For those of us that don't claim to be masterminds of finance, here are some recaps and updates that might help readers of this blog understand at least some of the reasons why suddenly last year there was a boom in buy-ins here in The Old Donut-Hole - downtown is qualified as an economically distressed, low-income census-tract neighborhood.
Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities.
If you're not up to snuff on LIHTCs, The TCAJA, Opportunity Zones and Opportunity Funds there's a wealth of information already posted on this blog - just use THE SEARCH BOX.
Note: To date there has been very little guidance from the IRS on how the Opportunity Zone provisions are supposed to work.
Link >> https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
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A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund.
The current list of approved Opportunity Zones can be found at Opportunity Zones Resources. This list will continue to be updated as more Opportunity Zones are approved.
A complete list of approved Opportunity Zones will be published later this spring after all Opportunity Zones have been nominated, certified and designated.
Please Note: Over the next few months, the Treasury Department and the Internal Revenue Service will be providing further details, including additional legal guidance, on this new incentive. More information will be available at Treasury.gov and IRS.gov.
"As we develop strategies for attracting Opportunity Zone Fund equity to LIHTC developments, I’m looking forward to the potential expansion of the capital market for the LIHTC.
> Based on preliminary modeling, we expect Opportunity Zone equity to fund 2% to 4% of the total equity investment, depending on the transaction profile and investor appetite.
> Housing finance agencies may want to consider incorporating the recognition of Opportunity Zone status in their qualified allocation plans, and developers should focus on land acquisition prospects in Opportunity Zones.
> Policy makers, at local and federal levels, must consider anti-displacement strategies that protect existing residents from gentrification that investor equity, for market-rate and affordable developments, may accelerate.
While Opportunity Zone Fund equity will not fully mitigate the lost value of the credit from the corporate tax rate deduction, it provides an intelligent way of adding equity to tax credit developments in underserved communities and, potentially, could attract a new cohort of investors to the tax credit equity market. That’s an opportunity I’m excited about."
Opportunity Zones are an economic development tool—that is, they are designed to spur economic development and job creation in distressed communities.
If you're not up to snuff on LIHTCs, The TCAJA, Opportunity Zones and Opportunity Funds there's a wealth of information already posted on this blog - just use THE SEARCH BOX.
Note: To date there has been very little guidance from the IRS on how the Opportunity Zone provisions are supposed to work.
Link >> https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions
_________________________________________________________________________
A Qualified Opportunity Fund is an investment vehicle that is set up as either a partnership or corporation for investing in eligible property that is located in an Opportunity Zone and that utilizes the investor’s gains from a prior investment for funding the Opportunity Fund.
The current list of approved Opportunity Zones can be found at Opportunity Zones Resources. This list will continue to be updated as more Opportunity Zones are approved.
A complete list of approved Opportunity Zones will be published later this spring after all Opportunity Zones have been nominated, certified and designated.
Please Note: Over the next few months, the Treasury Department and the Internal Revenue Service will be providing further details, including additional legal guidance, on this new incentive. More information will be available at Treasury.gov and IRS.gov.
- The IRS has announced a self-certification process for establishing Opportunity Zone Funds, under which each will simply attach a self-certification form to the fund’s first-year tax return.
- By the end of the summer we hope to see technical guidance from the IRS covering a variety of topics including the treatment of debt and whether investment partnerships will be allowed to space the pay-in of their capital to match the development process for LIHTC equity and other real estate development projects.
The Top 10 Opportunity Zones in the US
Much has been reported on the creation of Opportunity Zones and even more on their tax advantages, but, less has been written about the specific Opportunity Zones that are now found in all 50 states. Although there are more than 8,700 designated census tracts in the Opportunity Zone program, some offer more potential for immediate positive impact for both investors and residents than others.
Here we take a look at Opportunity Zone areas in major metropolitan markets with the most promising near-term growth potential.
What Makes them Promising?
