The Opportunity Zone concept is receiving major attention in the real estate industry. Experts predict there will be a substantial amount of capital that will be deployed in this space in coming months. Earlier in 2018, after receiving recommendations from governors, the Treasury Department designated nearly 9,000 census tracts as Opportunity Zones across urban and rural areas throughout the United States (including both states and territories). It is estimated that approximately 35,000,000 Americans live in Opportunity Zones, which have higher poverty and unemployment rates than the rest of the nation.
It is not surprising that many of the locations in Opportunity Zones are economically viable for development since in many cases they are on the outskirts of an urban area that is in the process of being redeveloped. Such is the case in Downtown Miami, Florida, where there are several locations located within the fringe of the Opportunity Zones that are in the process of being developed as mixed-use projects that are literally within blocks of major existing developments. For reference purposes, the Opportunity Zones locations in Downtown Miami generally range from (East) 1st court to (West) NW 7th Avenue; (South) North River Drive to (North) NW 5th Street and from (East) Biscayne Boulevard to (West) North Miami Avenue; (South) NE 15th Street to (North) NE 17th Street.
Current projects include a substantial mixed-use project in the Wynwood area where there is a significant amount of development activity taking place already. Another project is also a mixed-use project near the new All Aboard train station complex. Several other nearby properties are also being considered for development. Outside of Downtown Miami there is a large site bear the Florida International University campus east of Biscayne Boulevard in North Miami that is ripe for Opportunity Zone development as well.
It is expected that there will be a market imbalance in that there will be more capital seeking Opportunity Zone investments than economically feasible qualifying projects available for development. It is noteworthy that some of the industry experts expect a wave of transactions during the next twelve months that will consume the Opportunity Zone pipeline in reliance upon the regulations that have just been issued.
Brief Summary of Opportunity Zone Program
In a nutshell, new Section 1400Z-2 of the Internal Revenue Code establishes several tax benefits for qualifying investments in Opportunity Zones with respect to sales or exchanges on or prior to June 29, 2027. Some of eligibility requirements include:
- An entity or an individual investor that is a partner/shareholder of an entity may defer capital gain if the investment is made within 180 days after the capital gain is realized.
- If the Opportunity Zone investment is held for at least seven years, then there is a 15 percent discount on the amount of capital gain being recognized, in addition to the deferral of the capital gain recognition until the earlier of the date of disposition of the investment or Dec. 31, 2026.
- The appreciation in the value of the Opportunity Zone project is in effect tax-free until the project is disposed of, subject to an outside limit in the year 2047.
- The Opportunity Zone property must be acquired after 2017.
- To qualify under the Opportunity Zone legislation, there must be a qualified opportunity fund (QOF) to invest capital into recognized qualified Opportunity Zone projects. The projects must be located within the designated Opportunity Zones and must be part of a qualified business, which can include both real estate and other tangible properties, including operating businesses. The funds can invest in a partnership interest and stock of a corporation or membership interests in a limited liability company, and there can be a pre-existing entity that likewise acquires the interests in the Opportunity Zone fund or becomes an Opportunity Zone fund even if it was established prior to 2018, provided that the qualifying asset is acquired after 2017.
- A QOF must invest at least 90% of its assets in qualified Opportunity Zone property, subject to variations that allow for a 70 percent investment. The basis attributable to the land component of any real estate acquisition would not be taken into account in determining whether the building has been substantially improved in order for the investment to qualify as an Opportunity Zone project.
- The new investment in the Opportunity Zone property must equal or exceed the acquisition cost of the Opportunity Zone property.
Industry experts predict that the economic value of Opportunity Zone fund investments, considering the tax advantages, will provide a significant increase in the after-tax profit from investing in an Opportunity Zone project.
Ronald R. Fieldstone is a partner in the Miami office of Saul Ewing Arnstein & Lehr. He focuses his practice on real estate, corporate/securities and taxation law.
Originally Published on November 15, 2018 at 09:47AM
Article published originally via opportunity zones – Google News https://www.law.com/dailybusinessreview/2018/11/15/miamis-opportunity-zones-are-rife-with-opportunity/