property in a QOZ will most likely need to consider only the substantial improvement test because the original use test may not be available for real property
Golden Door Partners OZ Advisory Services
Golden Door Partners has in-depth knowledge in navigating the complexities of the Opportunity Zone investment process across Opportunity Zone communities and assets. With over ten years of urban investment experience, we can provide expert advice to capitalize on QOZ. Our exclusive network of accounting and legal experts is equipped to assist investors in utilizing the maximum tax benefits by reinvesting capital gains in emerging QOZ investments.
Golden Door Partners Opportunity Zone advisory services provides comprehensive fund structuring and investment analysis for investors with $1 million or more in capital gains. Golden Door services cover fund structure, deal sourcing and diligence process as further outlined below:
Understanding Opportunity Zones
- Explain the technical aspects of the qualified Opportunity Zones program, including structuring considerations at the fund and deal level
- Identify key fund or business requirements of qualified opportunity zones
- Identify Opportunity Zone possibilities, including how to consider investments and social impact
- Recommend best practices to maximize the impact of an opportunity zone investment
- Direct Investments
- Indirect Investments
- Single-Asset Fund
- Multi-Asset Fund
- Commercial Real Estate
- Residential/Mixed-Used Real Estate
- Operating Businesses: Suitable business types for OZs, expansions, and dealing with intangible assets
The success of Opportunity Zone investments requires extensive diligence and industry expertise. The assets underpinning the investment must still be fundamentally valuable and the real estate or company’s performance diligently projected. We will perform extensive diligence and can actively monitor the progress post-investment.
Investing in a diversified portfolio of QOZ investments can reduce principal risk and achieve higher compounded returns. Investing in more than one OZ investment creates the benefit for diversification, which is essential for the reduction of principal risk.
We look at how investors can tap into local and national OZ investments to find the best opportunities available to fit the specific investors’ needs. We focus on OZ investments that present attractive operating costs, geographic advantages, realistic performance projections, attractive valuations, and strong exits.
OZ Advisory Services
Golden Door Partners provides a comprehensive suite of advisory services for QOZ investments. We offer fund development strategies, investment strategies, investment diligence, and a vast array of exclusive QOZ investment deals. Our quantitative and qualitative skills, and extensive fund development expertise presents unique insight for OZ investors.
Investment Strategies for Qualified Opportunity Funds
Our team has access to national OZ stakeholders and can connect investors to exclusive investments. Our national network is knowledgeable about the strategic efforts that may be beneficial to investment opportunities, such as:
- Identifying attractive OZ investments
- Identifying projects that meet community goals
- Providing national and regional specific QOZ insight
Opportunity Zone Investment Market Potential
Our team has the resources to:
- Create OZ marketing campaign materials and data
- Develop content for websites and social media campaigns
- Facilitate curated meetings with business owners, property owners, residents, and other opportunity zone stakeholders
Tracking and Evaluation of Opportunity Zone Investments
We can deliver performance measures to track the public policy goals for OZ regions, including performance, job creation, affordable housing, and business expansion focusing on:
- Developing performance management systems
- Providing annual reporting to track OZ investments over time
Opportunity Zones will support disruptive investments in emerging markets. Invest with an initial investment as little as $1 million:
- Access an opportunity zone research and investment team
- A pool of 20+ experienced advisors, and investment engagement potential with in-depth due diligence
- Leverage a tailored investment opportunity presenting carefully vetted real estate and operating businesses