There has been a lot of buzz about the potential for Opportunity Zone Funds ever since they were mandated by Congress through the Tax Cuts and Jobs Act of 2017. Investors can defer capital gains taxes by investing in Opportunity Zone Funds, which invest in designated under-developed areas to rebuild broken-down infrastructure, schools, and water management systems or expand existing facilities. Infrastructure needs are urgent in some states such as: Rhode Island, New Hampshire and Maine, whose water system needs alone are more than $4.9 billion.
Leading Silicon Valley changemakers have pushed for the inclusion of Opportunity Zones in the tax bill and view this as an alternative to traditional forms of philanthropy. “It’s designed to have them do something with their capital that’s productive, rather than just sitting on a huge amount of Facebook stock,” says Napster founder and early Facebook executive, Sean Parker.
So, What are Opportunity Zones?
Opportunity Zones are a new community development program established by Congress to encourage long-term investments in low-income urban and rural communities nationwide. The goal is to encourage development in underserved areas or neighborhoods designated as economically distressed by the governor of each state. This program will also encourage investment in areas that greatly need it.
The U.S. Treasury has certified 8,700 Opportunity Zones. The designated zones have a median household income of $33,000, median unemployment rate of 13 percent, and an average poverty rate of 31 percent. They also tend to have lower home values, lower monthly rents, and lower rates of homeownership.
A study done by the Rockefeller Foundation established that America has more than $6 trillion in unrealized capital gains held in stocks and mutual funds. If these are moved into designated Opportunity Zone funds – they would benefit from, frankly, the largest tax benefit since World War II to invest in low-income communities around this country.
Benefits to Investors
Investors can avoid paying capital gains tax on the appreciated value of the Opportunity Zone investment altogether if they hold onto it for 10 years. Treasury Secretary, Steven Mnuchin, believes the program will spur $100 billion in capital investment across the country. Additionally, if a significant amount of capital can be channelized through these funds, they could help revitalize neighborhoods and towns that are starved for investment. Finally, the program specifically allows investors to trade out of one asset class and place the earnings into real estate. And there is no cap to the amount of money investors can put into Opportunity Funds.
U.S. based financial technology startup company, Fundrise, has recently launched a $500M fund targeting office and mixed-use projects in opportunity zones, and it has already identified one of its first investments in Northwest D.C. The fund, called the Fundrise Opportunity Fund L.P., will have a minimum investment of $25K. It has already raised $388K, according to the Washington Business Journal, which first reported on the fund.
Other companies are also lining up capital to invest in these funds. Origin Investments, a private equity real estate firm, launched a Qualified Opportunity Zone (QOZ) fund last month and collected $105 million in commitments from 425 investors in 17 hours. The Long Island City neighborhood of Queens, where Amazon just announced plans to build another headquarters, is an Opportunity Zone. And traditional alternative asset management firms like Highmore Capital have also entered the impact investing space with their HP Opportunity Zone Fund, which takes equity stakes in a diversified group of real estate projects nationally.
Opportunity Zones can be an economic development tool designed to spur economic growth and job creation in distressed communities. They can be a new formula for the public and private sectors to work together to generate new investments in real estate development as part of a broader strategy to support jobs, entrepreneurship, education, health, and safety—all in the same place at the same time.
However, it is crucial to realize that more capital is not always synonymous with more progress. Investors should develop strong partnerships with community organizations and local leaders to ensure that long-term interests are aligned. As with any investment, family offices and investors must continue to focus on the fundamentals when making a decision such as due diligence including the location, property type, market demand, operator’s track record and if they have developed in an area similar to the designated opportunity zone. Boundless is launching a workshop on Opportunity Funds in April of 2019. Interested investors should contact Research and Events Coordinator, Jaishree Singh, for more information at email@example.com.
Opportunity Zones can be a great opportunity, assuming the operator produces their intended results, the investors clearly state a social purpose, and all parties make outcome data publicly available.