THE NEED FOR SPEED Roughly $25 billion has already been committed to the Opportunity Zone concept even without final reg- ulations. We don’t know what the rules will ultimately say and it’s possible that, in the end, the regulations might have some nasty surprises. For this reason, it might be expected that investors would wait until more is known. That hasn’t been the case and here’s why. The Economic Innovation Group (EIG) points out that the deferred gain must be recognized when an O-zone investment has been sold or by December 31, 2026, whichever comes first. That’s a little more than seven years from now, a very tight deadline for investors as the program is currently designed. The Center on Budget and Policy Priorities explains that “an investor must invest in opportunity zones by December 31, 2019 to obtain the full benefit of the tax break, because opportunity zone investments must be held for seven years to qualify for the full 15 percent cut in capital gains taxes and investors must realize their deferred capital gain by 2027. Investors can still benefit from tax forgiveness on appreciation in opportunity zone investments if they invest after 2019, as long as they do so by December 31, 2026.” It may be that such deadlines are at least in part responsible for the rush to invest as well as the sudden price rises seen designated areas. “In the months immediately following the final selec- tion of Opportunity Zones,” Zillow reported in March, “the price trajectories diverged. Sale prices in eligible but not selected tracts began growing more slowly and by single digits, whereas sale prices in Opportunity Zones started growing by more than 20 percent year-over-year.” whether O-zone investments will produce good returns af- ter inflation. We don’t have enough experience to say what works and what doesn’t. Some strategies and some loca- tions are no doubt riskier than others. But, which ones? The best parallel is likely our experience with Super- fund sites. Long written off as impossible to develop, it turns out that some of the nation’s 4,000 Superfund and Formerly Used Defense Sites (FUDS) have enormous potential. As an example, Camp Leach was a 660-acre parcel where the government tested chemical weap- ons, bombs and incendiary munitions. Toxic gases from the site once drifted over nearby homes and “slightly gassed” a US senator and his family. Today the property includes much of Spring Valley, a neighborhood just a THE CASE FOR OPPORTUNITY ZONES While tax breaks are attractive, the real question is

few miles from the White House and one of the most-ex- clusive residential areas in Washington, DC. So far, more than 400 once-spurned Superfund and FUDS sites have been returned to commercial use with more in the pipeline. The elements which made the federal environmental program successful apply to Opportunity Zones. First, there is real government money in the O-zone effort. The Joint Committee on Taxation estimates that between 2018 and 2027 federal revenues will decline by $1.6 billion annually because of Opportunity Zone write- offs. This is effectively money “spent” on the program. Second, there is a political consensus which supports Opportunity Zones. Senators Scott and Booker are from different political parties, yet they have come together for this effort. What politician is going to oppose new money going into local areas? The O-zone concept is certain to develop a following that will seek to continue – if not expand – the program. Third, Opportunity Zone investments are certain to benefit from expansive and positive media coverage, especially if local job counts increase. Fourth, Opportunity Zone census tracts, like Super- fund sites, are often strategically located in the heart of major metro areas. Long Island City, in the borough of Queens and just one subway stop from mid-town Manhattan, is one of the two areas initially selected by Amazon to develop a massive HQ2 property with some 25,000 jobs. Where Amazon wanted to build is also a designated Opportunity Zone. Unfortunately, in this particular case, the Amazon deal fell through. Still, the location will no doubt attract other investors. OPPORTUNITY ZONE RISKS Money is the magic ingredient that often creates community success and the O-zone program is all about moving dollars from investor accounts into local projects. But what is OZ success? And what are the risks? The answers are surprisingly complicated, in part because the program is new and little information is available. That information deficit, however, is likely to end. In April, the IRS sent out a proposal “to measure the ef- fectiveness of the policy” in terms of such factors as job creation, economic development, and investment activity. If the proposal is approved, QOFs will have to answer a variety of questions when filing their annual Form 8996s. Even with more information, the question of “success” and how to define it remains elusive. The problem is that the Opportunity Zone concept involves a variety of stake-

QOF INVESTMENT OPTIONS A qualified opportunity zone “property” can be stock, a partnership interest, real estate, or a business (a QOZB). However, a QOF cannot own “debt, stock, part- nership interests, options, futures contracts, forward contracts, warrants, notional principal contracts, annu- ities, and other similar property.” Also on the banned list are investments in golf cours- es, country clubs, massage parlors, hot tub facilities, and suntan parlors. Racetracks, gambling dens, and take-out liquor stores are similarly prohibited.

The National Council of State Housing Agencies (NC- SHA) publishes a free Opportunity Zone Fund directory which, as of March, included more than 100 funds rang- ing in size from $1 million to $3 billion with an average size of $224 million. In total, more than $24 billion has been raised by Opportunity Funds according to NCSHA. James Tassos, Deputy Director of Tax Policy and Strategic Initiatives with NCSHA, tells the Housing News Report that “approximately 36 percent of the 117 funds plan to invest nationwide, while the remaining 64 percent target specific states or regions. The West/ Southwest region is the target of 19 percent of the funds (22 of 117), followed by the Northeast/Mid-At- lantic region with 15 percent (18 of 117), the Southeast region with 13 percent (15 of 117), and the Midwest re- gion with seven percent (8 of 117). The remaining funds target multiple states and/or regions.” Tassos adds that “while it is difficult at this early stage of Opportunity Zone capital raising to estimate the potential size of the market, the Treasury Depart- ment estimates approximately $100 billion in private capital could be invested in Opportunity Zones.”


Neither the Treasury Department nor IRS publish lists of QOFs. However, it’s clear that in a short time a large number of opportunity funds have emerged. Novogradac, a tax, audit and consulting firm, has a free Opportunity Zone Resource Center with more than 100 QOFs. As of mid-April, the Novogradac list included funds with $26 billion in investing capacity.

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