by Johnney Zhang, CEO, Primior
The Opportunity Zone program was created by the 2017 Tax Cuts & Jobs Act to revitalize economically distressed communities through long-term private investment as opposed to taxpayer dollars. Opportunity Zones have now been designated in all 50 U.S. states, the District of Columbia and five U.S. possessions.
Currently, there are 879 Opportunity Zones in the state of California. A study by CA FWD and Golden State Opportunity indicates a potential for $745 million to $1.2 billion in new economic activity in Opportunity Zones this year.
Investors in a Qualified Opportunity Zone can benefit from substantial federal capital gains tax incentives available exclusively through the program. Moreover, in comparison to other programs that encourage private investment in low-income areas through tax advantages, the Opportunity Zone program is less restrictive, costly or reliant upon government agencies.
Regulations and Guidelines Continue to Emerge
Although the program has been in place for about two years, regulations and guidelines have emerged over the course of that period and continue to do so. That’s one reason it is important to work with a knowledgeable partner when it comes to evaluating and investing in an Opportunity Zone fund. At Primior, we are closely monitoring the progress of these regulations and guidelines in order to provide the best counsel to potential investors.
Currently, the tax benefits of such investments apply to federal capital gains tax obligations only. However, many states (including California) are debating the potential for applying these incentives at the state level as well.
“Opportunity Zones provide an excellent opportunity to revitalize low-income areas in California,” said Lenny Mendonca, chief economic and business advisor to Governor Newsom. “In order to move the economic needle for millions of Californians who are struggling, attracting investment in areas where they live is sound policy that can help us meet our objective of making California’s economy more sustainable and inclusive.”
Momentum Builds with Clear Advantages
As the program has become clarified, it has gained strong momentum in recent months with attention from investment managers and individual investors looking for a reliable means of sheltering previous capital gains as well as taxes on real estate investment income.
The bottom line is that taxes on capital gains invested in an Opportunity Zone fund are progressively reduced by a total of 15% over a 7-year period, while taxes on gains from earnings associated with the fund are not taxed at all if the investment stays in place for a10-year period.
Is an Opportunity Fund the Right Fit?
While the fundamental benefits of Opportunity Zone investing are fairly straightforward, the next question is whether the program makes good sense for all investors. The answer to that query, as with any potential investment, is “it depends.”
Opportunity Zones may not be the best option for traditional real estate investors who are used to investing in projects with a three- to five-year horizon or who typically plan to reinvest gains from a property sale into another or additional properties via something like a 1031 exchange.
The fundamental consideration here is that Opportunity Zone investments must remain in place for a span of 10 years in order to derive the full tax advantages. In other words, it is akin to a 401(k) or a “buy and hold” strategy where the investor should be prepared for the time commitment required.
That said, of course, earnings from the investment will accrue on a regular basis. But, again, the investment must endure over the 10 years for gains tax on those earnings to be waived.
Another aspect to consider is the requirement that the rollover of gains into an Opportunity Zone fund must be made within six months. That can be a challenge for many investors. Primior addresses this issue by being the developer of properties that are then ready for Opportunity Zone fund investment.
Our approach also helps address another consideration, which is the requirement that existing properties in an Opportunity Zone must be substantially improved within 30 months or have their original use commence with the opportunity fund in the opportunity zone.
If these parameters are a good fit for an investor’s strategy and needs, an Opportunity Zone fund can be a solid option for deferring and reducing capital gains taxes from the sale of a range of assets including real estate, a business, artwork and so on.
Localized Expertise and Community Involvement
It is also very important that the developer be knowledgeable and experienced in collaborating with local governmental entities to help ensure that projects are located and designed in ways that benefit the community.
Primior currently has two Opportunity Zone projects underway in Santa Ana:
First Harbor Plaza. Mix of retail, dining and office use in 40,129 sq. ft. in a pedestrian friendly design consistent with the goals of the North Harbor Specific Plan. Groundbreaking is set for June 26, 2019.
Westfair Plaza. Within walking distance to Santa Ana College, a 10-minute driving from Orange County Outlets, and 6.5 miles from Disneyland.
An Integrated Approach
As we’ve noted, the investment in an Opportunity Zone fund requires a 10-year commitment to derive its full tax benefits. In addition, the potential ongoing earnings from the fund investment should also be an important criteria.
Primior develops its own Opportunity Zone projects with a uniquely integrated suite of services tailored to expedite the process and reduce costs. Our experience in real estate finance and management, coupled with our development knowledge and experience, gives us a deep understanding of what it takes to make projects successful.
Our in-house services include architecture and design, development management, construction management, asset management, property management, leasing, acquisition and sales, and financing. This strategy enables us to maximize returns while minimizing risk.
Plus, we also offer other investment programs such as traditional real estate development projects, REITs, and EB-5 projects for foreign investors.
Primior Founder and CEO Johnney Zhang focuses on maximizing the income potential of real estate properties to grow the firm’s client portfolios quickly and with minimal risk. Zhang’s unique expertise in real estate development and investment management spans high-end commercial properties, luxury custom homes and multi-family properties. He leverages that expertise to formulate a distinctive portfolio for each client.
Primior is a strategic real estate development firm offering a uniquely integrated suite of services and resources to maximize returns for its investors. The full-service firm with a uniquely integrated suite of capabilities is focused on generating attractive, risk-adjusted returns for investors over the long term. Its deep expertise, professional team and cutting-edge technology combine to deliver superior levels of value, income generation and return on investment. www.primior.com