The Opportunity Zone incentive as created by the Tax Cuts and Jobs Act of 2017 is a brand new, once-in-a-generation, economic development program available to Commercial Real Estate investors. Even though there’s an element of “building the plane as it’s being flown” due to the lack of final guidance from the IRS over the program’s rules and the lingering questions that remain about its functionality, the program as it is structured now is a powerful tool for tax deferral and a way to spur development in disinvested markets. Because of the economic potential of Opportunity Zones, here are three primary reasons why it pays to be forward thinking about this new investment tax incentive.
A staggering amount of money is affected by this program. Estimates are that as much as $6 or $7 trillion of unrealized capital gains could be eligible to benefit from this program. At present, even without final guidance from the IRS, there are approximately 130 active Opportunity Zone funds with a value of $20 billion. New Zone Funds are being formed faster than investors can fund them. United States Secretary of the Treasury Steve Mnuchin indicated there is $100 billion of new private capital ready to be invested into these areas right away, with an ocean of further capital gains to invest over the life of the program. And those figures are just for the independent funds, institutional money hasn’t found its way into the program—yet.
Lots of demand, not a lot of supply. There is a groundswell of demand for Opportunity Zone projects, but not a lot of folks have a grasp on the program fundamentals, and likewise there is a much smaller immediate supply of available projects. Frankly, many of the owners of properties in Opportunity Zones that I’m talking to aren’t aware of the program and don’t understand just how beneficial it can be to them if they’re ready to divest their holdings. Once owners of properties in Opportunity Zones understand the benefit to them when they capitalize, there is no doubt that supply will catch up to demand. By then, values will stabilize and it will be those early to the market who stand to benefit most from the long-term benefits of the program, even if it means a tougher slog in the beginning.
The sheer volume of Opportunity Zones in Southern Louisiana. There are 87 Opportunity Zones alone in the “super regional” corridor between Baton Rouge and New Orleans. Most of East Baton Rouge Parish is an Opportunity Zone. A broad swath of the Canal Street and New Orleans Bio-district corridors are in an Opportunity Zone. The amount of Opportunity Zones in our region is easily double that of areas with similar populations. Even much larger cities don’t have the volume of Opportunity Zones we have in Southern Louisiana. Consider the Dallas/Fort Worth Metroplex with a population of 6.4M people, but only 50 Opportunity Zones, or Metro Atlanta with 5.8M people but 56 Opportunity Zones. 47 of our Opportunity Zones are in 2 parishes alone—Orleans and East Baton Rouge—which puts us at a terrific advantage...IF WE WORK IT.
So where are we in the life cycle of the Opportunity Zone? At a recent panel hosted by GNO Inc. on the topic, one of the speakers said talk of the program has moved from “cocktail party conversation” and into the Boardroom. Even though the program is still in its infancy, and there is a lot yet still unknown, discussions about investor's uses of the program are moving into professional settings with accountants, attorneys, and real estate professionals.
For sure, the large degree of uncertainty over the final set of guidelines and rules is delaying some initial momentum. That’s the bad news. The good news is that there are deals that are getting done now. Don’t forget, the 1031 Exchange program took decades to get sorted out and tweaked before it became a cornerstone of real estate investment. For sure the unknown about Opportunity Zone programs is throwing some cold water on the initial excitement building around it. But, once (if?) the IRS gets back to work, we should see final guidance in 2019. After that, the initial waves of interest in the program will turn into a full-fledged tsunami.
Is the Opportunity Zone tax incentive a quick hit, or a plan for robust, long-term growth? The answer is both. The decision of whether to benefit from the program now or later on doesn’t have to be either/or. It can (and should) be both. Yes, you want to be in at the beginning of the market making, AND you want to capitalize off the long term results. As part of the Tax Cuts and Jobs Act, the Opportunity Zone program is about as bi-partisan a policy as you’ll find—people on both sides of the aisle in Washington want to see this program succeed. The more deals that get done in the early phases of this program, the more pressure is put on Congress to get this thing sorted out and make this program much more than just a one-off tax incentive.