The Trillion Dollar Power Play: Opportunity Zones

Let that word “trillion” sink in for a moment. Do I have your attention?

Good. Because Opportunity Zones just may be one of the biggest business opportunities of our generation.

  • More than $2 trillion in unrealized gains currently sit on the ledgers of investors and corporations, according to the Economic Innovation Group.
  • Investing these funds directly in 8,700 Opportunity Zones (or 1 in 8 U.S. Census tracts) for 10 years or more would eliminate any federal taxes due on those gains – and potentially reduce poverty via job creation and income growth related to those investments.

This July, we organized some of the brightest minds on this topic for a select group of attendees in Orange County, CA. So what is an “Opportunity Zone”, and how do businesses and communities ultimately benefit? First, some historical context.

Opportunity Zones originally stemmed from a discussion between Sean Parker (co-founder of Napster) and Peter Thiel (PayPal) back in 2015, as both were interested in creating a tax-efficient mechanism that would encourage capital investment in historically low-income tract census areas around the country.

Parker and Thiel found political allies in Sen. Cory Booker (D) and Sen. Tim Scott (R), who co-authored a bill to create Opportunity Zones. Over 8700 low-income census tracts were identified around the country, and the bill became part of the sweeping 2017 Tax Cuts and Jobs Act. The Opportunity Zone Program provides for the deferral of long term capital gains, and potential for a step up in basis and elimination of long term capital gains.

The U.S. Treasury confirmed Opportunity Zone maps in June of 2018 and issued the first set of regulations in October of 2018.

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Sources: U.S. Census, HIP Investor

2019: What We Know and How It Works

Throughout 2019, the IRS and U.S. Treasury have released additional guidance around Opportunity Zones, and one of the most significant included guidance around operating businesses sited within an Opportunity Zone and funded by a Qualified Opportunity Zone Fund (QOF):

Safe harbors: Businesses funded by a QOF can now qualify for tax incentives, as long as they satisfy any of three “safe harbors”:

  1. At least 50% of work hours or amounts paid to employees or independent contractors are spent within the Opportunity Zone, or
  2. At least half of the company’s gross income is generated by tangible property of the business, and
  3. The management or operations are based in the Opportunity Zone.

Reinvestment: Qualified opportunity funds now have a grace period of a single year after the sale of an Opportunity Zone asset to reinvest the proceeds in other Opportunity Zone assets.

The reinvestment feature provides fund managers the option to hold cash and pivot to other properties if a fund’s original investments are not performing at expected levels. This feature should also prove popular with Opportunity Zone Fund investors.

Partnership debt: Investors originally worried that partnerships with debt would not provide a basis adjustment, which is important for distributions. Partnership debt is now included in the investor’s basis and does not impact the amount of the deferred gain in 2026, or the gain from appreciation if the partner sells their interest in the Qualified Opportunity Zone Fund after the 10-year holding period.

Orange County Perspective

Our panel included the aforementioned Carey Ransom (Managing Partner OC4 Ventures), Kevin Maloney (Investor Relations RevOZ Capital), and Johnney Zhang (CEO, Primior). All have created early success with the Opportunity Zone vehicle:

Johnney Zhang, CEO Primior

Primior: On June 26, 2019, Primior celebrated the groundbreaking of its’ first Opportunity Zone project, the ambitious First Harbor Plaza Development in Santa Ana, CA. This project has been celebrated by city and community leaders, and it will positively transform an important section of Santa Ana’s core:

Primior Opportunity Zone Project: Santa Ana

Kevin Maloney, Investor Relations RevOZ Capital

RevOZ Capital: Kevin Maloney (Investor Relations RevOZ) provided our guests with a unique view into the firm’s activity in this space, as they evaluate a pipeline of over 100 Opportunity Zone deals around the country. RevOZ Capital

Carey Ransom, Managing Partner OC4 Ventures

OC4 Ventures: Carey Ransom (Managing Partner OC4 Ventures) provided an inside look at how the Qualified Opportunity Zone Fund will create a tech incubator for early-stage technology companies here in Orange County. This vehicle will attract capital investment, create jobs, and help diversify the local economy beyond the historical powerhouses of real estate and construction. OC4 Ventures

Final Thoughts

Thanks to the Pacific Club in Newport Beach, CA for hosting this event. A special thanks to our host and sponsor Sinan Kanatsiz (CEO, KCOMM), and to Robert Mosier.

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The Opportunity Zone vehicle presents an unbelievable opportunity for communities, investors, and the firms putting OZ Funds together.

And as always, create your own Opportunity Zone by investing time with the market and thought leaders that will reshape much of our tomorrow through this innovative program.

Be Great,

Sean

Sean Conrad is a Principal with EPIC Insurance Brokers and Consultants, and an entrepreneur and investor. Sean is an accomplished Senior Executive with 20 years of success in the commercial insurance brokerage industry and is passionate about leveraging his expertise in risk management, employee benefits, and sales and marketing to make businesses better. Sean is also a Founding Member of The International Executive Council (IEC), one of Southern California’s premiere Executive Business Networks.

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