Opportunity Zone Funds are a new asset class and source of equity capital financing, established in the Investment in Opportunity Act sponsored by Sens. Corey Booker and Tim Scott, passed in late 2017 as a provision of The Tax Cuts and Jobs Act. This novel legislation was designed to unleash trillions of dollars of capital gains to fund real estate projects and grow businesses in low-income urban, suburban, and rural communities designated as Opportunity Zones.
Under the Act, an investor can employ virtually any “capital gain” (the increase in an asset’s value upon its sale) to obtain relief from the payment of taxes applicable to capital gains, if the investments are made in Opportunity Zones. These zones have been authorized for a period of 10 years, expiring Dec. 31, 2028. Potentially, investors could make Opportunity Zone Fund investments multiple times over the ensuing years. While still early in the life of the legislation, trending evidence indicates that Opportunity Zone Funds or “OP Zone Funds” could become a significant new source of equity capital for real estate projects and businesses in Opportunity Zones.
With the issuance of very detailed regulations in 2018 and 2019 on the tax and legal framework for OP Zone Fund investments, the collective experience of investors, real estate developers and businesses, as well as financial, legal, and tax advisers, with the Act and OP Zone Fund investments is still in its infancy with limited precedent transactions. This circumstance provides both challenges and opportunities.
One of the challenges includes the structuring of OP Zone Fund deals in compliance with the new Act and regulations. The OP Zone Fund investment, similar to other tax-structured investments, such as 1031 exchanges and New Market Tax Credits, is a complex investment, with regulatory and structural requirements that must be understood and applied correctly to protect the tax advantages of the investment.
Another challenge is locating real estate deals and businesses in Opportunity Zone designated census tracts that are eligible for OP Zone Fund investment. To help meet this challenge, Brown Hatchett & Williams (BHW) works closely with existing local developers and businesses, as well as community-based organizations, with established ties to OP Zone neighborhoods.
The historic Booker-Scott legislation creates the opportunity to identify and structure real estate and business transactions that meet target returns for Op Zone Fund investors to bring much-needed equity capital to under-served communities where Opportunity Zones are located.
At BHW, we believe that the Opportunity Zone Fund legislation presents a generational opportunity for real estate developers, business owners, and investors to put OP Zone Fund capital to work in low-income neighborhoods across the United States.
In our next entry, we will examine how investors benefit from Op Zone investments and identify strategies local developers and companies might use to attract Op Zone capital to their communities in order to take advantage of the tremendous promise of the Opportunity Zone Fund legislation.
Brown Hatchett & Williams LLP is a corporate boutique law firm located in New York City. Find us at www.bhwllp.com.