CREW Orange County recently held a lunch event titled “Opportunity Zones: What They Are, Their Challenges, and the Benefits.” As the event organizers put it, opportunity zones have been added to every major metropolitan area in the U.S. via the Tax Cuts and Jobs Act enacted in December of 2017, and some are calling it the most important economic development tool of the 21st Century.
Carolyn Petty, COO and SVP of Kosmont Companies, was one of the panelists at the event, which also covered how investors can meet their financial and social objectives simultaneously. SoCal Real Estate spoke with Petty about how the commercial real estate industry can capitalize on opportunity zones, the qualifications for investing in these zones, and what else we should know about them. She also recommended the website OppSites.com for more information on the subject. And stay tuned for a more in-depth feature on opportunity zones in our January issue.
SoCal Real Estate: Which Southern California opportunity zones hold the most promise for our industry, and how can the industry capitalize on them?
Petty: We’ve been studying this subject since it first came out, and my perspective is that because opportunity zones have many time-sensitive provisions, the areas that are shovel ready will probably be most attractive to opportunity funds. There are over 870 approved opportunity zones in California, with opportunities up and down the state. Cities that are willing partners in promoting development will pave the way for these projects, and Long Beach is a great example. They’ve incorporated opportunity zones into their city website and have shown that they are open for business. Any city willing to streamline its processes to promote opportunity-zone development should be at the top of the list for opportunity funds. We are working with cities to help them become opportunity-zone ready.
What are the qualifications to invest in an opportunity zone?
Investments must be run through an opportunity fund, which is important because an individual cannot realize capital gains, directly purchase property, and qualify for this incentive. They have to run capital through a fund that complies with the rules. Fortunately, the tax legislation is fairly friendly, and opportunity funds can self-certify.
In addition to tax incentives, what are the primary benefits of investing in opportunity zones (i.e. portfolio diversification, etc.)?
The tax incentive is so incredibly significant. I cannot think of another occasion in which appreciation is not taxable — that’s huge and really should be emphasized. This is a tremendous program for an investor who is willing to have a long-time hold. In addition, the depreciation benefits are quite significant. But as to the beneficiary part of it: the community will benefit from this. That was the intent of this legislation.
What are the primary risks and/or challenges, and how can smart investors be prepared to circumvent these challenges?
There are two concerns: one is the CEQA process, which in the state of California can extend for years based upon challenges. An opportunity fund must substantially improve a property within 30 months, so knowing the challenges associated with CEQA, that might be an issue. Probably all of those projects that are entitled will be ready to go. The general sentiment is that we will need help on the legislative side in terms of streamlining or exemption or there will be fewer projects — which is a shame, since this legislation was intended to stimulate new projects, not just those already in the pipeline.
The second concern, which is key, is that the State of California’s tax policy is not aligned with federal tax policy for opportunity zones, which puts California at a disadvantage. Only a handful of states at this point have not aligned with federal tax policy, and California’s tax rates are high. If the state is willing to provide tax relief for projects related to housing, as an example, it will be a significant step forward. Absent that, the State of California will not be very competitive with other states who do have this policy.
What is the potential for positive social impact and even indirect impacts through these investments?
I see the biggest potential for opportunity-zone businesses as bringing employment opportunities to underserved areas. As I indicated before, development will be tough. Opp Zone businesses are not subject to those same time constraints. What an exciting opportunity for someone with a new business concept who can demonstrate to investors that they can reap the benefits of a tax incentive by locating in one of these underserved communities. Since the best benefit comes as a result of a 10-year hold, it keeps investors focused on the long term. That also benefits the community, because we all want someone committed to a concept and to their community over the long haul.
The benefits go beyond this, however, because localizing jobs can reduce our greenhouse gas emissions and improve quality of life, when someone does not need to leave their community for employment