The Internal Revenue Service (IRS) states that opportunity zones are federally-designated locations, usually in economically challenged areas specified by census tracts, where new investments may qualify for special tax treatment.
These distressed census tracts have a high poverty rate, a low median family income, and a high unemployment rate. The federal government solicited local feedback to determine which communities would gain the most from increased investments.
Understanding opportunity zones in commercial real estate is the first step. Read on to understand how opportunity zones could impact your commercial real estate investing journey.
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Community Benefits Of Opportunity Zones
It’s important to know that the 2017 Tax Cut and Jobs Act (TCJA) also established opportunity funds in addition to opportunity zones. These investment options are intended to increase economic opportunity and free up funds for usage in opportunity zones.
The goal of creating and taxing real estate opportunity zones is to identify places of greatest need and to encourage private investment in them. As a result, the projects created jobs and income that could be re-invested in the community, creating a virtuous cycle that would bring the town out of poverty.
For potential investors, investing in an opportunity zone has numerous advantages. You can postpone or reduce the amount of capital gains tax you pay. You won’t have to pay taxes on the increase in value if you hold the property for ten years.
Grants Access To Capital
Many people believe that projects located in opportunity zones can get lower financing. Aside from that, opportunity zones are now the best source of long-term equity.
The opportunity zone concept provides investors with cash in certain locations. In many of them, it makes more sense to pursue the investment rather than a 1031 exchange, as many people believe they should.
Why Are Some People Wary of Opportunity Zones?
Critics worry that the absence of control would result in only minor improvements on the ground. Currently, there are no precise outcomes defined in the legislation to establish if the investments have resulted in genuine change.
It also excludes any economic measurements or data reporting requirements. However, to combat missed opportunities, below are a few tips to strategically invest in opportunity zones in the U.S.:
Find Seasoned Sponsors
The most significant risk to obtaining OZ benefits is choosing the wrong sponsor, so be careful. Even if you do everything right, you could lose your tax break if you make this mistake.
Sponsors who treat transactions differently should be avoided. Capital from Qualified Opportunity Funds (QOP) cannot be used to complement a capital structure, unlike other tax advantages.
The revenues must be present for an agreement to work. A developer cannot invest $50 million in a legitimately impoverished community and then rent units for 50% less than the market rate. The agreement must function to gain the tax benefits, and OZ deals should not be treated differently.
Assess The Strategy Applied
Deals have to make money, and most neighborhoods can’t afford the rents required to justify new buildings. This makes discovering good offers much more difficult. On the other hand, cities move swiftly, and several OZ regions are shifting and ripe for new construction.
Pricing will rise due to competition, but there are still plenty of opportunities. Look for managers who have experience investing in up-and-coming areas. A solid real estate investing plan includes spotting shifting communities and getting there first.
Consider liquidity as well. When will the manager distribute the capital? Keep in mind that you’ll have to pay your delayed taxes in 2026. From where will that money come? Most fund managers intend to refinance assets and return capital to investors, but they also have a contingency plan.
When Should I Hire A Professional?
Investment professionals can save you time and possibly money from investing in poor opportunity zones when reporting arduous taxes on commercial properties. Some outstanding candidates for hiring a professional include:
- Those who own a business
- People going through a major life change (e.g., marriage, divorce, etc.)
- Those who’ve had their eyes on a new investing opportunity
Leave It To The Pros At Saint Investment
Professionals at Saint Investment are backed by years of expertise and founded by the high net-worth investment partners. Using dependability, flexibility, and performance as basic foundations of their operational strategy, Saint Investment brings unique investment terms to the real estate world.
Creating stronger possibilities with the right people at Saint Investment will help you maximize your investment plans in opportunity zone commercial real estate properties in your state. Find out more about investing in income funds or how you can get started by scheduling a free consultation with our people at Saint Investment.
President of Saint Investment Group
Nic is a two decade seasoned expert in investing and capital raising, specializing in Real Estate and debt markets. With Saint Investment Group, he leads large-scale distressed asset purchases and innovative syndications for investors.