The Most Exciting Piece Of Opportunity Zone Investing Is Still Being Defined

Despite the enthusiasm they have received from the private equity world and the billionaire hedge fund set, a majority of investors have been mostly shut out of the conversation surrounding the Opportunity Zones initiative included in the 2017 Tax Cuts and Jobs Act.

The program is designed to draw capital to economically distressed communities throughout the country, so-called Opportunity Zones, by offering tax benefits such as capital gains deferment and potential exclusion of some of those realized gains depending on how long the investment is held.

Although many investors are aware of some or all of the beneficial tax treatment they can generate by investing capital gains into a Qualified Opportunity Fund, ongoing regulatory clarifications have made it difficult for individual investors to maintain a complete grasp of what and Opportunity Zone investment entails. However, proposed regulations provided in October of 2018 and April of 2019 have provided a lot of guidance that will prove critical for the success of the program.

For individual investors, the most impactful of the April clarifications relate to the structure of diversified Qualified Opportunity Funds. The current guidelines clear the way for more investors to access the tax benefits of Opportunity Zones without the risks of a concentrated real estate or business investment.

According to Thomas McDonald, Investment Product and Portfolio Manager of the online real estate investing platform CrowdStreet, the new language is a critical move for the program.

“Even though these investment vehicles are called Qualified Opportunity Funds, which usually gives the sense of something like a mutual fund that’s diversified, that’s not really how they’ve been structured,” said McDonald. “The vast majority of these funds are actually single-property investment vehicles. These clarifications will help investment managers and investors better understand where a diversified fund, rather than single asset, can be used to participate in Opportunity Zone investments.”

McDonald noted that investing in a single property has concentration risks that investors might generally choose to avoid if there is an alternative, especially given the extended time frame—up to 10 years—necessary to realize the full tax benefits. The potential of a diversified fund mitigates some of that risk.

However, despite the potential benefits of more diversified investments, McDonald emphasized that there remains a variety of questions surrounding the regulation of Qualified Opportunity Funds and how tax treatment will work when all is said and done.

“We expect that there will be further clarifications as time goes on and, eventually, the regulations will be well-constructed and rigorous—it just takes time with such large changes,” McDonald said. “But, since a lot of this is not finalized there is always a chance that the regulations may change. We’re watching this very closely.

“One of the big things that we’re hoping gets clarified is the exact way that tax treatment happens well into the future. These investments typically have a 10-year hold period or more, and it can be a little scary to make a long term decision when there isn’t 100% certainty on what it will look like.”

Although there is already a flood of capital being funneled into qualified funds (upward of $40 billion according to the National Council of State Housing Agencies’ Opportunity Zone Fund Directory) Opportunity Zones remain an ongoing experiment in maximizing the benefit to both investors and the communities in which they invest.

McDonald cautions that investors interested in finding a Qualified Opportunity Zone Fund shouldn’t be overtaken by the promise of beneficial tax treatment. Investors should still remember this is primarily an investment decision.

“If you take any particular Opportunity Zone deal, clearly the fact that it is an Opportunity Zone deal is one of the key selling points. But ultimately, these have to be good real estate investments first and Opportunity Zone investments second.”

Explore dozens of commercial real estate investments, including those in Opportunity Zones, now on the CrowdStreet Marketplace.

Crowdstreet is a content partner of Benzinga

Posted In: CrowdstreetOpportunity ZonesCrowdsourcingGeneralReal Estate