The Conclusive CRE Guide to Opportunity Zones
Are you aware that you may be eligible for preferential tax treatment by investing in an Opportunity Zone? You don’t even need to live, work or have a business within the area of your investment! Discover how you can use this economic development tool to benefit your bottom line for the upcoming tax season, while also boosting economic development and job creation in underserved communities.
What Are Opportunity Zones?
In 2017, Congress passed a significant tax overhaul bill, the Tax Cuts and Jobs Act. For real estate investors, the bill created “Opportunity Zones,” a pivotal component to the Opportunity Act found within the new law. Along with a slew of updates and changes to real estate taxes, along with other investments and assets, commercial real estate investors can now take advantage of Qualified Opportunity Funds (QOF).
A QOF is a vehicle that drives the investment in an Opportunity Zone. The Qualified Opportunity Fund is created by a partnership or corporation and includes the proceeds from the gains of the prior investment to be used in the purchase of an Opportunity Zone property.
How Do Opportunity Zones Work?
As mentioned above, the legislation that created the classification of an Opportunity Zone was the Tax Cuts and Jobs Act of 2017. For investors seeking a clear “Opportunity Zone” definition in its simplest form, an Opportunity Zone is a low-income area or economically distressed community.
Opportunity Zones are nominated and then designated based on the pre-determined criteria. Selection adheres to a rigid approval process to ensure that it is an opportunity for growth in the most economically depressed areas of Columbus, Ohio and throughout Ohio.
To be considered for the program, a community must meet the following criteria:
- The poverty rate of at least 20 percent
- Median family income of no more than 80 percent of statewide median income
- A census tract that is consistent with low-income Opportunity Zones
Overall, the program is intended to boost the economy, particularly in communities surviving on private investments instead of financial support from the government. What is the incentive? Taxpayers that invest in qualified Opportunity Zones can also benefit from capital gains tax incentives that the program exclusively offers.
So, how can you add Opportunity Zones to your commercial real estate portfolio? Before you make the critical first step, come take an insider’s view of Opportunity Zones, their tax benefits, and their governmental regulations. And, if you are an investor from Columbus, Ohio and beyond, we have first-hand insight for navigating Opportunity Zones investments within the State of Ohio.
Opportunity Zones Explained: Assistance for Economically Distressed Communities
Opportunity Zones are economically challenged communities in Ohio that qualify for the Opportunity Zones program. Communities that meet the criteria outlined in the 2017 Tax Cuts and Jobs Act are rich targets for Ohio commercial real estate investors.
A quarter of low-income communities that meet the program guidelines in Ohio can be designated as real estate Opportunity Zones. Any community that meets the guidelines can maintain its designation for ten years. Investors that are committed to real estate opportunities can receive access to capital gains tax incentives.
How to Find Opportunity Zones in Columbus, Ohio
Over 8,700 areas across the country are designated as Qualified Opportunity Zones. In Columbus, Ohio, there are 44 qualified Opportunity Zones throughout the community. These areas include:
- Eastside Opportunity Zones: Includes parts of Whitehall along Broad Street, the Brice and Main Corridor in Reynoldsburg, the Eastland Mall area, Mt. Vernon, King-Lincoln District, Olde Towne East, Near East Side, and Franklin Park.
- Northeast Opportunity Zones: Includes parts of Milo-Grogan, Devon Triangle, the Cleveland Avenue Corridor (South Lindon, Northern Lights area, Walnut Creek, and the Cleveland and Morse area), Framingham, Cumberland Ridge, and Bridgeview.
- Northwest Opportunity Zones: Includes parts of Crosswoods, The Continent, and West Campus.
- Westside Opportunity Zones: Includes parts of the Scioto Peninsula, Franklinton, South and Central Hilltop, Valleyview Heights, Consumer Square West, Westland Mall, and Lincoln Village.
- Southside Opportunity Zones: Includes parts of the Rickenbacker area, 270/23/Alum Creek Drive area, Route 104 Industrial Corridor, and the East Parsons Avenue Corridor.
In each of these zones, buyers have the opportunity to use the funding for business operations, equipment, and real estate. The funding is designed for use in areas where acquiring Qualified Opportunity Funds (QOF) may otherwise be challenging for business owners.
If you are a first-time investor, you may want to start with a beginner’s guide to purchasing your first commercial property for sale in Columbus, Ohio. Our in-depth article not only captures the 2017 tax overhaul, but also provides actionable tips on purchasing CRE property, your due diligence checklist, and common pitfalls to avoid.
Are Opportunity Zones a Good Investment?
The Ohio Opportunity Zones program will create enormous investment opportunities in communities that are in desperate need of an economic boost. Rather than channeling taxpayer money into low-income census tracts, the program will fuel business development through private gains held by U.S. households. Investors can take advantage of capital gains instantly and long-term.
How does the Ohio Opportunity Zones program differ from other programs that attempt to stimulate commercial investments?
- Fewer restrictions placed on investors.
- Real estate investment and development costs are lower.
- Ohio communities can rely less on government and more on private spending.
- The number of investors who can participate is unlimited.
- There isn’t a limit on the amount of capital that investors can generate for Opportunity Zones.
- Opportunity Funds can self-certify without approval from the U.S. Treasury Department.
With less reliance on government, there will be fewer regulations placed on investors. Less restriction frees them up to invest more, generate a healthy profit, and provide job and economic opportunities for communities.
Opportunity Zone Regulations: How Does My Property Qualify?
