When Trump’s tax overhaul became law a year ago, the real estate industry’s attention was focused on caps to the mortgage-interest deduction, plus state and local tax deductions—which the industry predicted would put the housing market in peril. (It didn’t.)
After the dust settled in the spring, the industry realized a hidden gem had been tucked away in the law: Opportunity Zones. The brainchild of Silicon Valley financier Sean Parker, Opportunity Zones allow investors to obtain massive tax advantages if they invest capital gains—money made on the sale of assets like a home, a business, or a piece of art—into “distressed” areas of the country where the post-financial crisis recovery passed by.
While the provision theoretically allows investors to put money into any type of project so long as it’s in a designated zone—a business, infrastructure, whatever—most observers believe it is especially attractive to real estate developers, partly because the largest tax benefits go to those who stay invested in the zone for at least 10 years. Advocates for the program believe this could be a game-changing community development tool.
Given the horizon for these investments is quite far off, where do things currently stand? Many firms looking to jump into Opportunity Zones were waiting on the Department of Treasury to release a set of guidelines that should clear up questions left open by the Tax Cuts and Jobs Act, which was intentionally written to be open-ended, supposedly to allow municipalities to tailor the program to their specific needs.
While the Treasury guidance was mostly inside baseball for financial professionals, it seemed to open the flood gates for activity around Opportunity Zones, as firms announced their intention to jump into the space en masse. The firms interested tend to be private equity firms, which have experience in raising money for long-term financial projects—many of which already specialize in real estate development.
If the pitches arriving in my inbox are any indication, firms have been awfully busy making slide decks to pitch their Opportunity Zone projects to investors. Some ahead-of-the-curve outfits have already raised money, for example, private equity firm Virtua Partners, which is close to breaking ground on three Opportunity Zone projects in Arizona.