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Opportunities come with challenges. So it could be said of opportunity zones, the chance for investors to help revitalize downtrodden locales with the promise of tax breaks to come.
First, for the record, opportunity zones were born of the Tax Cuts & Jobs Act of 2017, with the purpose of incentivizing investment in low-income areas around the country. According to wealthmanagement.com , a major—but not the only—benefit of investing in an opportunity zone is to defer taxes on gains from other investments. (Redeployed capital is the only ticket to ride here.) That deferral lasts until the investor sells the property or until the end of 2026. If the investor holds the property for a decade, there’s no tax on that gain.
Needless to say, as investors redeploy their gains into these downtrodden areas, the opportunities expand for retail, multifamily and office property managers as well.
As Natalie Dolce reports in GlobeSt.com, there could be more than $100 billion invested in the nation’s 8,700 zones, as designated by the federal government. But, covering a panel on the topic at the recent RECon conference in Las Vegas, Dolce points out that challenges are also a part of the opportunity zone picture.
According to panelist Scott Maxfield, VP of Goldman Sachs, all of the rules that apply to any smart investment apply here as well, and, Dolce writes, “Opportunity zone tax credits will not solve the problems for a project that doesn’t pencil or that is hardly making any return.” The benefit, said Maxfield, “isn’t deep enough.” As with any good investment, projects in opportunity zones still need a strong developer with “a compelling plan for redevelopment.”
Another challenge with the opportunity zone methodology is the length of the investment period. That 10-year hold can be a challenge, especially as the local community shifts—or fails to—around you. “When we look for a project, a 10-year vehicle, let’s say, we have to be focused and look at it closely,” said panelist Arturo Sneider, co-founder and CEO of Primestor Development Inc. “It’s a fairly long-term commitment and these communities are evolving at a significant pace.”
The worry therein, he continued, is that, “You don’t really know what an exit looks like in 10 years, so while it’s an attractive program, the timeline is tough and you cannot lose site of the program’s intent.”
The message, at the end of the panel, was clear. And that message is essentially the same as it is for all investments: Look before you leap. “Above all,” said Primestor’s Sneider, “there are complexities with opportunity zones that many people don’t understand.”
About the Author
John Salustri is editor-in-chief of Salustri Content Solutions, Inc., a consultancy focused on enhancing the web and print content of clients around the nation. He is a regular contributor to JPM Magazine and a frequent blogger for IREM. Prior to launching SCS, John was founding editor of GlobeSt.com.