Looking in the rearview mirror from what we know now from all the behind-the-scenes deals and years of planning with city officials here in Mesa, more than a few people probably may have acted on closely-held cahoots on inside information.
‘Opportunity’ Knocks for Real Estate Investors Buoyed by Tax Program
A year ago, nobody knew what an opportunity zone was. Now, it could be the biggest thing to hit real estate development ‘maybe ever.’
"Tucked into the federal tax reform bill that passed late last year, the “Opportunity Zones” program wasn’t designed specifically with real estate in mind. Rather, the provision—which provides significant tax relief to investors who pour money into designated, “economically distressed” areas across the country—is meant to spur investment across a wide variety of business sectors and industries.
And yet, due to the very nature of the program, it is real estate interests that appear most poised to benefit from its potentially lucrative tax incentives.
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“The tax benefits here are off the charts,” Millett said.
“When tax reform passed [in 2017], nobody really knew that this was in here. It wasn’t until a couple of months later when people started saying, ‘What?’ ”
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Already, numerous real estate investment firms and financial platforms have launched funds seeking to raise billions of dollars with the goal of scooping up and redeveloping properties in designated Opportunity Zones.
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The hope is that this capital will be able to regenerate and reinvigorate specific census tracts across the country that have been economically overlooked and underserved—areas nominated by the governors of all 50 states, and subsequently approved by the U.S. Treasury Department as eligible. In exchange, the Opportunity Zones program provides investors with the deferral, and eventually the exemption, of hefty capital gains taxes that they would otherwise incur
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Early last year here in downtown Mesa there was "A Bee-Hive" of buy-out offers proffered to about twelve building owners to acquire their assets by scooping up in one grab most of the commercial properties on Main Street for about $100 sq ft. The first eight acquisitions were transacted with a price tag just shy of $8M.
Two more were later acquired in the portfolio by various holding companies for one group of investors. Another group bought in and then a third - all with a "Wait-and-See" outlook for what was announced in December 2017.
Within the first five months of 2018 everything appeared somehow to happen all-at-once.
Then some details emerged from the fog in all kinds of 'pretty pictures', proposals and plans for the transformation and makeover of downtown Mesa by the groups of investors and the for-profit investment affiliates of The LDS Church to "protect and revitalize" the area around the Mesa Mormon Temple east of Mesa Drive/Main Street, with no financial details revealed at all. On top of all that, Justin Graham announced in July that an entire 10-acre city block east of the Mesa Arts Center on Main Street owned by Sunbelt Holdings would break ground in 45 days on a mixed-use project that might include another hotel on the former site of Brown & Brown Chevrolet/Auto Nation that has been demolished and 'remediated' after 85 years just leaving a parking lot.
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Blogger Note: There have been at least 20 posts or more on this site covering details and actions about the makeover and transformation of downtown and many more about Opportunity Zones or OZones > please use the SEARCH BOX on the left-hand side of this home landing page
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" . . . Under federal guidelines, investors who pour such gains into “Qualified Opportunity Funds” are able to defer federal capital gains taxes through 2026.
If they hold onto that Opportunity Fund investment for five years, they would receive a step-up in their basis and would only be on the hook for 90 percent of the gains tax that they would have otherwise had to pay on those proceeds; upon seven years, they would receive another step-up that means they would only have to pay 85 percent.
And even more enticing for investors is the fact that, should they hold onto an Opportunity Zone investment for a 10-year period, they would be exempt from having to pay any federal capital gains taxes at all upon divesting their interest.
Of course, there are certain restrictions that investors must adhere to in order to reap those benefits.
> For instance, Opportunity Zone funds must have virtually all of their capital dedicated to investment in Opportunity Zones, and they must have at least 90 percent of their total capital deployed at any given time.
> Additionally, such funds must double their basis over the life of a given investment—a “substantial improvement” provision that’s meant to prevent them from simply parking their money without pouring additional capital into the Opportunity Zone, and one that lends itself to redevelopment or new construction projects as far as real estate investments are concerned.
> What’s more, the Opportunity Zones program and the guidelines governing it could look markedly different in the coming weeks, as the U.S. Treasury Department is expected to release an updated set of rules and regulations on the program this fall that could alter its complexion.
“What is still needed is details on the specifics—how the funds need to be set up, what gains need to be made to qualify, permissible investments, and a lot of the nuances you get in federal programs,” Steven Kahn, a director at affordable housing development firm Standard Communities, said of the guidelines still to come. “The strict rules and regulations that lay out a game plan for you, that is still missing.”
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EXpect A BOOM IN MARKET-RATE HOUSING?
That's about everything in all the proposals and plans for the makeover of DTMesa, with Bob Worsley's Drew Street Plan for "above-market" and luxury units
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> While there have been concerns that the Opportunity Zones program and its incentives could end up spurring a wave of market-rate residential development in the areas in question—rather than the sort of affordable housing that’s in short supply in cities across the country—Clinton said he believes it “can be a positive catalyst” for creating new workforce housing in areas overlooked by this cycle’s urban development boom. That could be through the development of new affordable housing, or “market-rate [housing] in an area where the gap between affordable and market-rate isn’t enormous.”
>> “The logistical complexity is in raising the money, transacting the funds for investors within 180 days of their gain, deploying it into the right real estate and having to be more than 90 percent deployed in Opportunity Zone real estate,” Miller said. “That logistical challenge of how you raise the money and how you deploy it is much more complicated for a fund. You usually spend 18 months raising a fund and draw those commitments down—that’s not how this works.”
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MORE TAKE-AWAYS:
> Maturo, like others interviewed for this story, cited the $6 trillion in unrealized capital gains that are “sitting on the sidelines” and eligible for potentially tax-free investment through the Opportunity Zones program—and given the sheer depth of that untapped liquidity, it’s easy to see why real estate market observers and participants are excited about the program’s potential.
> Alvin Schein, a partner at real estate law firm Seiden & Schein, described it as
a supercharged version of the 1031 exchange program, which allows real estate investors to roll over their proceeds from a property sale into a new acquisition without having to pay a gains tax—except in a 1031, “you never step-up your basis” and “you can never cash out” without eventually paying that gains tax.
“It’s so wide-ranging—it’s not like tax credits that are limited to a particular function, such as low-income housing tax credits. This is for any kind of commercial investment,” Schein said. “The reason many real estate people love 1031s is that they can put off the day of reckoning for their [gains] tax. This is a way of exempting the day of reckoning, and it’s much broader.”
