Please ensure Javascript is enabled for purposes of website accessibility

Qualified Opportunity Zone funds shaping up as win-win for neighborhoods, investors

Anthony Rinaldi, founder and managing principal, Saxum Real Estate, at his property 40 Beechwood in Summit.-(AARON HOUSTON)

A federal Opportunity Zone program that is able to attract the investments needed to rejuvenate economically depressed areas may also be a bonanza for investors, real estate developers and consultants, according to some experts.

A federal Opportunity Zone program that is able to attract the investments needed to rejuvenate economically depressed areas may also be a bonanza for investors, real estate developers and consultants, according to some experts.

New Jersey — which has 169 approved sites approved across 75 municipalities, representing every county — should attract a lot of interest, they say. Investors will have to jump through some hoops, but that isn’t deterring some first-movers.

“In August we launched the $100 million Saxum Opportunity Zone Fund — and have already raised more than 25 percent — a tax-advantaged fund focused on development located within the government-designated Opportunity Zones,” said Anthony Rinaldi, founder and managing principal of Saxum Real Estate, a real estate investment and development company. “This is generating very robust interest from investors, and we’re partnering with industry-leading operators and developers for each project, most of which will be in New Jersey with some in New York and Connecticut.”

Incentive for change

The federal Qualified Opportunity Zone Program was established by the Tax Cuts and Jobs Act of 2017, and was designed to give investors an incentive to sell off stocks or other assets that have gained in value and invest some or all of the proceeds into specialized Opportunity Zone funds that will fund projects in depressed areas.

Investors may be able to defer and reduce the federal tax due on the initial sale of their assets, and down the road may also be able to escape federal tax on any gains realized when they sell their interest in the Opportunity Zone fund. Just about anyone can invest in an OZ fund, although the tax breaks are generally only available to investors who sell off qualified assets to raise capital to buy into the fund.

According to the Economic Innovation Group, a bipartisan public policy organization, U.S. households and corporations were sitting on an estimated $6.1 trillion of unrealized capital gains at the end of 2017.

“I’ve spoken with many people who have held off cashing in on their unrealized gains because of the tax bite,” said Brian Lovett, a tax partner at the accounting and tax advisory services firm Withum. “One family, for example, is sitting on sizable stock-option gains from a previous employer. Until now they’ve been balancing the tax consequences of cashing in against concerns over how long the bull stock market will last, and now they’ve considering selling off and reinvesting in an Opportunity Zone fund.”

The program should represent “a new stream of capital” for real estate developers, he added.

Real estate investing still about fundamentals

“People are really excited about the federal Opportunity Zone program, but at the end of the day, investing is still about fundamentals,” according to James E. Hanson, president and CEO of The Hampshire Cos., a real estate firm and investment fund manager. “My fear is some people will focus on tax advantages, not fundamentals.”

His company currently owns or is involved in three projects in designated Opportunity Zones: a mixed-use development in Jersey City; an agreement to work with Fourth Edition and Russo Development for a multiphase mixed-use redevelopment of the former Record building in Hackensack; and a self-storage facility in New London, Conn.

“We go after good investments,” he said. “If they’re within an OZ, that may be an added advantage and could influence the way we put an investment group together. But it has to be a good opportunity to begin with.”

In mid-October, the IRS released preliminary guidance on OZ regulations, which was welcome news to fund managers like Rinaldi. “The initial guidance is very positive for Opportunity Zone fund managers and will give most sponsors and fund managers the confidence to move forward. I expect more guidance will be issued around year-end or early 2019, but at this point we’re almost all the way there.”

Rinaldi’s confident enough to plan on moving forward. “We’ve got some properties in the pipeline identified and should be acquiring a handful” in a matter of months, he noted.

Other firms are also gearing up. “We sprang into action as soon as the new program was enacted, and again when the zones were officially designated,” said Ted Zangari, a member of the law firm Sills Cummis & Gross PC and chair of its real estate department. “First, we formed an interdisciplinary practice group comprised of attorneys who specialize in tax, trusts and estates, corporate, fund formation, real estate, redevelopment and securities regulation.

“We next developed, and continue to add content to, a specialty blog that provides readers with a wealth of information on the OZ program and links to various mapping tools to identify eligible zones.”

The firm also put together a “war room” to track OZ-eligible properties that are either owned by clients or would be ideal for its redeveloper clients or end-user businesses. “Our Opportunity Zone practice group has already set up several Opportunity Zone funds, including ones for a couple of prominent REITs (Real Estate Investment Trusts),” he added.

There are three “buckets” of interested parties, added Jaime Reichardt, of counsel and chair of Sills Cummis’ state and local tax practice. “Investors, fund managers and recipients of Opportunity Zone funds, such as a developer of a real estate project in an OZ or a business moving into an OZ or already located in an OZ and looking to expand.”

He said an added bonus is investors don’t have to go through a third-party fund to realize the tax benefits associated with the program, as long as “they have identified an attractive new investment. An investor with a capital gain could organize and fund its own Qualified Opportunity Fund to realize the tax benefits while also funding a new project in an Opportunity Zone.”

While the real estate community seems to be interested in the Opportunity Zone program, Michael Kroll, a manager at accounting and consulting firm Wiss & Co., pointed out one significant requirement. “It appears as though you’ll only have 180 days following the sale of an asset that generates the original gain to make the decision to invest in an Opportunity Zone fund,” he said.

Although the concept of directing investment to depressed areas isn’t new — the federal New Markets Tax Credits program is similar — this latest initiative puts a different spin on the effort, according to Scott Drago, a managing director at the global business advisory firm FTI Consulting.

“The Opportunity Zone program is different because investors have to sell an asset to participate. And instead of a partial tax credit, the future appreciation of the fund may be completely exempt from federal tax if the investor retains his or her interest in the fund for at least 10 years,” he said. “That could be a huge incentive. We’re already seeing a lot of interest from real estate funds, owners and developers and from high-net-worth individuals and families.”

Many FTI Consulting clients already own properties “on both sides of the Hudson,” he added. “They’re saying that Newark and other parts of New Jersey could represent big opportunities.”

NJBIZ Business Events