Understanding the Changes Occurring in Opportunity Zones

axxis real estate llc


Jun 1, 2019

The Tax Cuts and Jobs Act of 2017 has left a lasting impact on the commercial real estate market, particularly with the introduction of opportunity zones.  It is helping to shape the face of commercial investing and now, with new regulations just having been introduced, it’s apparent the changes are just beginning!

What are Opportunity Zones?

An Opportunity Zone refers to an urban or rural community that is facing severe economic challenges.  Since the inception of the Tax Cuts and Jobs Act of 2017, Congress has appointed 8,700 of these zones across the United States.  The purpose of these zones is to draw investors into the suffering areas by offering incentives to buy in the form of tax breaks.  Investors can, in fact, stand to reduce the tax liability on their capital gains by as much as 15% in these areas, with no tax applied to appreciation of the properties, pending the investor holds onto them for a minimum of ten years.  As investors move in and develop properties, these communities are offered another chance to flourish and grow.

Impact on Investors

When the concept of Opportunity Zones was first introduced, many investors held back, largely due to the lack of regulations surrounding the policy.  That did not, however, prevent the commercial real estate industry from seeing sales prices climb 20% in these designated areas.  Based on ratings from Zillow, who used information such as population, income growth, and transaction volume to rank the likelihood of a given area to appeal to investors, the most intriguing Opportunity Zone sits in our own local market of the Brooklyn Heights neighborhood.  It’s among one of four of the top-ten zones in the Brooklyn area, followed closely by the Astoria neighborhood in Queens.  With the introduction of new regulations, the interest in this type of investment is expected to continue to grow quickly. 

New Regulations

The United States Treasury and the Internal Revenue Service have been hard at work trying to implement regulations that will get real estate developers into these areas quickly, to begin projects that will help stabilize the distressed communities.  On April 17, 2019, they released their latest set of propositions, which will be revisited in a public hearing on July 9, 2019.  Among the many changes made, some of the major concerns that have been addressed are as follows:

  • Grace Period:  Under the previous guidelines, investors were expected to reinvest any proceeds from Opportunity Zone assets immediately back into another Opportunity Zone.  This left many investors worried their assets would be penalized in the event they were unable to do so as quickly as was necessary.  The new regulations, however, offer investors a 12-month grace period to reinvest, putting many investors at ease.
  • 50 Percent Rule:  Businesses operating within an Opportunity Zone were previously required to make at least 50% of their gross income from within that zone.  Now, however, these businesses may also qualify if 50% of their hours or wages come from revenue earned in the zone.  
  • Defining “Trade or Business”:  Previously, under the original proposal, there were no guidelines to define what, exactly, constituted as a trade or business which could benefit from these tax incentives.  The governing authorities are now proposing that the terms “trade or business” meet the criteria put forth in Section 162, which is defined by the Supreme Court as a for-profit business being operated consistently and regularly, as opposed to one opened for “sporadic amusement”.  This could pose potential problems for properties leased on a triple-net basis, as the IRS typically views these types of properties as an investment (rather than a Section 162 business or trade).  Lease arrangements, therefore, should be structured in a way that they will not classify as triple-net leases. 
  • Time Frame:  Investors now also have access to a time-frame put forth.  In order to receive the maximum benefit, property will need to be purchased by the end of 2019, making these properties increasingly attractive.  It is thought that the rush being created could bring nearly 100 billion of investment dollars back into the 8,700 zones scattered throughout the United States. 

Many other changes have been proposed as well, but only time will tell what the eventual outcome will be. 

Looking for an Investment Property in the New York City or Long Island Area?

If you’re a fund looking to invest in Opportunity Zones, now is the time to begin your search, particularly if you want to take full advantage of the tax breaks available through the end of the year.  Axxis Real Estate LLC founded in 2006 is a trusted resource in the New York City and Long Island commercial real estate markets, providing a wide variety of services to a diverse clientele. Our team is poised and ready to help you make the most of your commercial property decisions. If you’re a fund, looking to invest, let us know. Alternatively, if you own property in an opportunity zone, we can certainly help you with valuations, selling your property or discussing other investment options.  You can message us through the contact page of our website.

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