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,
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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