Breaking It Down: Inland on Opp Zones

OAK BROOK, IL–Joe Cosenza is an unabashed fan of Opportunity Zones, the uplift mechanism for downtrodden neighborhoods set into place by the Tax Cuts and Jobs Act of 2017. After all, he argues, “Who wouldn’t want to create jobs for people, improve their quality of life, improve the local community, supply long-lasting income, build buildings and businesses and get a tax benefit in the process?” Good argument.

At its core, says the Inland chief, Opportunity Zones are geared to “steer money from people who have it to places that need it. That’s the essence of the whole concept.”

As GlobeSt.com has reported, there are designated Opportunity Zones in every state in the union. (Cosenza suggests you Google Opportunity Zone Map for an interactive display on locations. Or you can click here. But as he points out, uncovering the opportunities in those zones–if there are any–is a matter of research.

“There might not be anything for sale,” he says. “You have to do some research and even knock on some doors to engage with individual owners and get a project going forward.”

But once you find the sellers, the benefits begin. If you invest eligible gains into an Opportunity Zone Fund and meet the strict timing requirements of reinvestments of such gains and the 10-year holding period, then you don’t have to pay any taxes on the appreciation of the investment,” says Cosenza, who admits that Inland is currently exploring such deals. “That’s the biggest incentive.”

Some pundits, in this space and elsewhere, have expressed worry about the G- word (gentrification) as new projects in any one area beget more interest. Cosenza passes off such fears, because, in a sense, upgrades are inevitable. “If you build something new,” he says simply, “then it’s new,” and it’s bound to be a better alternative than what had been there before.

Rules to Play By

Joe is clear to state he is not a tax expert and the rules are very complex so every investor needs to consult with their tax professional.  For example, there are some catches to consider, as Cosenza points out. First, it has to be a long-term hold to enjoy that tax break. In addition, you have to double down on any investment you make. “So let’s say the asset cost you $4 million,” he explains. “In order to qualify as substantially improving the property, you have to spend at least another $4 million–actually $4 million plus a buck. Otherwise it doesn’t qualify.” And all improvements have to be complete within 30 months.

In addition, Cosenza points out that “unless the laws change in the next several months, the tax benefits of the program are only available for investors that have eligible gains to invest from the sale of capital asset. If an investor puts “regular” cash into an Opportunity Fund, he/she does not get to enjoy the tax benefits the program offers.

Particularly for that reason, and for tracking issues as well, he suggests doing Opp-Zone deals with specified projects, rather than through a blind pooled fund. It has to be deal-specific so you as an investor know exactly what you’re getting into and what’s happening with your investment. How in the heck can you put that capital out fast enough to meet all of the deadlines–especially since the IRS has not clarified some of the fine points of the program?”

With those bases all touched, here is the play-by-play as Cosenza sees it: “You gather your fellow investors and you buy the asset for $4 million. Your plan is to build a 200-unit apartment building. Let’s say that costs $100,000 per unit. So now you have $24 million invested. You add a 50-percent mortgage, so that’s $12 million. You need to raise $12 million for the deal. When you sell that asset 10 years from now, your $24 million deal sells for $30 million and there’s no tax on the six million.”

That, he says, is a win/win. In short, “Opportunity zones are just great for America,” he concludes.