Q: What are Opportunity Zones?
A: Opportunity Zones are economically-distressed communities, designated by states and territories and certified by the U.S. Treasury Department, in which certain types of investments may be eligible for preferential tax treatment. The tax incentive is designed to spur economic development and job creation in distressed communities by providing these tax benefits to investors. Effective June 14, 2018, Treasury certified Opportunity Zones of all states, territories and the District of Columbia. Opportunity Zone designations certified by Treasury will remain in effect until December 31, 2028.
Q: What is an Opportunity Fund?
A: A qualified Opportunity Fund is any investment vehicle organized as a corporation or partnership with the specific purpose of investing in Opportunity Zone assets. The fund must hold at least 90 percent of its assets in qualifying Opportunity Zones property.
Q: Who can create an Opportunity Fund?
A: Any taxpaying individual or entity can create an Opportunity Fund, through a self-certification process. A form (expected to be released in the summer of 2018) is submitted with the taxpayer's federal income tax return for the taxable year.
Q: What can Opportunity Funds invest in?
A: Opportunity Funds can invest in any qualified Opportunity Zone property, including stocks, partnership interest or business property (so long as property use commences with the fund, or if the fund makes significant improvements to the qualifying property).
Q: Will Opportunity Zone businesses need to conduct most of their business within Opportunity Zone tracts, or will it be sufficient if the majority of the business’ assets are located in Opportunity Zone tracts (property, equipment, etc.)? For example, would a trucking business based in an Opportunity Zone, but serving a whole region, qualify for Opportunity Fund financing?
A: To qualify as an eligible Opportunity Zone Business, a business must demonstrate that substantially all its tangible business property is located within a Qualified Opportunity Zone. No such stipulations have been made regarding the service area of the Opportunity Zone Business in the statute, but this may nonetheless be an item that the IRS chooses to address in future guidance or regulations.
Q: What happens if a business located in an OZ moves? Is there a recapture risk?
A: There is no recapture risk, but an opportunity fund that fails to meet the 90% asset requirement of the fund will be required to pay a penalty for each month it fails to meet the requirement. The penalty is not designed to be catastrophic, but rather, to ensure that funds stay within the zone’s parameters. Once an asset no longer qualifies, there will be a period of time in which the asset can be disposed of before incurring penalties.
Q: Can an Opportunity Fund make investments in multiple Opportunity Zones?
A: Yes - so long as an Opportunity Fund has at least 90% of its assets in qualified Opportunity Zone property, the fund may invest in as many qualified tracts as desired.
Q: Can an investor invest directly into an Opportunity Zone business to qualify for associated tax incentives?
A: No - an investor must invest in an Opportunity Zone business through a qualified Opportunity Fund in order to qualify for associated tax incentives.
Q: What tax benefits are available for investors that invest into an Opportunity Fund?
A: There are primarily three benefits available to investors that invest previously realized capital gains into an Opportunity Fund, with increasing benefits the longer the investment is held in the Fund:
Q: Can Opportunity Zones tax incentives be realized beyond beyond 2026?
A: The tax incentive itself does not expire in 2026. Investors in Opportunity Funds that hold investments for at least 10 years will still be able to take advantage of the favorable tax treatment of gains related to the investments into Opportunity Funds, even if realized after 2026.
Q: Are there minimum or maximum investments?
A: There are no minimum or maximum investments required by Opportunity Zone legislation.
Q: What kind of returns are investors likely to expect?
A: We expect a broad range of investor return expectations. On one end of the spectrum, Opportunity Funds may raise capital from socially responsible, high net worth investors that would otherwise be contributing to donor-advised funds with a principal preservation focus and a low return expectation (e.g., less than 5%). On the other end of the spectrum are private equity fund investors that are expecting double digit returns based on the risk of providing equity capital to real estate or business investments. In the middle are preferred equity investment models with 6-10% annualized return expectations.
Q: Once an Opportunity Fund is established, is there a timeframe within which investments must be made?
A: This timeframe will be determined in the IRS rule making process. Based on the legislation, an Opportunity Fund may need to have 90% of its capital invested in Opportunity Zone Property within the first six months of the taxable year of the Opportunity Fund. There may be some timing relief in the rule making to enable a 12-month investment window. Also, to receive the tax benefits, the investor must deploy their capital into an Opportunity Fund within six months of realizing the capital gain being invested.
Q: Do you anticipate the creation of single-use or single-purpose funds? For example, could a developer that does business in an Opportunity Zone create an Opportunity Fund for a specific project?
A: Yes, given the expected ease of certifying an Opportunity Fund and the timing constraints of investing the capital in Opportunity Zone Property, we anticipate that single asset funds will be utilized.
Q: Will Opportunity Zones be compatible with LIHTC and NMTC investments?
A: As of today, we think Opportunity Zone investments could be combined with the Low Income Housing Tax Credit & New Markets Tax Credit, though we won’t know for sure until the Treasury Department releases its guidance.
Q: What is a reasonable timeframe in which we might see the first Opportunity Fund investments deployed?
A: It will take some time for the IRS to establish regulations and guidance relating to the certification of Opportunity Funds and the eligible use of proceeds. It is possible that the first Opportunity Funds will be deployed in late 2018, though we anticipate this happening in 2019.
Q: What sort of efforts can be made to ensure that the Opportunity Fund investments truly benefit the residents of the Opportunity Zones?
A: Mitigating displacement tied to gentrification will be one of the main challenges of a market-based initiative, and is something LISC and its partners are already trying to address. Specifically, we submitted a comment letter to the Treasury Department suggesting the creation of certification guidelines to manage where and how investments are made to avoid exacerbating displacement trends in certain tracts; and that Treasury collect data on an annual basis so that there is transparency with respect to the investments that are made by the Opportunity Funds. In addition, we recommend advocating to your state and local officials to consider creating companion incentives – whether new programs or the direction of existing resources – for Opportunity Fund investments that are targeted towards serving the residents of the Opportunity Zones (e.g., through the creation or preservation of affordable housing; through community benefit agreements targeting jobs for community residents; or for community facilities such as child care facilities, charter schools or health centers). Finally, to the extent these are going to be large scale investments, local zoning and approval processes would probably be triggered, which hopefully will offer an opportunity for community engagement.