January 22, 2019
While talk of Opportunity Zones has flourished in the past year and new funds are popping up like crops during spring, a lot of information is still needed before investors take the plunge into Opportunity Zone investments.
That’s the viewpoint of Allison Berman, a managing director and general counsel at Greystone, who is leading the firm’s Opportunity Zone initiatives. To that end, Greystone has yet to establish a Qualified Opportunity Fund as it looks for the right project in which to invest.
“We will designate a project first” before forming a fund, Berman said. “We’re going to take a one project, one fund approach. We’re evaluating a few projects”
Berman also heads up Greystone’s EB-5 programs, which provides a Green Card to immigrant investors who put at least $1 million into a U.S. business that hires at least 10 U.S. workers. She sees some potential in some EB-5 projects that could make good Opportunity Zone investments.
The devil is in the details. Berman explained that though the Treasury’s Oct. 19 guidance clarified many issues regarding Opportunity Zone investments, there are still several holes in the proposed regulations that need to be filled. Until they are, Berman encourages caution while deciding when – and whether – to invest.
“There are a lot of bold statements, but there are not a lot of details in those statements,” Berman said. “There’s not much discussion about when we can self-certify; what kind of records need to be kept; what’s needed to achieve the needed tax breaks.”
Other needed information, from both the investors’ and fund manager’s side: “Does the 180 days (maximum to invest in Opportunity Zones after a capital gain is realized) mean invest in a fund or deployed into a project? Do you have to sell an interest in the fund, rather than partner in a project? If you’re taking in third-party funds as opposed to your own capital gains, we do not know how we need to report…how to take the discount on the gains.”
It’s not that Berman is against Opportunity Zone investments. “Even with the lack of total guidance, it’s a great concept in terms of economic development,” she said. “There are multifamily-type real estate projects that, if you bring them to Opportunity Zones, it will really help the community.”
The problem is, the information still needed must come from Treasury. The department was supposed to provide new guidance in late December or early January, but the government shutdown now in its second month has prevented that.
Which brings up a timing issue. “If you want to get the full investment (and capital-gains-tax discount), you have to invest in 2019,” Berman said. “Hopefully, the regulations are coming out soon. But they may say a Phase 2 of Opportunity Zones is coming, or they may extend the 2027 deadline.”
In order to get the full 15% break on capital-gains taxes for gains used for Opportunity Zone investments, the investment must be held for seven years. But the Opportunity Zones expire on Dec. 31, 2026, which means that the remaining capital-gains tax must be paid in 2027. Investors must be aware of that payment as the time approaches.
“Investors need to manage their liquidity to pay those gains, and I don’t know if there will be a secondary market to sell to,” Berman said.
Berman is bullish about the potential of Opportunity Zone investments. “It’s an exciting area. There’s a lot of energy around it. The benefits are real,” she said. “We just need more guidance.”
For comments, questions or concerns, please contact Dave Sorter