Commercial Investment Real Estate March/April 2019 | Page 36

drawbacks when compared to dispositions centered around the exchange or QOF. Each approach to limiting taxes in disposing of property has its benefits under federal income tax laws. While limit- ing or avoiding taxes is attractive, as well as full exclusion of the gain, selling for cash improves flexibility in investing. Cash normally is available on a traditional cash sale, but not necessarily on a 1031 exchange or the QOF investment. Other important issues to consider when choosing the form of disposition include determining management issues for the property; refinancing options; dealing with others in the investment; timing of dispositions and acquisitions; control over decisions; and the requirement to stay invested in the qualified opportunity zone to gain tax benefits. The geographic areas to invest in and the type of property to select are additional factors with 1031 and the QOF. While QOFs add another alternative for taxpayers and planners when considering the best approach to dispose of property, the decision is complex. The taxpayer must care- fully weigh all factors, not only the tax benefits, to find the right option for a particular situation. Mark Lee Levine, CCIM, LLM, Ph.D., is a professor, and Libbi Levine Segev, LLM, MSRECM, is an assistant teaching professor, at the University of Denver. Contact Levine at [email protected] and Segev at [email protected]. Think Outside the ROI Box by Maurice Williams, CCIM U.S. investors currently hold trillions of dollars in unrealized capital gains in stocks and mutual funds alone — a significant untapped resource for economic development. Opportunity zone funds will enable a broad array of investors to pool their resources into opportunity zones, increasing the scale of invest- ments going to underserved areas. The program provides investors with incentives to encourage long-term investment in low-income com- munities. Investors willing to put their capital to work can expect: • A temporary tax deferral for capital gains reinvested in an opportunity fund. The deferred gain must be recognized on the earlier of the date on which the opportunity zone investment is sold or Dec. 31, 2026. • A step-up in basis for capital gains reinvested in an opportunity fund. The basis of the original invest- ment is increased by 10 percent if the investment in the qualified opportunity zone fund is held by the taxpayer for at least five years and by an additional 5 percent if held for at least seven years, excluding up to 15 percent of the original gain from taxation. • A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in a qualified opportunity zone fund if it is held for at least 10 years. However, this exclusion only applies to the gains accrued from an investment in an opportunity fund, not the original gains. Using the federal program regulations, high net- worth individuals and institutions will seek out quali- fied opportunity funds to make investments in low- to moderate-income real estate ventures and operating businesses. The funds, some of which already are capitalized, will vary in size, investment objectives, 34 March | April 2019 and social impacts. At the project level, many opportunity funds will be paired with other funding incentives to fill the necessary project proforma or capital stack, such as tax increment financing, credit enhancements, and asset value write-downs. Additionally, funds are being capitalized for invest- ments across property types, including housing, commercial and retail, mixed-use, manufacturing, industrial, and a host of operating business models. Best Practices and Potential Pitfalls Since the opportunity zone program is fairly new, with clarified federal regulations just released in January, not many best practices are developed to date. Community development real estate activities tend to be very complex to manage due to the various levels of human capital involved and the need for public-private partnerships to obtain the layers of collaborative funding to be successful. Investors must be prepared to think outside the “return-on-investment box” and seek more than just a financial return when investing in opportunity zones. Social returns are just as, if not more, rewarding as a financial return — such as creating wealth without displacement and gentrification in low- to moderate- income communities of color; creating pathways for new job training and development; and catalyzing the economic turnaround of stalled community corridors. Yes, a good ROI is a must, but why not allow your investment to help improve the lives of others along the way? Maurice Williams , CCIM, is principal at MW & Associates in Chicago. Contact him at [email protected]. COMMERCIAL INVESTMENT REAL ESTATE