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I think it's going to make somewhat attractive areas more desirable, but certain areas will never be desirable and the tax break won't have any meaningful impacts. Probably just add more gentrification to poor parts of town that aren't too far from the important pieces.
What's your thought on why the tax breaks won't have meaningful impact?
I'm meaning more in the rural parts of the states, weren't very desirable before, and deferral of capital gains will probably not attract enough interest.
I think it will 'help' (if you want to call gentrification helping) generate more interest in the, poorer, but well located, parts of town.
Right now, it's last minute jockeying for developers (who are aware of the potential awesomeness this will be) to petition for their planned developments to be included as an opportunity zone tract.
The real value to this is not the deferral of taxes on the capital gains but the mark-to-market of basis in year 10, which has the potential for a HUGE capital gains savings.
Can you provide an example of how mark to market of basis would play out in this kind of situation and how you would save on taxes? Thanks.
Easy, you don't pay any capital gains tax after your initial deferred capital gains tax when you sell beyond year 10.
Here's the example: You invest $10MM through a certified opportunity zone fund in Dec 31st, 2019. On Dec 31, 2026 you have to pay your capital gains on that $10MM - 15% basis reduction ($2,006,000). Assuming you sell your investment on Jan 1, 2030 or beyond, you do not have to pay capital gains on the sale. Doesn't matter if you sell it for $1B, no capital gains is owed because your basis is marked-to-market beyond a 10 year hold.
Just for some clarity on what this could be in savings- Let's say you also had a loan on the property of $40MM that had amortized down to $25MM by the time of sale and you also took $8MM of depreciation.
If you sold for $100MM, you'd have a $73MM gain ($50MM basis - $15MM amortization - $8MM depreciation = $27MM residual basis) and your capital gains tax at sale would have been $17.374MM. So $0 vs $17MM in tax. Time value of money reduces the benefit a little, but in the deals that we've done analysis for, it's a 4-5% IRR increase.
You'll probably see a lot more family dollars and dollar generals popping up, if they don't set some real guidelines around it.
I hate this kind of public policy. It's just lazy. These policies do nothing to impact the underlying causes of poverty; they just serve to shift poverty out of one area and into another. The United States is a large land mass, so you'll be able to re-arrange the poor for a very long time.
Although NMTC is a far from perfect program I think it's a good step in the right direction. This policy while it has a lot of support and people interested, I don't see how it will have any meaningful impact that matters. It's just a tax shield and doesn't require investment in the communities just that you have assets there.
How is it a step in the right direction?
Lol, these programs are decades old in some cases, and the people in charge are lawyers and public policy champs, aka business people run circles around them and get richer. The lawyers get pretty rich too. Poor people are maybeee, kindaa helped sometimes.
Most O-Zones will be designated by around April 22nd (at the latest).
The regs should be released over the coming months but no later than October 2018.
This piece of legislation is the most significant piece of legislation to the Real Estate industry since the creation of the 1031 exchange. It will be widely used by investors who are highly-sensitive to tax efficiencies.
A question I have - In the regulations, there is an ambiguous definition of what "Substantial Improvement" means for already-built real estate. Here's what I've gathered so far:
Real estate that has been previously used in an OZ can still qualify as QOZ business property as long is purchased after Dec. 31, 2017 by the OZ business and as long as the OZ business substantially improves the property. Real estate is substantially improved for OZ purposes if during any 30-month period following acquisition of such property there are additions to basis that exceed the adjusted basis as of the beginning of the 30-month period. This is generally a much higher standard than the substantial improvement standard under the low-income housing tax credit (LIHTC) which requires a taxpayer to spend $6,800 per unit or 20 percent of adjusted basis over a 24-month period
Now, I've heard two different interpretations:
Anyone have any insight to which is correct?
