By Chris Owen, Director of Research – Florida
Florida markets are set to take advantage of the new Opportunity Zone program that resulted from the Tax Cuts and Jobs Act passed in 2017. This program incentivizes investment in economically distressed areas and enables any investor – foreign, domestic, retail and institutional – to defer and ultimately reduce capital gains taxes on any asset by reinvesting the gain in underfunded communities.
While rules regulating Opportunity Zone investments will not be finalized until next spring, there is now sufficient clarity so funds can begin taking capital from investors and deploying it in earnest. Some estimate that up to $100 billion could be deployed in Opportunity Zones around the country over the next several years, and Florida is expected to receive a significant piece of it.
Florida Markets Lead U.S. for Economic Momentum
A new Cushman & Wakefield report shows that Florida is in a particularly favorable position to benefit from Opportunity Zone investment. Cushman & Wakefield evaluated markets around the country across a range of factors indicative of economic momentum. These factors were divided into three categories: tax and regulatory, economic drivers and commercial real estate fundamentals. Markets were ranked by their composite score for all three categories.
Of the 25 U.S. markets ranked, Orlando leads the country for economic momentum, making it the market with the most potential to benefit from Opportunity Zone investment. West Palm Beach and Tampa immediately follow Orlando, with Fort Lauderdale and Miami also in the top 10 (see graphic below).
These are areas where growing populations support strong economic and commercial real estate fundamentals. Combined with the lack of state income taxes in the state, the dynamics in these markets are creating a more favorable environment for development and investment.
How Opportunity Zones Work
Opportunity Zones allow for any capital gains to be deferred, provided those gains are invested in one or more “qualified opportunity funds” (QOF) within 180 days. QOFs are required to have at least 90 percent of its capital invested in qualifying investments in designated Opportunity Zones. After reaching certain holding period hurdles (at five and seven years) the basis for the original capital gain is adjusted upward, thereby not only deferring but also reducing tax liability by up to 15 percent.
The balance of the deferred gain, unless the investment is disposed of earlier, will be recognized in 2026. Finally, if the opportunity zone investment is held for at least 10 years, there is no capital gains tax on the opportunity zone investment itself.
What Florida Investors Should Know
When it comes to Opportunity Zones, timing is key. Investors should focus on shovel-ready projects, ideally with regulatory approval in place, thus reducing regulatory risk.
Opportunity Zones offer wide applicability across all real estate sectors including multifamily and/or affordable housing, office, industrial and mixed-use that includes retail and/or hospitality. Eligible investments are limited to new developments and capital-intensive renovations, including ground-up developments, property repurposing or rehabilitations, business HQ expansions and public-private partnerships.
Also keep in mind that while Opportunity Zones are in economically distressed areas, not all “distress” is equal. Look for areas with strong job, income and population growth and commercial real estate market fundamentals, especially in areas where economic revival is beginning to take place.