May 28, 2019
The main attraction from the Opportunity Zone program is that investors who place their capital gain from the sale of assets into a Qualified Opportunity Fund (QOF) can end up with a large tax break. Experts in wealth management suggest, however, that investors are not asking essential questions when it comes to putting their capital gain into funds that, in turn, invest in Qualified Opportunity Zones.
Some of these issues include the following:
Liquidity. An article in the New York Times notes that “unlike buying shares of Apple or Google, which you can sell whenever you’d like . . . investing in an opportunity zone has a set of time hurdles set by the special tax treatment.” Because of this, Frazer Rice with Calamos Wealth Management recommends working with experienced managers who understand the local area, adding that “you need something beyond real estate experience.”
Strategic Considerations. Does the investor want to maximize returns, increase social benefit, or a combination of the two? Will the investor be more interested in an O-zone neighborhood that is already gentrifying, or one that isn’t? Whatever the answer, BDO’s Marla Miller suggests that investors consider investments in Opportunity Zones the same as investments in any other project. “If the project does not stand on its own and the fundamentals aren’t there, it’s not a good deal,” she noted. Furthermore, it’s important to consider that a property market in an Opportunity Zone could be depressed when it comes time to sell in Year 10; if those investments go south, there could be a rush to get rid of them.
Location, Location, Location. Not all Opportunity Zones are one and the same. The New York Times compares two neighboring Opportunity Zones in Norwalk, CT. South Norwalk’s booming real estate market is the result of younger professionals who are moving there, and taking advantage of the entertainment and nightlife. But, neighborhoods in Bridgeport, just a few miles away, are still economically challenged. Calamos’ Rice indicated that, while South Norwalk is a good Opportunity Zone, “if you’re stuck in the middle of Bridgeport, you could have all the tax benefits you want, but it may not turn out to be a great investment situation.”
The experts advise that investors should perform in-depth due diligence on a neighborhood before putting gains into a QOF. Investors also need to remember that Opportunity Zones are investments with upside and downside, and not miracles. Said Stefan Schimenes with InvestReal: “You can’t just build a city in the desert, and hope in 10 years it’s going to create momentum, and you can exit.”
Pictured: Sign for South Norwalk, CT
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