Opportunity Zone Regulations Unveiled With Strong Investment Appetite in South Florida

The Six13 apartment mid-rise is being built in an opportunity zone in downtown Fort Lauderdale. Courtesy rendering

The long-awaited draft of opportunity zone regulations brought good news to investors as the guidelines give them more leeway in how they can take advantage of the tax-break tool.

In South Florida, the Trump administration move Wednesday likely means an increase in an already healthy appetite to invest in some of the 8,700 zones designated nationally under the 2017 tax overhaul.

The Treasury Department regulations hammer out details on the investment mechanism created in the Tax Cuts and Jobs Act. The program focuses on developing in distressed areas by allowing investors to defer tax payments.

A major change would allow investors to exit an opportunity zone venture by selling the property or business in which they invested. Previously, the exit strategy was limited to selling interest in a qualified opportunity zone fund.

Two Miami attorneys who reviewed the update said the regulations give investors more wiggle room.

"No question," said Ronald Fieldstone, partner at Saul Ewing Arnstein & Lehr. "They clarified a lot of things. They want to make it viable. The statute in the prior regs had things that made it more difficult."

Barry Lapides, a partner at Berger Singerman, added the guidelines clarify how to invest in businesses located in opportunity zones.

Investors essentially can take their capital gains from any venture, real estate or otherwise, and put them into a qualified opportunity zone fund that then, likely through a fund manager, seeks eligible projects.

One fund can include capital gains from multiple investors and invest in multiple projects, which could be real estate and businesses.

The magnitude of the federal income tax break an investor gets depends on how long he keeps his funds into the venture. A five-year investment means 10% of the capital gains won't be taxed, and a seven-year investment means 15% of the capital gains won't be taxed. Also, there's a way to avoid paying tax altogether on capital gains from the opportunity zone investment itself. If an investor keeps his money in an opportunity zone fund for 10 years, then he won't have to pay taxes on the gains once he sells.

In Florida, 427 opportunity zones have been established including 67 in Miami-Dade County, 30 in Broward County and 25 in Palm Beach County, according to Saul Ewing Arnstein & Lehr.

MONEY IN, MONEY OUT

Under the new guidelines, an investor can exit an opportunity zone by selling stakes in an opportunity zone fund or the underlying business or project.

This is welcome news because OZ funds are seeking funding for multiple purchases, Fieldstone said. Something short of a real estate portfolio sale is possible.

"If I have a hotel, a multifamily, a this or that and I diversify the fund to different geographies, it's going to be hard to find a buyer," Fieldstone said. With the changes, "you can do each individual asset independently, and you'll get the tax-free effect every time you sell an asset if you have an appreciation."

Other rules broaden the definition of qualifying businesses in opportunity zones. For instance, investing in an OZ business would be permitted even if the business rents, instead of buys, its location in the opportunity zone.

Formerly, qualifying businesses had to generate at least half of their revenue from their opportunity zone location.

"Some people said, 'That's a real problem because I may set up a business in an opportunity zone and franchise it and have distributorships all over the country, and all of the sudden my revenue is no longer 50% in the zone. It's much less because I expanded the business,' " Fieldstone said.

This has been expanded to include businesses which can claim at least half of the employee hours are worked from the opportunity zone site or at least half of the payroll is coming from that site.

"These regulations really helped to clarify how people can invest," Lapides said.

The document setting the guidelines isn't final. Comments will be accepted on the tentative rules, and a public hearing will he held July 9.

ON THE GROUND

Some investors sat on the sidelines waiting for more details, and the federal government shutdown delayed the release. Still, South Florida already has seen interest from developers, and deal flow is expected to grow.

TSG Group and Linéaire Group, both based in Miami, plan to build an 18- to 24-story apartment tower on a 30,000-square-foot vacant property at 1765 N. Miami Ave. in an opportunity zone in Miami's Arts and Entertainment District.

Affiliated Development LLC, based in Fort Lauderdale, is constructing the six-story, 142-unit The Six13 apartment building at 613 NW Third Ave. in Fort Lauderdale's Progresso Village.

Both pursued the opportunity zone projects before the latest round of regulations was released. TSG and Linéaire said they decided to move forward on the real estate purchase to avoid greater competition after publication of the new regulations.

“We saw an opportunity because a lot of people were waiting on the sidelines to see how the regulation was going to come out,” Diego Bonet, Linéaire managing partner, told the Daily Business Review last month. “All the big players were waiting on the sidelines, so we wanted to make sure we were one of the early movers and jump on this before all of the guidance had come out.”

Exactly how the opportunity zone investments will be structured varies by project and developer. Some developers will use the funds only for financing, while others also are benefiting from the tax deferral opportunity.

For example, Affiliated Development is one of the investors putting funds into a qualified opportunity zone fund that is putting money in a qualified business, The Six13 project, and will get the capital gains benefit.

TSG and Linéaire stand to see no tax benefits but expect to be on the receiving end of early opportunity zone funding.

The federal government has projected $100 billion in opportunity zone investments.

Critics have argued the investment mechanism does little to help opportunity zones residents, who might be pushed out by higher housing costs from gentrification.

Some state lawmakers have taken the initiative to address this issue. House Bill 481 would pave a path for developers to get more benefits for investing in opportunity zones in return for social and public benefits.

Related stories:

Opportunity Zone Buy Means More Apartments in Miami Arts and Entertainment District

New Fort Lauderdale Apartments in Opportunity Zone Promise Attainable Rents