Tax law provides opportunity within designated zones

There is growing talk of an upcoming economic time of instability as Wall Street stock prices have outpaced the value of the companies they represent, as new technologies disrupt ancient industries and average household incomes and wealth remain flat as debt levels rise.

Where should Wall Street investors go with their $7 trillion in capital gains if the economy goes south? In addition to all of the classical options, a provision within the Tax Cuts and Jobs Act passed in December of 2017 authorized tax incentives for investments into businesses and properties located within designated geographic areas — opportunity zones.  The incentives are intended to influence investors to provide capital to distressed economic areas to generate jobs and aid the local economies.  This represents a new source of capital for entrepreneurs whose business is located within, can be relocated to or started within an opportunity zone.

Investors who hold stocks with an appreciated value over the original purchase price may sell their stocks and roll over their gains within 180 days into one or more opportunity zone funds that reinvest the money into opportunity zone businesses and properties. The payment of taxes on the capital gains is deferred until the earlier of 2026 or the date when investors sell their investment in the fund. The greatest benefit is that if investors leave their investments in the fund for five, seven or 10 years, a portion or all of any gain on the opportunity zone fund investment is tax free.

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A fund may be a single-investor, single-purpose fund where an investor places his or her money to acquire a specific opportunity zone business or property.  A fund may also be a multiple-investor, single- or multiple-purpose fund in the form of a private equity or hedge fund.  The fund may be a collaboration with local, state or federal government agencies or districts as part of a community improvement project. 

The Colorado Office of Economic Development and International Trade (OEDIT) is leading the way in promoting opportunity zones as a new and unique way for local communities to engage in public-private partnerships and fund needed projects. A map of all certified opportunity zones in Colorado can be obtained at https://choosecolorado.com/opportunity-zones/. 

A detailed analysis of opportunity zones was authored by Steven Mount with the law firm of Squire Patton Boggs and published in the Tax Management Real Estate Journal: https://choosecolorado.com/wp-content/uploads/2018/07/18tmre7Mount.pdf

Entrepreneurs positioning themselves as opportunity zone businesses must be “ready to receive capital” by developing a capital campaign that clearly communicates their potential to qualified investor candidates who have a high interest in the success of the business.  All securities laws apply.  The opportunity zone business may establish its own opportunity zone fund that is dedicated to its own investment.

An opportunity zone business must compete for investment money by making itself more attractive than other shorter-term investment opportunities.  Some actions that may enhance the appearance of the opportunity and reduce the perception of risk include:

• Investments that include land, buildings, equipment or other capital assets that serve as collateral.

• Quantification of social metrics representing “impact” benefits to a community or a cause.

• Joining with other opportunity zone businesses where the investor is investing into a pool of investments.

• Participating in an economic development project where part or all of the risk may be shifted to a government agency, foundation or other organization.

I have started a new meetup on opportunity zones as a gateway for information on this source of funding:  https://www.meetup.com/Opportunity-Zones.

Karl Dakin is principal with Dakin Capital Services LLC. Reach him at kdakin@dakincapital.com.