Realize this is somewhat different so please take this for what it's worth, but in projects that I've done in MSA's that have some sort of existing historical rehab tax credit or a low income housing project tax credit, etc, the 'substantial completion' definition is kept vague on purpose - it's usually a benefit to both governing authority and developer/investors in my experience. I don't know if they'll be able to meaningfully implement a 'one size fits all' approach to this. For example, in one building we did a complete facade restoration and interior rehab to creative (historical office building in CBD). We only ended up spending ~5M on a +/- 50M deal (10%), but we still got the nod for the tax credit since we 'substantially improved the neighborhood' with our project. I've heard of peers in the same city doing as little as 5% and as great as 40% of the total project cost and all been given 'substantial' improvement status. I know this backlogs the city since they have to spend more time evaluating case by case, but I think this type of approach ends up being more practical/beneficial to everyone in the long run.
https://www.novoco.com/sites/default/files/atoms/files/client_alert_opp…
Good find. This crap will do literally nothing to alleviate poverty. Very frustrating. The tax cut passed was so full of garbage (like this) in order to get support for a 21% corporate income tax rate, something that virtually all congressmen and senators should have supported by itself. D.C. is so dysfunctional--in order to realize better economic growth for everyone, supporters of a lower corporate income tax rate had to "bribe" representatives who would rather see legislation to boost economic growth not pass than go without a political bribe.
I am a little confused why you think cutting the corp tax rate by itself will do more for economic development than also incentivizing capital investment in low-income areas. Capital investment in these communities creates direct constructions jobs and numerous indirect jobs.
Also, based on your post history I would think you would laud government incentive of private sector activity rather than direct spending.
It will fund a ton of low - income projects, and some NMTC/HTC projects do deliver economic growth into areas. However, if those areas actually do see growth, they're quickly priced beyond any point low-income earners can afford in rent.
The gov keeping all this stuff in the laws/code comes from the lower tax rate for corps. If corps pay a lower rate, their tax credit is worth less, and they have less incentive to invest into those programs (big corps are the ones who buy up these tax credits).
If they have less appetite, less projects get funded, and then the politicians accuse each other of voting for policy that led to less affordable housing. It's an easy argument to make because people eat it up and dont understand the underlying economics of the projects.
Just to make sure everyone is on the same page, NMTC and Opportunity Zones are two entirely different things.
Right, and apologies that I'm not reading the full info, but I assume it is a tax-incentive driven program to catalyze investment into RE projects in specific areas, correct? So the thesis/purpose is in the same space as NMTC/LIHTC/HTC stuff, right? .. HTC has some other merits i guess
Then again, when you assume...
http://www.housingfinance.com/news/opportunity-zones-what-they-are-why-…
Is it known the requirements to form an Opportunity Zone Fund? Will there be a minimum "Fund Size"?
Still waiting on the IRS to issue guidance I believe
For real estate investments, you will need to improve the assets basis by 100% (e.g. from $10M to $20M) in order to pass the "substantially improved" threshold.
No limit to fund size.
Now that the legislation is starting to gain notoriety in the industry, does anyone know of any firms, funds, etc. that are explicitly pursuing an Opportunity Zone Investment?
Virtua Partners, which I am unfamiliar with, officially announced yesterday that they are organizing a fund. Several tax credit syndicators I've spoken with have interest in creating funds. Without IRS guidance putting together any sort of fund or plan is virtually impossible as there are too many factors. Even the use of "fund" may be inappropriate once guidance is released.
I've been following Virtua closely. They are very knowledgeable about O-Zones. However, until the IRS releases technical rules and regulations, no group has any business announcing a fund. It's borderline fraudulent to start marketing a fund prior to IRS rules and regs given that so much of the information they are feeding investors is 100% speculative at the present moment.
PS - With regulations provided by Treasury thus far, it is impossible to create a commingled, discretionary fund with that takes longer than 180 days to deploy 90% of its fund capital.
I get that after ten years cap gains on invested property appreciation will be zero, but what about the cash flow up until then? If you have an office building you buy for 100k and 10k rental income a year in a high cap rate area where there isn’t much appreciation expected, is the rental income exempt from taxation as long as you keep it in the fund for ten years, and then the next day you can take it out?
from my understanding it is only capital gains so any income or proceeds pulled out of refinance would not get the treatment.
investREanalyst Proceeds from refinancing are not taxed. That's why many old school real estate families sit on an asset forever while continually refinancing. Then when the elder generation passes away, the the inherited assets basis steps up to market value and allows the next generation to avoid paying capital gains should they choose to sell it at that point.
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