The U.S. Treasury has disclosed its highly anticipated Opportunity Zone regulations. The new guidelines are intended to give greater tolerances to Qualified Opportunity Funds (QOF) with more flexible timelines, though they could divert some funding away from real estate and toward business ventures.
The federal program, first launched in 2017, allows investors to defer federal taxes on capital gains until December 31, 2026 so long as the gain is reinvested in a QOF. There is no cap on the amount of money that can be invested, but at least 90 percent of fund assets are required to be invested in Opportunity Zones. For those that hold the investment for 10 years, no taxes are applied to any appreciation after funds are invested and participants also receive a 15 percent cut to their capital gains. The intent of the program is to kick-start economic development in impoverished neighborhoods by tapping into an estimated $6 trillion in unrealized capital gains.
“Finally, investors and communities across the country have the clarity on the rules governing Opportunity Zones they have been waiting for, and can confidently move forward to position neighborhoods for transformative, long-term and inclusive growth,” said Decennial Group co-founder and managing partner, Scott Goodman.
Goodman, founding principal of Farpoint Development, recently launched Decennial Group with Bob Clark, founder and CEO of Clayco, and Shawn Clark, president of CRG. The joint venture is targeting $1 billion in Opportunity Zone investments through a vertically integrated, developer-builder platform.
“Opportunity Zones hold the potential to positively transform economically distressed communities, and without them, a platform like Decennial Group wouldn’t exist, and wouldn’t have a pipeline of deals under consideration throughout America’s Heartland,” Goodman said. “That said, today’s regulations speak to why this program is designed for more than a traditional investment fund, and why we’ve taken a comprehensive approach that meets the requirements of the regulations as well as the intent and spirit of the law, to align the interests of both investors and those communities building for the future.”
Early critics of the program have declaimed that Opportunity Zones would only enrich well-heeled investors while simultaneously gentrifying neighborhoods and not creating enough well-earning jobs. Answering these criticisms, the regulations—the second set issued by the Treasury in an attempt at clarifying the program—appear to prioritize entreprenurial investment over real estate investment.
Under the Treasury’s new regulations, certain properties are fast-tracked for the tax breaks if they have been vacant for an extended period of time while investors now have a one-year grace period to sell assets and reinvest proceeds. Investment is incentivized if a target business has a focus on exported goods and/or services, or if goods and services would impact the domestic market outside of the zone that the business is located in.
The guidelines also give flexibility to include more than one investment in a fund as investors sell shares in a fund with the caveat that the money from the share sell is reinvested in another qualifying business or asset. Real estate investors were thrown one bone as they can now lease and refinance properties located in Opportunity Zones.
Even before full guidance was available for the Opportunity Zone program, many were eager to get in early. Chicago-based private equity real estate firm Origin Investments launched a QOF last November that amassed $105 million in commitments from 425 investors in 17 hours.
Others, like mid-market multifamily brokerage Kiser Group, hope that the program will reinvigorate long-ignored communities on Chicago’s South Side. Sterling Bay and DL3 Realty recently formed a partnership to develop a project at 67th Street and Wentworth Avenue in Chicago’s Englewood neighborhood; the five-acre site is located in an Opportunity Zone.