Can developers be hopeful that the opportunity zone tax incentive will give them new opportunities and even pave the path to developing in areas that were not part of their portfolio? Many investors are seeking clarity so that they can put it into action.
When Congress passed the Tax Cuts and Jobs Act in December, it left many members of the commercial real estate community with uncertainty. Several clauses in the TCJA lack specification and clarity, leaving many looking for answers. Analysts have criticized the law for a series of glitches and typos that impose tax increases and stricter regulations on a number of business owners, while providing loopholes that benefit hedge funds and private equity firms. More than six months after the passing of TCJA, the exact implications for the commercial real estate industry are still unclear.
One clause that will impact the way investors and developers do business is the creation of opportunity zones, found in section 13823 on page 130 of the tax overhaul. The provision incentivizes developers to build in low-income communities, or designated opportunity zones, across the U.S. to spur economic development and job growth. These zones are Congress’ attempt to stimulate the American economy through development in communities recovering from the recession. The concept has made many optimistic about the future of America’s most vulnerable communities, but tax advisers are worried the lack of clarity and high level of risk could delay progress.
“I think everyone is pretty uncertain about what’s actually going to happen with opportunity zones,” RSM U.S. Director Paul Nadin said. “We’ve seen tax incentives like New Markets Tax Credits and Low Income Housing Tax Credits, but those are monetized. With opportunity zones, the incentive is a long-term investment, and these investors can only get returns after holding the investment for 10 years. The downside to this is I’m not sure how applicable that is going to be and if people are going to want to put money into a long-term investment, because it is risky and they could lose money.”
The opportunity zone concept was first introduced in 2015 by public policy firm Economic Innovation Group to help address the post-recession economic gap and lack of growth in many American communities. It was reintroduced by South Carolina Sen. Tim Scott, who grew up in a low-income community in North Charleston.