What Treasury’s Opportunity Zones Mean for CRE?

The Treasury released its regulations regarding Opportunity Zones, the new tax policy set to encourage investment in underserved markets across the U.S. Connect Media asked Adam Hooper, Co-Founder and CEO of Portland, OR-based RealCrowd, to share what these new regulations are about, the tax benefits to investors, how opportunity funds work and what the expected impact on CRE will be in our latest Q&A.

Q: Now that the regulations are released, what are the key factors investors need to know about Opportunity Zones and their tax benefits?
A: The regulations released last week address many of the unanswered questions investors had regarding Opportunity Zones. Key questions answered include:

• What gains qualify for tax benefits?
Only capital gains are eligible for reinvestment into Opportunity Zones.

• How long will Opportunity Zone investment be an option?
The last date to make an Opportunity Zone investment is EOY 2026.

• How long do investors have to hold Opportunity Fund investments to benefit from the exclusion of tax on the appreciation?
Investors must hold their investment in an Opportunity Fund for a full 10 years to exclude taxable gains on the appreciation of the investment.

Q: What is included in the substantial improvement requirement?
A: The original legislation required that 100 percent of acquisition basis will need to be reinvested into improvements. We now know this requirement only applies to building value. Land value is not included, and does not have to meet the basis improvement requirement.

This is a major win for commercial real estate investors.

For example, if an investor purchases a property in an Opportunity Zone where the land is worth $5 million, and the building is worth $500,000, only the $500,000 will need to be reinvested in order to qualify.

This clarification is likely to result in more activity, as investors plan for reinvestment and redevelopment.

Q: What is the time frame to invest the money raised into an Opportunity Fund?
A: The latest proposed regulations from the Treasury provided a “working capital safe harbor” that allows for funds to be invested over a 30-month period. To qualify for the safe harbor, the Fund has to retain a written strategy and plan as to how the money will be deployed over that timeline.

For example, if a manager raises a $250 million fund, they don’t have to invest all of that money within the first six months as was the initial concern for capital deployment. The safe harbor provides much more flexibility for managers to deploy the capital in a responsible way.

As a whole, while there are still questions to be answered, the new regulations are shaping up to have a very positive impact on investment activity over the next several years.

For comments, questions or concerns, please contact Dennis Kaiser