Investors and developers are poised on their starting blocks, ready to sprint into the country’s many designated Qualified Opportunity Zones just as soon as they get the signal.
The White House Office of Management and Budget now holds the starter pistol, a set of proposed regulations for the program from the Treasury Department. When those guidelines are released—possibly this week—it should trigger a flurry of liquidations and investments.
“Everybody’s kind of waiting with bated breath because we may finally see the regs,” real estate lawyer Frank Giantomasi, said.
The Office of Management and Budget, or OMB, received the draft regulations on September 13, Jessica Millett, a tax attorney at Duval & Stachenfeld, said. The agency has a typical turnaround window of 10 business days, meaning the public could see the Qualified Opportunity Zone Regulations as soon as Thursday.
However, while the lack of specific guidance has kept investors and developers from diving headfirst into these designated neighborhoods, Millett said it has not stopped groups from laying the groundwork for funds and exploring different strategies.
“A couple of months ago a lot of people were kicking the tires and thinking about how novel it is,” she said. “Now that they’ve had some time to get their heads around it a little more, they’re just anxious to get everything lined up so they can be ready to go when the regs finally do come out.”
Created by last December’s Tax Cuts and Jobs Act, the Qualified Opportunity Zone program promises tax relief to wealthy people who back development projects in designated low-income areas.
“No one has the model to work with this new and quirky creature.”
Investors who sell assets that have appreciated in value—typically real estate holdings or stock portfolios—can defer capital gains tax for 10 years if they re-invest their profits into a Qualified Opportunity Fund, which has to keep 90 percent of its capital in designated census tracts, or zones. At the end of the program, investors can receive a basis reduction of up to 15 percent on their initial gains and pay no taxes at all on proceeds from the fund.
It’s a simple concept with broad appeal: investment in poor urban areas, lucrative tax breaks to the capital class and no government spending. But it’s still the tax code, so details are hardly cut and dry.
How will these funds operate? Can taxes be passed through to investors? How can investors exit these funds when the program ends? Do earmarked construction funds count as investments? What happens when these projects aren’t profitable? How do are different properties accounted for in the same fund?
“Mutual funds and real estate investment trusts already do a good job of handling all these things in the normal market,” Walter Calvert, a Baltimore tax and finance attorney, said. “No one has the model to work with this new and quirky creature.”
However, while questions abound, they haven’t stopped big banks and developers from creating funds, scouting properties and canvassing for investors. Others, sensing a looming shift in the market, have shed properties and hope to find a fund to park their profits in before the 180-day reinvestment window closes.
At least one group, Giantomasi said, has started buying up cheap land in and around opportunity zones in New Jersey, betting their value will increase once the guidelines are set and the funds get off the ground. Giantomasi decline to identify the group, citing a confidentiality conflict.
“They’re strategically going through different bands in New Jersey, making acquisitions,” he said. “They think they’ll have trade bait later on.”
Goldman Sachs has been outspoken about its intention to operate Qualified Opportunity Funds throughout the country and multiple sources tell Real Estate Weekly that RXR Realty has been exploring the space. RXR declined to comment for this article.
“Everybody’s kind of waiting with bated breath because we may finally see the regs.”
Fundrise, a crowd-sourced investment platform, has already set up a website promoting its Opportunity Fund. Calvert said there are several such funds waiting to be switched on once their operators know what they can and can’t do.
“When the regulations come out there will be a flood of activity coming forward,” he said. “You see a lot of shell websites where people are promoting themselves as qualified investment funds and once those regs come out you’ll see them go live.”
Although the rules have not been set, differing ideologies about how these funds should operate have already emerged. Millett said her firm has focused almost exclusively on ad hoc funds, ones that focus on single development projects. Meanwhile, Calvert said he sees opportunities for funds of all sorts, ones that focus on specific geographic areas and others that specialize in certain asset types.
All Opportunity Fund investments must be made by December 31, 2019, so there will be a short window of time between when the regulations are finalized and acquisitions have to be made.
Once the OMB releases its version of the regulations, they will be open to public comment and further change. Most new tax laws go through various iterations and can take several years before they’re finalized. However, because of the small window, hope is that any added penalties will not be added retroactively.
“One would think they’d have to come out with something we can rely on and if they change in the future they wouldn’t penalize people who suddenly aren’t compliant,” Calvert said. “Seldom does the IRS get these things right on the first draft to the world’s satisfaction.”