• Team Palmeri



This article is going to take a closer look at multiple topics including the following, and more

  • The history of Opportunity Zone Program

  • Benefits of the Opportunity Zone Program’s Tax Incentives

  • The rules and qualification details for opportunity funds

  • Possible types of investments

  • Qualified Opportunity Zone Business Property

Before jumping into those topics, it’s important to understand the reality that many American’s face. 52 million American’s live in economically distressed communities. That’s 1 in 6 American’s. The communities that are struggling today have been completely sidelined by 21st century economic growth.

In non-prime communities, non-prime businesses are struggling with traditional modes of financing. Since 2008, nearly 1 in 4 community banks have disappeared. Small business lending is down by a quarter and 75% of all venture capital is concentrated in CA, MA, and NY.

Taking a look at mission-oriented capital shows that it is just as uneven. 27% of countries received no CDFI funding in the years of 2011 to 2015. Even philanthropies and foundations bypass many of the countries neediest communities in recent years.

What is Opportunity Zone?

Opportunity Zone has strong, bipartisan roots and builds on the lessons prior federal efforts to revitalize struggling communities. Opportunity Zone is so unique because it is designed to concentrate capital, rather than diffuse it. this is an investor incentive that pertains exclusively to capital gains. All of these incentives are tied to the longevity of investment, meaning it rewards patient capital. Opportunity zone provides no up-front subsidy, picks no winners, and unlocks scarce equity capital. Opportunity zone was designed with start-ups in mind and moves with the speed of the market. This truly gives investors a stake in a communities’ future by rewarding based on community success, not individual projects.

What Makes Opportunity Zone Promising?

There are a few things that make Opportunity Zone truly one of a kind and promising for positive results. First, the flexibility of Opportunity Zone is unmatched. Low-income communities have a wide range of financing needs. The flexibility of the incentive provides the potential to support a variety of mutually reinforcing activities within a single community as well as across a broad spectrum of communities.

The Scalability of Opportunity Zone is also very promising. There is no statutory cap on the amount of capital that can flow to Opportunity Zones in any given year. Because of this, Opportunity Zones have the potential to help fuel economic renewal in distressed communities on an unprecedented scale.

Finally, the simplicity of Opportunity Zone is one-of-a-kind. Complexity has often been the Achilles heel of policies aimed at unlocking private capital in low-income areas. Complexity adds cost, time, and risk to business transactions, biasing programs towards a narrower set of stakeholders and more risk-averse outcomes, often precluding the very types of business investments that are most likely to have transformative benefits for communities.

Three Core Elements

Opportunity Zone is based on three core elements.

  1. Zones - States and territories designated up to 25 percent of Low-Income Community Census tracts in their state to be certified by Treasury as Opportunity Zones.

  2. Funds - Opportunity Funds are self-certified investment vehicles organized as corporations or partnerships for the purpose of investing in qualified Opportunity Zone assets. All investments that seek to take advantage of the provision must flow through Funds.

  3. Investments - Funds make equity investments into businesses and property in Opportunity Zones. Qualified assets are the stocks of qualified companies, interests of qualified partnerships, or direct ownership of qualifying tangible property.

The unique design of Opportunity Zone results in some major tax benefits for the tax payer. Tax payers can benefit from temporary deferral of a capital gain on any sale or exchange of property to an unrelated person. They can also benefit from a partial reduction of deferred gain. This means that income tax is still paid on a large portion of the deferred gain, but not all of it. Finally, tax payers receive forgiveness on the additional gain or the appreciation on investment. A deferred gain is defined as the aggerate amount invested that does not exceed the amount of the gain generated within 180 days of the sale or exchange. These tax benefits may apply to any individual, business entity, or trust.

What is an Opportunity Zone?

An opportunity zone, or O-zone, is a population census tract that is a low-income community, or LIC. There are 74,000 census tracts in the US, 37% of those are considered LIC’s. For example, Arizona has 671 LIC’s and 217 contiguous tracts. A LIC is based upon poverty rate (20%) and median family income (80%). O-Zone’s are to be timely nominated by each governor. 25% of LIC’s eligible for O-Zone status. This equates to roughly 8,00 census tracts (168 in AZ), 5% of those nominated could be a contiguous tract (9 in AZ).

What is an Opportunity Fund?

An opportunity fund is an investment vehicle organized for the purpose of investing in Opportunity Zone Property. This includes a certification process, penalties for non-compliance, and statutory requirements stating that it must be organized as a corporation or partnership and meet a 90% requirement. The opportunity fun certification is a self-certification that requires the taxpayer to complete a form attached to the taxpayer’s federal income tax return for the taxable year. This form will be released in the summer of 2018. The tax return must be filed timely, taking into account for extensions. There does not appear to be a cap on the number of O-Funds or the amounts that can be invested in the O-Funds. The 90% requirement mentioned above means that 90% of assets must be held in O-Zone Property, which is determined by the of the average of the percentage of O-Zone property held on the last day of the first six-month period of the fund’s taxable year and the last day of the fund’s taxable year. If the 90% requirement is not met, there will be a penalty placed on O-Fund Partners.

Investments that constitute an O-Zone Property include equity investment in an O-Zone Business or the direct purchase of an O-Zone Property. O-Zone Business Property is tangible property used in a trade or business that is acquired by purchase from an unrelated party after December 31, 2017. Original use in the O-Zone must commence with the O-Zone business. The other option is that the O-Zone Business or O-Fund substantially improves the property within a 30-month period by creating additions to basis that exceeds the adjusted basis of such property. During substantially all of the holding period, substantially all the use must be in an O-Zone.

Possible investments in Opportunity Zones include real estate development and significant rehabilitation, opening new businesses, acquiring an existing business and relocating it with expansion, and large expansions of businesses already within O-Zones.

Additional Information

Many of the terms and phrases used may need further explanation. These are a few pieces of additional information regarding the content.

  • The Deferred Gain is included in taxable income on the earlier of the investors sale of their interest in the O-Fund before December 31, 2026.

  • The amount of deferred gain subject to income tax is based on the lesser of the amount of the deferred gain or the fair market value of investment in the O-Fund.

  • Partial Reduction of a Deferred Gain when the taxpayer had an initial basis in the O-Fund of zero is based on the time held. If held for 5 years, the investors tax basis in the O-Fund is increased by 10% of the deferred gain. If help for 7 years, the investors tax basis in the O-Fund is increased by 5% of the deferred gain.

  • Full Forgiveness is granted when the investor held interest in the O-Fund for 10 years and 1 day. The result is no gain on the appreciation above investor’s original investment in the O-Fund.

  • Certain businesses can not be an O-Zone Business. These businesses include golf courses, country clubs, massage parlors, gambling facilities, hot tub facilities, sun tan facilities, and any store which sells alcohol for consumption off the premises as their main form of business.

Our team specializes in corporate real estate by representing clients in their leasing and purchasing. Dan Palmeri, SIOR and myself Natalie Wainwright have the experience, bandwidth, knowledge and most importantly, the determination to get corporate users the best possible deal terms for their needs. You can follow our team’s daily activities with our impressive client roster on Twitter & Instagram @vegascreteam.

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