The federal Opportunity Zone (or OZ) program, created as part of the Tax Cuts and Jobs Act, could become the most impactful federal incentive for equity capital investment in low-income and distressed communities. It offers significant capital gains tax exemptions for taxpayers who invest in projects and businesses in low-income areas, allowing investors to delay, reduce and potentially eliminate capital gains taxes on Qualified Opportunity Zone (QOZ) investments.
Under the program, individuals and other entities can delay paying federal income tax on capital gains until as late as December 31, 2026 – provided those gains are invested in Opportunity Funds (or OFs) investing 90 percent of their assets in businesses or tangible property located in OZs. In addition, the gains on investments in OFs can be federal income tax-free if the investment is held for at least 10 years. These tax benefits could reduce the cost of capital for these projects, making them more viable, especially when paired with other development incentives like the New Markets Tax Credit (NMTC) or Low-Income Housing Tax Credit (LIHTC).
Duane Morris oversees all types of tax-driven real estate investments, including structuring such investments, and transactions involving historic rehabilitation tax credit, federal and state low-income housing tax credits (NMTC and LIHTC), real estate tax abatements and tax-exempt bond financing.
Our lawyers have helped guide the early phases of this emerging investment class. We know how to help clients analyze and implement the Opportunity Zone program. Our cross-practice team of corporate, real estate, finance, tax, private equity, family office, investment management and renewable energy lawyers collaborate to advise and provide full-service guidance to clients.
Among other things, we can assist clients with:
- Tax Guidance – Understanding the tax benefits and obligations that OZs provide investors, owners and businesses, including compliance with tax obligations.
- Fund/Business Formation – Forming and capitalizing Opportunity Funds and qualified OZ businesses.
- Investment Advice – Structuring investments in qualified OFs and OZ businesses, including the interplay of OZ and other tax programs, including NMTC, LIHTC, EB-5 visas and the like.
- Regulatory Compliance – Assessing regulatory concerns and eligibility requirements of being a business or an Opportunity Fund within an OZ.
- Capital Markets – Accessing capital markets and related transactions.
- Securities Compliance – Complying with applicable federal and state securities laws.
Who Should Consider These Investment Opportunities?
- Private equity and venture capital funds/sponsors who invest in real estate or low-income communities
- Family office(s)
- Institutional and private investors – both domestic and foreign
- Mission driven nonprofits and other businesses with underserved community initiatives
- Affordable housing, industrial, senior housing (i.e., assisted living, skilled nursing and continuing care retirement communities (CCRCs)), grocery-anchored retail and medical office buildings (MOBs) who seek to build in low and moderate income areas
- Universities, hospitals and MOBs who may be able to use their donor base as a means to raise equity capital to fund construction if they are in an applicable OZ
- Real estate owners, operators and developers, who may form their own Opportunity Funds to build in OZs for their own account or for third parties