Opportunity Zones were designed to encourage private investment generally in economically distressed, low-income census tracts through capital gains tax incentives. Under the Opportunity Zone program, up to 25% of census tracts that met income requirements of the Opportunity Zone program were eligible to be nominated as Opportunity Zones. Additionally, up to 5% of census tracts that didn’t meet income requirements of the Opportunity Zone program, but satisfied other qualifications were also eligible to be nominated as Opportunity Zones.
The end result: 57% of all neighborhoods in America were up for consideration as Opportunity Zones, and more than 8,700 census tracts are now designated as Opportunity Zones according to the Brookings Institute. The Brookings Institute also found that 19% of designated Opportunity Zones were found to be in already-gentrifying areas (areas with the highest rates of home price appreciation).
The expansive reach of the Opportunity Zone program throughout the country now offers many new tax-advantaged options for investors and entrepreneurs to explore diverse Opportunity Zone investment options intended to benefit these distressed communities. With many Opportunity Zones based in or adjacent to growing neighborhoods, in our view, here are the top 10 Opportunity Zones in the country with more immediate growth potential.
Source: https://fundrise.com/education
7. Phoenix: Downtown, Tempe, Chandler and Mesa
- Home value increase over the past year: 9.8%1
- Home value increase over the past 5 years: 38%2
Phoenix is among the fastest-growing cities in the country.
In 2017, it added roughly 66 people per day to its city. Phoenix is a growing job and an expanding college center. Many of its neighborhoods experiencing or poised to experience high growth are now in or near Opportunity Zones.
Downtown Phoenix is home to new college campuses of Arizona State University and the University of Arizona. Arizona State University’s Downtown Phoenix campus now has more than 10,000 students enrolled and both schools expect higher future enrollment numbers. The surrounding areas will likely receive demand for greater businesses and housing options within walking distance of the campuses. A new light rail extension running down Central Avenue is also set to connect Downtown Phoenix to northern neighborhoods, which will offer a convenient option for commuters.
Major job centers, such as Mesa, Chandler, and Tempe also have Opportunity Zone census tracts running through them. Apple and State Farm are currently among the largest employers with more than 1,000 employees in the Phoenix area, but the tech sector is growing. Intel alone is expected to add 3,000 jobs in Chandler, AZ.
Phoenix is home to billionaire GoDaddy Founder, Bob Parsons, who is active in real estate in Phoenix as well.
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Keep in mind what the author of this report has to say: "As we develop strategies for attracting Opportunity Zone Fund equity to LIHTC developments, I’m looking forward to the potential expansion of the capital market for the LIHTC.
> Based on preliminary modeling, we expect Opportunity Zone equity to fund 2% to 4% of the total equity investment, depending on the transaction profile and investor appetite.
> Housing finance agencies may want to consider incorporating the recognition of Opportunity Zone status in their qualified allocation plans, and developers should focus on land acquisition prospects in Opportunity Zones.
> Policy makers, at local and federal levels, must consider anti-displacement strategies that protect existing residents from gentrification that investor equity, for market-rate and affordable developments, may accelerate.
While Opportunity Zone Fund equity will not fully mitigate the lost value of the credit from the corporate tax rate deduction, it provides an intelligent way of adding equity to tax credit developments in underserved communities and, potentially, could attract a new cohort of investors to the tax credit equity market. That’s an opportunity I’m excited about."
AFFORDABLE HOUSING FINANCE 01 Aug 2018
Opportunity Zones and Tax Credits
Catalina Vielma looks at the potential for a new program to work with the long-established housing credit.
How do Opportunity Zones work with housing tax credits?”
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| Catalina J. Vielma |
First, it is important to know that Opportunity Zone investors are unlikely to be the same investors that provide most of the capital for the low-income housing tax credit (LIHTC) program.
> LIHTC investors are primarily major institutional banks, and they invest in the housing credit program for myriad reasons, including economic benefit and the need to meet their Community Reinvestment Act (CRA) obligations.
