Opportunity Zones is a new buzzworthy concept that has investors’ interest piqued. Areas of the country that have been left behind after the Great Recession have been deemed Opportunity Zones and are now getting a refresh with private capital and development.
Now that we have established what Opportunity Zones are, what makes them so attractive to investors?
Investing in Opportunity Zones offers federal tax incentives for realizing the capital gains into the opportunity funds, which are used to propel business and commercial real estate development in the low-income areas that have been dubbed as these Opportunity Zones. The opportunity for deferred capital gains tax and opportunity for lower-cost capital created by the program has piqued the interest of many investors.
Here are six things to know about investing in Opportunity Zones:
1. Now is the time to invest – Investing in an opportunity zone sooner rather than later could boast better returns since the reduced tax on the original gain can only be deferred until December 31, 2026, or the date the new investment in the opportunity zone is liquidated, if not sooner. Investors can also defer the sale of the asset if they want gains to roll over into a fund that invests in the zone.
2. Diversify with asset classes that generally yield lower returns – With the higher post-tax return on the investment, there is a greater chance to attract more affordable capital, which offers the developers the opportunity to attract investors looking to diversify into assets that would typically offer lower returns.
3. Geography matters – Location is everything with Opportunity Zones. Different lower-income communities have demand different investment strategies from developers. Investors and developers may also pick locations based on prior experience in the market or existing relationships with local developers.
4. Look into a joint venture – A joint venture could grant a new investor looking to enter a new market better access to local resources and knowledge. These joint ventures allow investors to enter new areas by partnering with another company who has experience in that area and can make more educated decisions.
5. Consult a trusted adviser for clarification on certain provisions – There are several provisions that require further clarification. The original use provision of the Opportunity Zones program, which determines qualified opportunity zone properties eligible for investment, defines that asset as a tangible property where the original use of the property commenced with the qualified opportunity fund. Current provisions do not indicate whether this requirement applies to assets that have been vacant for a long time. Clarification is also necessary for the 30-month requirement for what constitutes as a substantially improved property.
6. Build flexibility into documents – As investors look to jump into Opportunity Zones, it is vital to have knowledgeable professionals to perform the modeling and consult on the structuring. Having financial documents that embed flexibility when it comes to alterations can help protect the anticipated tax benefits from their investments that lie in these Opportunity Zones.