Investing in the future: The opportunity in Opportunity Zones

Investing in the future: The opportunity in Opportunity Zones

On Wednesday, December 12, 2018, President Donald Trump signed an executive order to establish the White House Opportunity and Revitalization Council, saying, “the resources of the whole federal government will be leveraged to rebuild low-income and impoverished neighborhoods that have been ignored by Washington in years past. Our goal is to ensure that America’s great new prosperity is broadly shared by all of our citizens.” The Council will work with agencies across the country to develop “Opportunity Zones”, or under-developed and economically distressed neighborhoods with high poverty rates and slow job and business growth. The Council will be led by Housing and Urban Development Secretary Ben Carson. According to Carson in an opinion piece published the Washington Post two days later, “The White House Opportunity and Revitalization Council is ready to consider more than 150 actions to better target, streamline and coordinate these federal programs.” The Opportunity Zones Program was part of the $1.5 trillion tax overhaul originally signed in December 2017, known as the Tax Cuts and Jobs Act. While the goal of the Opportunity Zones is to spread prosperity to under served communities, the investors that choose to take part in the program may be the greatest beneficiaries. With more than $2 trillion in unrealized capital gains by individuals and corporations across the U.S., there’s a lot of money to be re-invested into qualifying Opportunity Funds through the program. The program allows investors to defer capital gains taxes the longer an investment is held. If the Opportunity Fund investment is held for ten years or more, the investor permanently avoids capital gains taxes on the appreciation. Carson estimated in his remarks that “the Opportunity Zone legislation could attract over $100 billion in private investment which will go a long way to spur on jobs and economic development.”

Seattle-based CRE attorney Erik Marks expressed his concern about the true benefits of the program in an interview with BisNow, “I think the regulation may be useful, but this is not a problem-solving regulation. I don’t know what [Trump’s] strategy is, but I think when there are opportunity zone successes, he has a clear opportunity to put himself and his Cabinet at the locations for the photo opportunity. I don’t mean to say that in a derogatory sense … This is to make sure [everyone knows] he’s still part of it.” Marks may have hit the mark. The President’s son-in-law and senior adviser Jared Kushner and close friend Richard LeFrak both had business interests in designated zones. Kushner’s wife and White House adviser Ivanka Trump was also a strong proponent of the program, appearing with Republican Senator Tim Scott of South Carolina frequently touting the tax bill including the proposed zones. Kushner and wife Trump could benefit from the program from properties already owned in what have now been designated as Opportunity Zones in areas of New York.

Executive Director of Seattle Chinatown International District Preservation and Development Authority, Maiko Winkler-Chin, offers a third perspective of the program’s incentives. “It could be a total gentrification machine,” Winkler-Chin told GeekWire. “There’s nothing needed to show that you are providing a public benefit and thus should receive a capital gains reduction in perpetuity.” Similar critics share concerns in neighborhoods that are already beginning to grow rapidly in cities including Long Island City, Seattle, Portland, and the Bay area.

However, Opportunity Zone successes there are—the chief example being the location of one of Amazon’s HQ2’s, in Long Island City, New York. The company could see up to $3 billion in tax incentives. Gary Painter, Director of the Sol Proce Center for Social Innovation and University of Southern California professor, believes Amazon’s location decision is incentivized by the program and a premier example of it working correctly. “It’s an example of how capital could move into these places,” Painter said. “It is an example that, if private capital could actually redirect where it’s going because of the designation, the zones are working as intended.” Democratic Senator Corey Booker of New Jersey sees the opportunity in the zones of the same-name as well: “Is the developer doing this as an act of charity? No. But in areas of our country that are starved for capital … this will probably be the largest economic development bill for low-income areas in half a century.”

A Redmond, WA, based real estate firm launched its own Opportunity Zone Fund, SmartCap Group, specifically for tech investors, and it’s first project is an industrial development in Arlington, Washington. The fund, led by two Microsoft ex-executives, already has most of its required funds committed for the project. Tim Shoultz, leading the fund with partner Joe Ollis, commented to GeekWire on the advantage of the program to the Seattle-based tech crowd: “We’ve had very significant interest, especially in the tech base, for this type of investment where they’re able to diversify out of their tech stocks and invest into something like commercial real estate that has a different life cycle and a different market cycle.”

The criteria for a designated Opportunity Zone have been defined by the Economic Innovation Group and may be viewed here.

The White House Fact Sheet can be viewed online here. Frequently Asked Questions regarding the program are answered by the IRS here.

Maps of designated areas can be viewed on the Department of Commerce website, available here.

If you’re interested in finding a qualifying property, completing a tax-deferred exchange, or participating in a syndication or other structured investment in commercial property, contact IWCRE at or by calling (206) 533-5090.

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