The talk of “Opportunity Zones” seems to be growing with each passing month, though there is not a lot of information available. Opportunity Zones are a great way to not only receive tax benefits, but help better economically stressed communities in the process. This article helps acquaint those unaware of Opportunity Zones with how they work, and what makes them so important for the future of redevelopment efforts across the US.
What is an Opportunity Zone?
In 2017, Congress established the Tax Cuts and Jobs Act to aid economically strained communities by turning designated areas into a potential real estate investment. By using private investment funds, the communities would benefit from economic growth while investors would receive tax benefits by re-investing their unused capital gains into Opportunity Funds. Today, up to 25% of low-income neighborhoods qualify, in a state, territory, or district are eligible for qualification. Once an Opportunity Zone is created in a certified area, it holds onto that title for 10 years until it is time for the zones to be re-evaluated.
Investing in an Opportunity Zone
If planning to invest in an Opportunity Zone, there are a few requirements that should be taken into consideration. As an example, with a real estate investment, there are certain restrictions put in place to ensure that the property in question is, in fact, bettering the community. For these real estate investments, properties can be either built or remodeled. It must be known though, that if an investor is choosing to remodel, there is a minimum on how much the investor must invest in the project. Say you, as the investor, bought a pre-existing building for $2 million and only wanted to upgrade/remodel it, in order to comply with the Opportunity Zone rules, you would need to spend at least $2 million and 1 dollars. An investor must put more into the project more than the amount they purchased it for – even it that means the investment is only $1 more than the purchase price.
It is also essential that investors note there are “right” and “wrong” types of investments, especially when it comes to real estate. As an example, the “wrong” investments are those that are not much use to community, with examples such as country clubs, luxury housing, gambling facilities, and liquor stores. Keep in mind, communities where Opportunity Zones are located are those with greater financial hardships. The examples provided either create greater financial burden for the residents of the community or are of no use to them. The goal of the Opportunity Zone project is to improve and bring wealth to low-income communities, not to bring in establishments that can do them more harm than good.
The “Right” Investments – Real Estate Example
It is essential when choosing a real estate investment to keep in mind the question of “is this bettering the community”? Great opportunities can come in the form of business parks and warehouses, due to their ability to generate job growth. In 2015, Ashley Capital began a project to turn Hazel Park Raceway, a horse track in Hazel Park, Michigan, into industrial offices and warehouses. The project generated 675,000 square feet of the manufacturing and industrial space now known as the Tri-County Commerce Center. The raceway was located in an Opportunity Zone, so Ashley Capital would receive the provided tax benefits for building within the zone, all the while creating the possibility for job growth in the area.
What is an Opportunity Zone Fund?
Opportunity Zone Funds are a way for investors to invest in Opportunity Zone projects. They are a US corporation or partnership planning on investing at least 90% of its holdings into a qualified Opportunity Zone. They can be used, as stated before, to start ground-up on new buildings, or significantly improve existing ones. These investments allow investors to receive tax benefits immediately and long term on capital gains.
When using an Opportunity Fund to invest, there are three different types of investments that are available. The first is through partnership interests in a business that operates within an Opportunity Zone; the second is owning stock in a business that executes all of its projects and affairs in an Opportunity Zone, the third, is by investing in property located within an Opportunity zone such as real estate.
If looking at it on a 10-year timetable, like the one provided by fundrise.com, there are a few crucial years to note. For the first year, taxes are deferred on the capital gains. For the 5th year, the tax on the capital gains will be reduced by 10%. On the 7th year, tax on the capital gains is reduced by 5% from the 5th year now making it a total of a 15% reduction. On the 10th year, the capital gains taxes are eliminated on potential profits from the Opportunity Fund. It is important to note that in order to take advantage of this program, an investor has to take their capital gains and invest it into an Opportunity Fund within 180 days of the sale of the asset.
According to Adam Hooper for WealthManagement.com, “Essentially, the federal government is allowing the investor to keep the capital gains at 0 percent interest and use those funds to invest in one of these Opportunity Zone projects for 10 years. After 10 years, the investor pays no capital gains tax on the appreciation of the asset”.
How REGENESIS and Land Science Can Help
When investing in an Opportunity Zone, there may be a unexpected issues that come with the land. There is a possibility that the previous inhabitants of the site created negative environmental impacts, and cleanup may be necessary before further progress can be made.
That’s where REGENESIS and Land Science can help. As investment continues into Opportunity Zones, developers will increasingly look to develop brownfield sites – properties with environmental impacts preventing redevelopment. By integrating site cleanup with wider community plans, there can be significant economic benefits, such as the creation of new jobs or an increase in housing values, which can stimulate the revitalization of distressed neighborhoods.
To learn more about handling environmental impacts at opportunity zone sites, download the eBook 11 Tools and Resources for Maximizing Your Investment in An Opportunity Zone.
When it comes to site cleanup, there are many available approaches, each of which must be carefully considered to achieve maximum impact both technologically and economically. Selecting the proper technology to deal with environmental issues can lead to immediate cost savings due to the streamlining of construction schedules or as compared to other applicable remedial technologies or future cost savings from the reduction of overall risk.