THE OPPORTUNITY ZONE INCENTIVE : POISED TO LEAD IN THE UPCOMING ECONOMIC RECOVERY
11 an important recovery tool , especially with respect to providing financing to start-up businesses , and infrastructure projects .
THE OZ INCENTIVE SUBSIDIZES EQUITY INVESTMENTS
The OZ incentive is unique as it provides a subsidy for investors to make equity investments in real estate projects and operating businesses located in QOZs . It provides three income tax incentives to investors and rewards the investors for holding their investments for at least ten years .
The Biden administration will be engaging in a number of policies which differ from the previous administration including changes in public health , fiscal policy , immigration , and energy . The Biden administration has been signaling the need for economic recovery legislation , which could be in the form of an infrastructure plan . Still , the OZ incentive could be a significant economic recovery tool and can be combined with any possible incentive included in such plan .
The OZ incentive could be a significant economic recovery tool and can be combined with any possible incentive .
The purpose of the OZ incentive is to encourage the making of long-term investments of private capital in certain population census tracts , called Qualified Opportunity Zones ( QOZs ), and to increase the economic growth of such QOZs . To date , the OZ incentive has been used frequently for making investments in real estate projects . Here is why the OZ incentive could be
During the last major economic crisis , the American Recovery and Reinvestment Act of 2009 provided a number of incentives which included low-interest loans , loan guarantees , and grants to certain projects and businesses . The OZ incentive is functionally different as it directly subsidizes investors for making equity investments in real estate projects and businesses ( including infrastructure projects ). It is an inherent prerequisite with this incentive that these projects and businesses have certain fundamentals for the potential of success . This results from the exclusion of gain on the disposition of the underlying investment after an investor has held an interest in a Qualified Opportunity Fund ( a QOF ) for at least 10 years . Generally , investors need to make a business determination that they believe that their investment in the QOF will appreciate over this ten year period . The ten year exclusion offers a valuable income tax benefit that should hopefully allow investors to reduce their expected minimum rate of return and invest in a project or business that has a cash on cash expected return outside their typical investment criteria . Obtaining equity capital that is difficult to find and / or obtaining less expensive equity capital is attractive for any project or operating business .
CAN BE USED WITH OTHER INCENTIVES AND DEBT FINANCING
The OZ incentive is a very flexible economic tool as it can be used with most other federal , state , and local incentives . Below are some examples of incentives that have been combined with the OZ incentive :
• Federal historic tax credits involving the rehabilitation of buildings located on the National Register of Historic Places
• State or local grants including the grant of real property for development purposes
• Real property tax abatements ; and
• State tax credits designed to work in conjunction with the OZ incentive .
It is common for a capital stack in an OZ transaction to include debt financing . Even though interest rates are low , equity capital from the OZ incentive provides certain advantages over debt financing . Specifically , almost all QOFs require a preferred return on their invested capital that accrues to the QOF to be paid at a later time when cash is available for distribution . Even with the accrual of the preferred return , not having to pay regularly scheduled interest payments , the failure of which would result in a default under the loan , provides businesses and projects with
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