Hurry up or wait? Experts weigh Opportunity Zone investment strategies
By Opportunity Zone Expo Staff
Investors and developers are looking forward to netting significant tax benefits through the 2017 Tax Cuts and Jobs Act’s new Opportunity Zones — but significant confusion remains over how the program will work, and what immediate action interested parties should be taking. The Treasury published new guidance in October 2018, but with the public comment period still ongoing, some experts are urging their clients to hold back, and wait for further details before taking the plunge.
“If you don’t have to get your money in by the end of the year then I wouldn’t rush to do it,” says Adam Sanders, a real estate and business transactions attorney with Rosenberg & Estis.
The guidance published to date mostly covers real-estate deals, and investors focusing on land and buildings likely do have enough information to get underway, says Mary Burke Baker, a government affairs counselor in the Washington, D.C. office of K+L Gates.
“If you’re a prototypical real estate investor then you probably have enough guidance that you can proceed with considerable certainty,” she says. “But if you’re looking to invest in an operating business then it’s a little less clear, and you’re going to have more questions.”
One key issue that remains unresolved is the extent to which operating businesses must be physically based in an Opportunity Zone in order to qualify, Baker explains. Some experts believe that 50 percent or more of a business’s sales must be made within a given Opportunity Zone, significantly limiting the number of projects that will qualify; others, though, believe that it will be sufficient for a business to maintain a significant physical presence in the zone.
Such uncertainties mean that for the next few months, going slow will remain the smartest move for many investors and developers, says Blake Christian, a CPA and tax consultant at HCVT. Still, he notes, investors who’ve recently taken gains on past investments might need to reinvest them quickly, since there’s only a 180-day window for investing new gains in OZ projects. One option is to set up an OZ fund now, even if the fund doesn’t immediately invest in specific projects.
“I’ve had a lot of calls to help people set up funds because they’re 100 days into having a big gain,” says Christian. “There’s really no downside to setting up a fund and putting it in there — if the regulations come out and you don’t like them, you can just pull it out.”
It’s also smart to start planning future OZ investments and doing due diligence to ensure that any potential projects are shovel-ready and able to spring into action once capital is invested.
“The longer you wait to make the investment, the less appreciation you’re going to have,” Christian says. “The faster you can deploy the fund the better.”
That might also be an argument for considering business-focused investments rather than real estate projects: figuring out real-estate entitlements can take time, “but if you’re going to start a business then you can be in business in a week,” Christian notes.