Rules Not Ready, the Clock Ticks for Opportunity Zones Investments

WASHINGTON, DC—The rules are not completely finalized for Opportunity Zones—yesterday the Internal Revenue Service held a hearing on the subject with testimony provided from several industry sources—but investors that are interested in these tax-advantaged tracts are still working against the clock. Decisions must be made, in other words, whether or not the final rules are ready. To that end, the American Bankers Association is encouraging the IRS to provide grandfathering and transition rules for good faith investments that relied on the original statute and earlier proposed guidance, according to Financial Regulation News.

In the meantime, investors are pushing forward with OZ projects in order to maximize the advantages they will receive under the program. A new report by Cushman & Wakefield lays out this timeline.

Investors can defer tax on any prior gains invested in a Qualified Opportunity Fund or business until the investment is sold or exchanged or Dec. 31, 2026. If the investment is held for longer than five years, there is a 10% exclusion of the deferred gain, and a 15% exclusion if held for seven years. If held for at least 10 years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.

Working capital can be held in cash and short-term debt securities for up to 31 months. Funds also have six months to identify projects for newly raised capital and 12 months to reinvest proceeds from asset sales. In addition, the 31-month and 12-month windows can be extended when a project is delayed while awaiting a government action.

Here’s the crux, C&W says: Dec. 31, 2019 is the deadline for investors to maximize tax benefits. The value of the tax break declines after that.

C&W also notes that investors can still contribute new capital to the program until the end of 2026 and avoid capital gains on the Opportunity Zone Fund investment itself, which can grow tax-free until 2047. However, as Revathi Greenwood, Cushman & Wakefield’s head of Americas Research says, the program potentially makes it significantly less expensive for taxable investors to back real estate projects as it can boost after-tax IRRs by up to 150-300 basis points in the first 10 years.

The stakes are high for getting the timing—and the rules—right. There are over $6 trillion in unrealized gains that could potentially be invested through the program, although C&W research suggests the scale to be closer to $100 billion deployed over the next several years.

C&W is currently tracking 138 large CRE funds targeting more than $44 billion in equity. Most of these funds have national mandates, it says, and intend to invest in multiple product types: 82% of capital for multifamily investments (including senior, student and workforce housing), 60% for office and 49% for retail.

“Projects in highly regulated markets or ones that are not shovel-ready will be easier to do than previously thought,” Greenwood says in prepared remarks. “Overall, it’s rare that a policy program aimed at low-income areas across the country garners a high level of attention and capital, but Opportunity Zones do just that.”