Finding the Opportunities in Opportunity Zones

Finding the Opportunities in Opportunity Zones

This summary was written by Jeffrey Stoller. Mr. Stoller is president of BJS Communications in Moorestown, N.J.

Lillian Plata, Esq. of Nee Plata Law and Eduardo Rodriguez from the City of Elizabeth discuss Opportunity Zones.

Since enactment of the 2017 Tax Cuts and Jobs Act, a broad range of developers, public officials, and community leaders have viewed the law’s Opportunity Zone (OZ) designations as a powerful tool for bringing new housing and business activity to low income areas nationwide.

The OZ program seeks to channel significant amounts of investor capital gains income into local development projects, in exchange for reduced or eliminated capital gains taxes. At first glance, there’s something in it for everyone: new amenities and jobs for distressed neighborhoods; more tax revenues for municipalities; a significant infusion of cash for developers; and reduced or waived capital gain taxes for long-term investors.

The ground rules seem relatively simple as well:

  • States can select up to 25 percent of their low-income census tracts to be qualified Opportunity Zone areas.
  • Any investor who realizes a capital gain from real estate or stocks has 180 days to reinvest that money in an Opportunity Zone Fund, which in turn must commit at least 90 percent to investment within a designated Opportunity Zone.
  • For OZ Fund properties acquired after Dec. 31, 2017, the deferred capital gain qualifies for a 10 percent tax reduction after five years; a 15 percent cut after seven years; and after 10 years in the Fund 100 percent of usual capital gains tax is waived.

So, what’s not to love?

According to an expert panel of New Jersey attorneys, developers and local officials at the 2019 Redevelopment Forum, there is no guarantee that every Opportunity Fund’s projects will succeed and appreciate in value enough to ensure long-term rewards. Their message: “Don’t try this at home … these Opportunity investments are hard!”

For all the success stories emerging from various OZs nationwide, there are still many obstacles to overcome:

  • Not every census tracts that meets required poverty level is an Opportunity Zone; the state was permitted to designate only 25 percent of those tracts for Opportunity Zone participation.
  • Local officials and community members should bear in mind that the Opportunity Zone program does not require developers to take into account the social impact of their projects on the municipality.
  • A zone with limited development potential might not attract investment from a qualified Opportunity Fund. Even where equity is available, it does not ensure that a project will be feasible over the long term.
  • Certain projects must be able to demonstrate that the non-land property has doubled in value within the first 30 months.
  • Developers seeking to establish their own Opportunity Fund must do so through a partnership or corporation with a flexible equity investor, and show a true capital gain for federal tax purposes.
  • The value of a high-quality project may be undermined over time if a capable property manager does not maintain the properties over the five-, seven- or 10-year periods required for tax reductions.
  • Federal OZ regulations are still under discussion, so there are not yet clear guidelines for dealing with failed projects or Opportunity Fund mismanagement.

Ultimately, the best strategy for New Jersey investors, local officials and developers may be to focus their attention on Opportunity Zones in municipalities that:

  1. have already hosted successful redevelopment projects,
  2. have streamlined the process for moving work forward, and
  3. have clear redevelopment policies and maps in place.

Partnering with experienced OZ developers with successful track records in construction and property management is also recommended. Avoid “first-time” firms with no prior involvement with redevelopment work

Above all, the panel stressed the need to obtain proper legal advice to help navigate the critical, unresolved issues surrounding the draft Opportunity Zone regulations.

More information about Opportunity Zones may be found on the session page on the Redevelopment Forum 2019 website.

Participating on the panel were Anne S. Babineau, Esq., a partner at the law firm of Wilentz, Goldman & Spitzer PA, who moderated the discussion; Brent T. Carney, Esq., a partner with the law firm of Maraziti Falcon LLP; Jeff Monge, the managing partner at Monge Capital; Lillian A. Plata, Esq., a founding member of Nee Plata Law LLC; and Eduardo J. Rodriguez, the director of planning and community development for the City of Elizabeth.

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