May 19, 2019 by Margaret Jackson

Expert Q&A: Taking Advantage Of Opportunity Zones Requires Caution

Photo: Courtesy of Nicole Ament

Opportunity zones have been making headlines across the country, but questions have swirled around how investors, businesses and real estate developers can use them to their advantage. The second round of opportunity zone regulations was released in mid-April, but many people are still trying to understand the benefits of investing through an opportunity fund and how developers can use them to improve projects that are in opportunity zones.

Brownstein Hyatt Farber Schreck shareholder Nicole Ament has been working with real estate and corporate clients in Colorado and across the nation to partner with the firm’s tax group to take advantage of opportunity zones. Bisnow asked Ament for her expertise in navigating the new investment and development tool, which she said should be approached with caution and only employed if a deal makes sense without using it.

Bisnow: What long-term financial planning and tax strategies do opportunity zones offer?

Ament: Opportunity zones create the ability for a taxpayer to defer, reduce and possibly eliminate certain capital gains taxes. Taxes on capital gains properly reinvested in an opportunity zone fund can be deferred until Dec. 31, 2026, and the capital gains tax on that same capital gains could be reduced by up to 15% if it is invested soon enough in an opportunity zone fund. Plus, if an investor holds its investment in the opportunity zone fund for 10 years, the investor will not pay taxes on the gains earned from the opportunity zone fund. ... If the investor sells its interest in the opportunity zone fund prior to the expiration of the 10-year hold period, the investor will pay taxes on its gains. There are a couple of scenarios where the transfer of the interest in the opportunity zone fund will not trigger gain, but they are very limited, such as transfer of the interest upon death and transfer to a grantor trust. The essential rule remains that the investor needs to hold its interest in the fund for 10 years.

Bisnow: How should investors plan to take advantage of opportunity zones?

Ament: Investors should look for opportunity zone funds that have clearly delineated plans for the investment of dollars in opportunity zones. There are many “funds” popping up trying to gather investors quickly. Investors should use the same business standards for evaluating a potential opportunity zone fund investment that they would use for any other investment. If the investment does not pencil out without using the tax benefits provided by the opportunity zone, then do not invest unless the investment is being done for the good of the community you want to support and you are just looking to defer the initial capital gains tax payment. The benefits afforded by the tax breaks of an opportunity zone investment will not make a bad deal good, but it can make a good deal great.

Bisnow: Who should be most interested in opportunity zones?

Ament: People have suggested that opportunity zones are “impact investing on steroids.” The tax benefits are definitely significant, and the potential to take advantage of opportunity zones should be considered by investors, real estate developers, businesses looking to relocate, startup businesses and community-minded folks looking to spur new development and public projects. From software companies to manufacturing facilities to the simple construction of a data center, the ability to benefit from capturing capital gains as investment dollars is there for a variety of investors and forward-thinkers. There really are so many different ways that opportunity zones can be utilized to create positive growth and huge social impact.

Bisnow: Who can establish an opportunity fund? How is an opportunity fund established?

Ament: Anyone can establish an opportunity zone fund. The word “fund” is used in relation to opportunity zone funds in a very different manner from how most of us think of “funds.” An opportunity zone fund is essentially a partnership or LLC; it simply can’t be a single-member entity. While there will be some traditional larger capital “funds” set up as opportunity zone funds that go through the large PPM [private placement memorandum] and subscription process, most opportunity zone funds will be set up as a partnership or LLC with a more limited number of investors. Once an LLC or partnership is formed, the entity then self-certifies that it is an opportunity zone by checking the box on a form. While there are many other technical aspects to the operations of the opportunity zone fund, the actual formation is fairly simple.

Bisnow: Can an opportunity fund invest in multiple opportunity zones?

Ament: Yes, an opportunity zone fund can invest in multiple opportunity zones. Because the best ultimate exit strategy for investors in an opportunity zone fund is to sell its interest in the opportunity zone fund itself, an opportunity zone fund may want to limit the number of investments within the fund to make for an easier exit unless the fund knows that it will want to sell the portfolio of its investments as a whole.

Bisnow: Can an investor invest directly into an opportunity zone business or property without going through an opportunity fund?

Ament: No, the capital gains need to be invested in an opportunity zone fund. The opportunity zone fund will then invest in the opportunity zone business or property but most likely in a business that holds the property given some positive attributes of structuring the investment in that manner.