Since the Opportunity Zones program will stimulate growth in economically challenged communities, restrictions will govern the types of investments that an Opportunity Fund can invest in. These investments are known as qualified Opportunity Zones properties. According to Opportunity Zone regulations, a qualifying investment may fall under any of these categories:
- Partnerships interests
- Stock ownership
- Real estate
Any investment must consist of a business or real estate with operations that lie within the qualified Opportunity Zones. In addition, business investments must operate under specific parameters to ensure that the business helps stimulate the local economy. These parameters may include:
- Approval: Certification by the U.S. Treasury Department
- Purpose: A corporation or partnership that has the purpose of investing in qualified Opportunity Zones property
- Investment: 90% of the assets or holdings of the corporation or partnership must be invested in qualified Opportunity Zones property
- Investment Type: Property must include a new stock issuance, partnership interest, or commercial property in a qualified Opportunity Zones business
- Equity: Limited to equity investments in businesses, real estate, and business assets
Columbus, Ohio Opportunity Zones Tax Benefits for Investors
As mentioned earlier, one of the benefits of investing in commercial real estate in Opportunity Zones is that an investor can take advantage of capital gains tax incentives. Opportunity Zones tax benefits may include these three incentives:
Temporary Tax Deferment
Investors may defer their taxable income for capital gains until December 31, 2026.
Step-Up in Basis
The basis of the capital gains is increased by 10 percent if the investor keeps the property for at least five years and five percent if they hold the property for seven years. That is a total of a 15% exclusion of taxes of the original gain.
If the buyer keeps the investment for at least ten years, they can expect a permanent exclusion from taxable income of capital gains.
The Opportunity Zones tax benefits create a win-win for both investors and the Columbus, Ohio communities in which they will be investing. They can transform economies in low-income areas while taking advantage of incentives that are not available to investors outside of Opportunity Zones.
Opportunity Zones Investments: Ohio Sweetens the Pot
During the summer of 2019, the Ohio legislature passed, and Governor Mike DeWine signed, a new budget. The two-year budget bill included several provisions that impact state laws governing economic development incentives, together with Opportunity Zones. Investors in Opportunity Zones are now eligible for a tax break equal to 10 percent of the taxpayer’s initial investment into the Opportunity Zones in question. Think of this tax credit as a partial fund matching initiative.
To be eligible for this tax credit, however, the fund must hold the entirety of its invested assets in a qualified Opportunity Zone property located in Ohio. This provision incentivizes Ohio taxpayers to establish Buckeye state-only funds to benefit from this incentive.
Additionally, 2018 updates to the law outlined how a business could legally move locations into an Opportunity Zone to receive tax and economic benefits. Doing so rests on the principle of “original use.” A physical property will still satisfy the original-use test as long as it has never been used within the zone in a manner that would have allowed it to be depreciated or amortized by any taxpayer. Essentially, this means virtually any Ohio business that wants to move into an Opportunity Zone can do so. This clarification serves as a powerful lure for investors looking to enter – and profit – from the area.
There was also a necessary clarification on businesses that operate partially in and partially outside of the zone. The original statute requires that an entity must derive at least 50% of its total gross income from the active conduct of the business at that location within the qualified Opportunity Zone.
Additional explanations to the law included what’s known as “three safe harbors” and a “facts-and-circumstances test” that would allow a business with a qualified Opportunity Zone to meet this requirement. Businesses must meet only one of the “safe harbors” listed below to satisfy the test.
- The “first safe” harbor requires that at least 50% of the services performed, based on hours for the business by its employees, independent contractors, and employees of its independent contractors, are performed in the zone.
- The “second safe” harbor is identical to the first, but it measures services performed by amounts paid rather than hours.
- The “third safe” harbor provides that the requirement can be satisfied if the physical property of the business and operations for the business in Opportunity Zones are each necessary to generate 50% of the gross income of the business.
Also, if the business cannot meet one of the three safe harbors, the business can still meet the 50% requirement. As a prerequisite, the trade or business must achieve 50% of its gross income within a qualified Opportunity Zone.
Lastly, unused or vacant property for an uninterrupted period of at least five years can also qualify as original-use property. Original use will be considered to have commenced when any person first uses the property in the qualified Opportunity Zones after the period of vacancy.
Recommendations for Making Investments Successful in Ohio
To ensure the success of the Opportunity Zones program, investors and government agencies may want to consider the following recommendations:
- Continue or increase public funding for struggling home or business owners already in the area until economic stability is accomplished.
- Monitor program progress and outcomes. Adjust the program as necessary.
- Establish local community advisory boards that can oversee the program to ensure its success and compliance with all regulations.
- Create community benefit agreements so that the community understands the benefits and supports the initiative.
Uncovering Unique Opportunities for CRE Investors
Opportunity Zone investments offer tremendous potential for real estate investors. As long-time investors understand that the purpose of real estate investment is to boost local economies, the program can be successful for everyone involved.
At The Robert Weiler Company, we specialize in helping clients identify and invest in the most lucrative economic zones throughout Central Ohio, as well as the greater Columbus metropolitan area. And, when it comes to our Opportunity Zones expertise, we use our experience as a full-service commercial real estate and appraisal firm to ensure investors they are working with a trusted company. Three generations of the Weiler family have labored tirelessly to build a reputable company that strives for the best.
For Ohioans with an eye toward transforming the local economy, Opportunity Zones investments are the right choice for your wallet. As investors ourselves, we envision a future where the State’s most disadvantaged regions have a chance to flourish. And, our Opportunity Zone investments mean success for all the hardworking residents and businesses in these designated areas that call our great state home.
Armed with 2017’s Opportunity Zones – as well as its recent clarifications and updates – the economic future for Columbus, Ohio and beyond appears bright! An investment in Opportunity Zones can be a challenging endeavor, so make sure you have the most knowledgeable partner at your side. With over 80 years in the commercial real estate business, The Robert Weiler Company has the background and expertise to ensure you maximize your investment in Opportunity Zones. Reach out to us today at 614-221-4286.