December OZ Deadline Looms, But Won’t Be The Final Word On The Program

Only six weeks remain before the year-end deadline for investors to take full advantage of the opportunity zone program’s tax benefits. But by no means will the deadline seal the verdict on OZs.

With the final IRS rules still forthcoming — and political challenges to the program brewing — experts say it would be premature to judge the success or failure of the OZ program by what happens in the next two months.

“There are still many chapters left in the book on opportunity zones,” Berdon partner Marc Fogel said. “We should see a spike in activity and deals before the year’s end, but it certainly won’t be the be-all [and] end-all for investment or the program itself.”

More Than A Drop In The Bucket?

Investors who place capital gains into a qualified opportunity fund by year-end 2019 will be able to defer taxes on that gain until 2026 and also shield 15% of that gain from taxes entirely. Investors who miss the deadline but invest in a QOF in 2020 or 2021 will get the benefit of deferral until 2026, but can only shield 10% of the gain.

That extra 5% may seem like a drop in the bucket, but it is motivation enough for many sophisticated institutional investors to try to get in under the deadline, Fogel said. He has been fielding calls from developers and sponsors with deals in hand, eager to structure their funds before the end of the year. 

For more casual investors, who may be interested in OZs not specifically for tax savings but more for the social good of redeveloping underserved communities, the deadline has somewhat less significance. 

“Some OZ deals are still going to make sense in 2020 and for years to come afterwards,” Fogel said. “But it’s true that 5% is real money for any type of investor.”

Political Uncertainty, For Better And For Worse

Some developers may have been stymied in their search for OZ funding because the backers they typically tap for real estate projects might not want to lock up their capital for the seven years it takes to see substantial tax savings. Alternatively, those backers may not have significant capital gains to shelter in the first place. Fogel expects these developers to continue their search past the deadline, into 2020.

The rate of opportunity zone deals could conceivably pick up when the IRS releases its final rulings on the program. Some investors have been hesitant to place gains into OZ projects because there are still ambiguities about how the program works. However, the current administration seems to be committed to making the program a success. If the IRS resolves these ambiguities in favor of investors, Fogel said, OZ investment could reach a new high.

But at the moment, the politics surrounding the OZ program are auguring a slowdown rather than a boost. A group of U.S. senators is pushing to disqualify hundreds of designated opportunity zones which they say are too affluent to require tax breaks. Even if these zones remain eligible, the program itself could fall under closer scrutiny than its advocates originally intended, with the government requiring yearly reports to check on the progress of each OZ development.

Enough Interest To Draw A Conclusion?

Overall, Fogel said, he has not seen as many OZ projects in New York as he would have expected given the clamor and excitement that surrounded the OZ program a year ago. Yet he believes it is too early to say if the program is a success or not, especially since demand has been higher in areas outside New York, where construction costs are lower.

Some real estate developers that Fogel works with have chosen to skirt the OZ program entirely, preferring to stick with more tried-and-true portfolio planning techniques, like 1031 exchanges, to grow and diversify their real estate holdings. Part of Berdon’s responsibility to these clients, Fogel said, is to evaluate which route will be most advantageous for achieving their goals.

Fogel is also reserving judgment because of the bureaucratic delays that so many construction projects now face. In many towns on Long Island, Fogel's home market, town and village governments can hold up the permitting and approval process for new development for years, which could mask the overall effects of the OZ program.

“Cutting through the red tape isn’t easy,” Fogel said. “It’s so difficult to get anything done on Long Island.”

This feature was produced by Bisnow Branded Content in collaboration with Berdon. Bisnow news staff was not involved in the production of this content.