> Opportunity Zone investors are more likely to be high-net-worth individuals
managed investment funds
life insurance companies
mutual funds that regularly realize significant capital gains.
> The vast majority of institutional banks do not generate capital gains because they are not permitted to own equity investments.
> As a result, while there will be some exceptions, we expect that the Opportunity Zone tax incentives will be unavailable to most banks. To be clear, banks are not prohibited from investing in LIHTC projects located in Opportunity Zones, but they will do so without generating the additional Opportunity Zone tax benefit.
As developers explore the potential of Opportunity Zones, knowing who their potential investors are and why they’re involved matters.
While tax credit equity pricing is impacted by a property’s relative “CRA value,” the investor appetite for developments located in Opportunity Zones is more likely to be driven by their relative risk and reward profile.
As previously noted, most Opportunity Zone investors will not be institutional banks and therefore are not motivated by CRA.
> The type of tax credit developments that will benefit from Opportunity Zone equity extend beyond developments utilizing the LIHTC.
- Opportunity Zone developments that are “twinned” with historic and/or New Markets tax credits will likely generate premium yields.
- Looking beyond tax credits, Opportunity Zone investors can place their capital in myriad Opportunity Zone businesses—from hotels, market-rate housing, community centers, and more.
- Market-rate developments are the most likely to attract significant investor appetite due to the tax-free treatment of any long-term appreciation in the underlying asset.
As Opportunity Zone investors compare affordable housing with myriad Opportunity Zone businesses, developers must ask themselves how they can maximize the attractiveness of their developments.
Although we have received limited guidance to date, the Opportunity Zone statute requires that the original use of the Opportunity Zone property must commence with the opportunity fund or, in the case of an existing property, that the Opportunity Zone business undertake a “substantially improvement” of the property.
For this purpose, a property is substantially improved if the improvement costs incurred within 30 months after acquisition exceed the adjusted basis of the property at the time of acquisition.
> As a practical matter, this means that the majority of acquisition/rehab LIHTC projects will not qualify for Opportunity Zone tax benefits.
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AFFORDABLE HOUSING FINANCE 17 July 2018
Report Examines Challenges for LIHTC Program
Urban Institute researchers look at the effect of tax reform on the housing credit.
The recent tax reform legislation “will have an uncertain effect on future low-income housing tax credit (LIHTC) investments because a reduction in corporate taxes lessens the financial incentive for corporations to make equity investments in tax credits,” according to a new report from the Urban Institute.
“If LIHTC investments falter, developers will not build affordable rental housing and existing units will be lost,” says The Low-Income Housing Tax Credit: Past Achievements, Future Challenges, . .
> Although the Consolidated Appropriations Act of 2018 (the March 2018 omnibus appropriations bill) included a 12.5% increase in LIHTC allocations for the next four years, it might not fill the gap created by the tax reform changes because it will have little effect on the pricing of credits and investor tax benefits and is not a permanent fix.
> The report also points out that the fate of LIHTC is intertwined with that of other federal housing programs because it frequently leverages other federal funding sources such as HOME and, more recently, the National Housing Trust Fund.
“If other federal housing programs get cut, LIHTC may shift more toward preservation, financing the capital requirements of a building without the additional subsidies needed to reach the lowest-income households.
This could mean:
- fewer investments in the new construction of additional supply,
- fewer units available to extremely low-income households
- an overall stagnating supply of affordable rental housing across the U.S.,”
says the report by Corianne Payton Scally, Amanda Gold, Carl Hedman, Matt Gerken, and Nicole DuBois.
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Urban Institute researchers also released a paper on how the LIHTC program works and who it serves.
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RELATED RESOURCES & CONTENT
Jun 7, 2018 - Opportunity Zones are designed to spur economic development by providing tax benefits to investors. First, investors can defer tax on any prior gains until the earlier of the date on which an investment is sold or exchanged, or December 31, 2026, so long as the gain is reinvested in a Qualified Opportunity Fund.
