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Philadelphia Opportunity Zones Offer Wealth Management Strategies Beyond Real Estate

Broad Street, Philadelphia

With the prospect of being able to shield capital gains from federal taxes, real estate investors are rightfully excited for opportunity zones. But thinking about opportunity zones from a pure real estate perspective is a narrow, and perhaps even a financially short-sighted, strategy. 

“The main way that the investing community has been looking at opportunity zones is as a real estate play, but it’s much broader than that,” Wells Fargo Regional Vice President Melissa Landay said. “We want to use these zones as a comprehensive strategy to help anybody invest their money and take advantage of tax incentives.”

Pennsylvania has designated over 300 Qualified Opportunity Zones, but the three counties surrounding Philadelphia on their own account for more than 120. That makes Philly a highly concentrated proving ground for the government’s revitalization strategy and investors’ new wealth management strategies.

Opportunity zones were intended as a way to bring capital to economically distressed areas via real estate development. But the tax code also opens up opportunities for bankers, lenders and even estate planners looking for new investment vehicles and wealth-transfer methods. Opportunity zones are a boon for more than the real estate industry — they can form the basis of an entire wealth management strategy for any kind of investor.

Opportunity zones were announced as part of the Tax Cuts and Jobs Act passed in December 2017. However, much of the tax code around the new policy was only worked out in the fall. Though some details of the legislation remain up in the air, the real estate industry is extremely excited to start working in opportunity zones, according to Jennifer Proper, director of legacy and wealth planning at Abbott Downing, a Wells Fargo business. 

“The IRS just released new guidelines for opportunity zones, but some of the finer details are still in the comment-and-review period,” Proper said. “So, many of our clients have some trepidation about jumping in head first. But we’ve received hundreds of calls about opportunity zones here in Philadelphia, not just from developers, but from attorneys, wealth planners and individual investors.” 

Part of Proper’s role is to help clients navigate the intricacies of the new tax code. She ensures that the funds and strategies investors choose are appropriate for their needs. Investors need to know that these funds are long-term investments — most of the potential tax savings are only available if investors hold their investment for 10 years. Proper also impresses on investors that opportunity funds, like any other asset, could decrease in value. 

But Proper also acts as a kind of ambassador. She helps spread the word that any investor, with any form of capital gains, be it from appreciated stock or the sale of a house, can invest in opportunity zones, even if they have never worked in real estate before. The good news, Proper said, is that current gray areas in the tax code are more likely to be resolved in favor of the investors once the code is finalized. 

“We know that the IRS really wants investors to bring capital to these areas,” Proper said. "They want to make their project work." 

Projects to revitalize Philadelphia's neighborhoods have long been underway. Pennsylvania already offers tax abatements in many of Philadelphia’s neighborhoods through a program called Keystone Opportunity Zones, which has been in place since 1999. Since the Keystone Zones offer abatement through sales and real estate taxes, while Qualified Opportunity Zones offer abatements on capital gains taxes, there is an opportunity to combine these tax incentives. However, Landay said, most investors in the Philly area are not considering it, as the state tax incentives provided through Keystone Zones are less significant than federal incentives through Qualified Opportunity Zones. 

“Revitalization has already begun in neighborhoods like Fishtown and Northern Liberties,” Landay said. "But the opportunity zones will help revitalization projects go broader and deeper, and push into new neighborhoods like North Kensington, to make those places viable for investments."

Even clients who have never invested in real estate can still benefit from opportunity zones. Proper explained that personal wealth investors can use opportunity zones for estate planning purposes, or invest in the opportunity funds that the bank’s fund managers are assembling for 2019. 

“We help investors choose the particular platform funds that are appropriate for them,” Proper said. “We’re acting as a link between anyone with capital gains and the world of opportunity zone investment.”

Meanwhile, commercial clients can work with banks like Wells Fargo to use opportunity zones for interest rate swaps or like-kind exchanges, or simply to borrow money to develop in the designated areas. Landay explained that as the nation’s largest real estate lender, Wells Fargo expects to facilitate a large chunk of the lending for opportunity zone development once the zones “take off.”

“Obviously, we want to help real estate developers bring capital to these areas as much as we can. But opportunity zones by their nature aren't restricted just to investors who are familiar with real estate,” Landay said. "We’re approaching this from the standpoint that anybody who wants to be involved in an opportunity zone investment should be." 

This feature was produced in collaboration between Bisnow Branded Content and Wells Fargo. Bisnow news staff was not involved in the production of this content.