A lot has been written about the new Opportunity Zone (OZ) guidelines in the past year as the first and second round of rules and regulations have been released. As part of the 2017 Tax Cuts & Jobs Act, Qualified Opportunity Zones (QOZs) were created to incentivize development and job creation in economically distressed communities. An individual or business who invests its capital gains in one of these QOZs is eligible for preferential tax treatment in the form of both deferral and forgiveness. I’m sure there will be more clarifications to come as this appears to be an evolving process.

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So how do we navigate this area of potential opportunity? With all these regulations and guidelines, what’s the best way to determine if this new tax code is a fit for the small to midsize builder? I tried to take a first step to help answer this question by studying the guidelines, attending conferences, and interviewing legal experts and fund managers. You can easily find the rules to review so I’m not going to go over the guidelines here as my goal is to give builders a place to begin—a first step in determining if there is opportunity for your company. Here are my top six OZ takeaways to help the small and midsize builder:

1. OZ benefits are not for 'for-sale’ product.
Single-family home projects, townhomes, or condos that are being sold after construction do not qualify. If you build and develop a project, in order to receive the full tax benefits, you have to hold the property for at least 10 years before you sell. It’s great for apartment buildings, townhome rentals, single-family housing rentals, or any other cash-flowing residential or commercial investment property.

2. The tax incentives can be substantial for long-term investment.
There’s a lot of money flowing into OZ funds these days because of the significant tax benefits. The initial capital gains you invest can be on the sale of any capital asset such as real estate, stocks, etc. If you invest capital gains into an OZ fund that invests in an OZ property or development within six months of your capital gains event and hold for 10 or more years, there will be no capital gains tax on the gains accrued upon the sale of the property. In other words, the invested capital grows tax free. There is also a deferral and step-up basis for the capital gains you initially invest. The basis is increased by 10% if the investment is held for at least five years and 15% if held for at least seven years. Your initial taxable income on capital gains can be deferred on the earlier of the date on which your OZ investment is disposed of or Dec. 31, 2026.

3. Know your OZ maps.
The purpose of OZ regulations is to create investment in low-income, economically distressed areas. There are over 8,700 OZ areas throughout the U.S. and its territories, with most major cities and rural areas included. Click here to see an interactive OZ map of the U.S. The map helps to easily identify OZ areas, and you can drill down all the way to street level.

4. Seek advice to structure the transaction correctly.
This is where the pros come in. Investment does not go directly into an OZ property. In order to acquire property to build a new project or renovate an existing building, your funds from a capital gains event need to be invested into an OZ fund, then the fund invests or acquires the property to build upon or redevelop. OZs have become a new niche for legal professionals who are monitoring the daily nuances and regulations, so start with a qualified attorney or accountant who can help you strategize with a proper structure and plan. See the OZ blog from law firm Saul Ewing Arnstein & Lehr, for example, where you can find up-to-date information as well as professional contacts.

5. Your project/investment still needs to work from a real estate perspective, regardless of OZ incentives.
The major emphasis here is you can’t obtain any tax benefits if there isn’t a value-add scenario and your project doesn’t appreciate or profit. The basics of real estate still apply. Just because you find a good location in an OZ doesn’t mean your project is going to succeed, as in any other real estate deal. Proper research, due diligence, market studies, etc., still need to be performed and a sound investment strategy prepared.

6. Substantial funds are available for OZ projects.
At the conferences I attended, as well as in my network of financial resources, fund managers have made it clear they are seeking properties, projects, and partnerships with builders and developers. The interest is very high with investors, so much so that one fund raised $100 million in one day for OZ investment. That fund manager is now aggressively seeking deals and partnerships nationally in order to put the funds to use. I feel there is great opportunity for builders and developers who can find sound real estate deals and projects as there is more than enough funding available.

Since only capital gains can be invested to receive tax benefits, for-sale builders and developers will have to look outside their core business for such funds. However, there are lots of different ways builders can participate. For example:

• Find projects in anticipation of partnering with a larger fund seeking deals and participate through standard development/partnership agreements. You also can sell capital assets such as property or stock and invest in the fund.

• Start your own friends-of-friends or business contacts type of fund and participate while finding properties and projects. Money is seeking experienced, qualified development partners.

• Be a “go to” construction services provider to groups and funds seeking to build OZ projects in your area.

QOZ funds will be actively investing until 2026, so there will be many opportunities to line up capital gains with investments. That being said, most the activity is anticipated in 2020 and 2021 as regulators flesh out the rules and developers gain comfort with the process.