Houston, TX, USA – February 8, 2015: Monopoly Board Game – money around the car, dice, houses and hotels
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If I was redesigning a new Monopoly game, I would include a set of spaces called Opportunity Zones. This new type of property could be extremely valuable, even more so than Boardwalk and Park Place.
Who knows. Perhaps there will be a version someday that includes that feature. It’s not that ridiculous an idea considering how Congress created its own Opportunity Zone Funds category in the Tax Cuts and Jobs Act of 2017. Abbreviated to OZs, they’re meant to encourage long-term investments in low-income urban and rural communities nationwide.
These opportunities provide a tax incentive for investors to reinvest their unrealized capital gains. Which means they’re worth paying attention to.
At first, admittedly, the laws surrounding them were ambiguous and confusing. While the notion of investing in distressed communities in return for substantial tax breaks seemed attractive, the original blueprint lacked clarity. So most people saw the big picture as more of a high-roller’s crapshoot.
But that might be changing now.
A few weeks ago, I was a keynote speaker in Dallas, where the resounding theme was that OZs will spark the U.S. economy and provide a catalyst for job creation. According to Jack Sullivan with Emergent Development Group and the developing Airacobra OZ Fund, they’re “the greatest tax benefit offered by our government in my career.”
He added that, “ The time to invest in OZ Funds is now. ” That’s because the law’s benefits clearly diminish over time. Due to a forced recognition in the 2026 tax year, there’s an initial investment window between now and the end of 2019.
Earlier this week, the government released a second set of guidance that will help form consensus on the optimal investment types and structures within the law. President Trump, for one, said that the tax had been lowered “all the way down to a very big, fat, beautiful… zero.” And Tyler Smith of the Parker Poe law firm told me that:
As lawyers, accountants, and others hasten to digest and implement the some-150 pages of new guidance, the emerging theme is that… federal regulators seem to truly want the OZ program to work.
So here’s what you need to know.
What Makes OZ Funds Tick
Because real estate investments have fixed upsides with developed values that generate “ordinary income,” real estate is not optimally tax-advantaged under the OZ law.
However, an early-stage venture equity investment sees nearly all of its value generation at disposition – a 100% capital gain – which has a much greater upside potential than a typical real estate deal.
Since the OZ law is, foundationally speaking, a “place-based” program, real estate will be a part of any optimized OZ Fund. Yet, according to Sullivan, “a portfolio that includes pairing the early stage VC and real estate models to create a handful of location-specific campuses which enable emergent ecosystems to foster long-term growth, community benefit, and economic returns seems to embody the ideal OZ law model.”
There are approximately 8,700 opportunity zone neighborhoods across the country. They qualify based on census data and a nomination from a state’s governor that proves there’s a need for economic investment in a low-income area. The pipeline for OZ opportunities is massive.
According to Stefan Schimenes, CEO of InvestReal:
My team is speaking with developers across the country every day. From traditional projects such as multi-family and office buildings, to the more unique offering of a pistachio farm, we are seeing a variety of OZ options available to suit the different needs of investors.
InvestReal is a data-driven real estate marketplace that connects investors with developers looking to raise capital for OZ projects. The company was launched in response to the overwhelming need to simplify the process of bringing these two parties together.
Stay Tuned
Senator Tim Scott (R-SC) and Housing and Urban Development Secretary Ben Carson spearheaded the initiative, together with President Trump. This opportunistic tax incentive allows investors to pay less in capital gains taxes for seven years (starting this year) if they make a long-term investment in qualified neighborhoods and then hold it for 10 years.
The hope is that businesses will develop and stay in these neighborhoods, providing employment opportunities and services as they do. So far, there’s definitely promise since, according to Carson, businesses have already invested over $25 billion into opportunity zones.
These funds’ incredible tax benefits have incentivized a flurry of new real estate investors. Keep in mind, however, that the majority of them don’t have pre-existing relationships with developers; and the ones that do have relationships might not find OZ projects within their network.
This brings us back to InvestReal.
In addition to providing a worthwhile marketplace, InvestReal’s platform also has a data component that utilizes proprietary algorithms and predictive analytics to offer users insightful trends about any metro area, zip code, or OZ in the country. Investors can research locations with a robust menu of metrics and indicators at their fingertips, and rank OZs based on their investment strategy; while developers can use the analytics as third-party validation for their offerings.
InvestReal has a lot of shovel-ready projects that can qualify as OZ investments already, and now that the new set of regs are out, investors that have capital gains already have a place to find projects.
In my REIT domain, I anticipate that a number of crowd-funding products are going to be launched, providing individual investors with expanded means to generate diversification and wealth creation.
More specifically, over the next few years, public REITs could become excellent buyers for opportunity zones as I expect these ventures to scale considerably, possibly reaching $1 trillion in market capitalization over the next 10 years.
Now that’s an opportunity worth talking about.
I am the author of The Trump Factor and I also serve on the campaign advisory board for President Donald J. Trump.