By Leah Maurer and Zander Fried
Written into The Tax Cut and Jobs Act of 2017 is a bipartisan tool – the Opportunity Zone (OZ) designation – intended to spark economic growth in low income areas. The legislation is capturing the attention of the real estate community, as it allows owners, developers and prospective tenants to utilize:
- A 100% deferral of capital gains tax from the sale of other assets – such as a stock or bond – funneled into OZ investments;
- A 10% capital gains tax reduction in OZ investments held for at least 5 years;
- A 15% capital gains tax reduction in OZ investments held for 7 years and;
- A 100% elimination of capital gains in Opportunity Zone investments held for 10 years or longer.
While the initial legislation generated quite a bit of excitement, most OZ money remained sidelined, awaiting further clarification of the original statutory language. Finally, in April, the IRS released a second round of updates to OZ regulations which, among other things, clarifies:
- The amount of assets an OZ Fund must hold in an OZ business (at least 90%).
- If an OZ fund can purchase raw land (they can) and how that purchase is dictated with respect to capital gains benefits.
- Whether an OZ fund or OZ business is required to “substantially improve” a lease (they are not).
- How properties vacant for 5+ years and partially finished properties are impacted by the capital gains benefits described above (they can still receive the full benefits).
In the 2019 legislative session, Minnesota passed an omnibus tax bill conforming with most federal tax code, finally aligning State and the Federal Opportunity zone benefits. It remains unclear if 2018 OZ deals will retroactively conform to both sets of regulations. As other holdout states follow suit, we anticipate these recent federal and state updates will be a much-needed catalyst for OZ funds to begin placing money in the 9,000 OZ communities scattered across the country.
In greater Minnesota, we are tracking 128 sites eligible for OZ funding. In Minneapolis and St. Paul alone, there are 37 tracts where such funds could boost overall investment and economic development in the surrounding communities. Sites in Bloomington, Minnetonka, Mendota Heights, Brooklyn Park and more are also eligible for that funding. In the coming months we expect Opportunity Zone funds and Opportunity Zone REITS to begin identifying sites and deploying capital for retail and mixed use development in these areas.
Cushman & Wakefield is tracking 138 large CRE funds with more than $44 billion in equity looking to invest in opportunity zones, about half of which plan to invest in retail. Click here for that full report.
So, where are the best OZ opportunities? For more, don’t hesitate to reach out to our team!