IN THE ZONE – The Opportunity Zone

Tax Reform Opens New Possibilities for Florida’s Real Estate Investors

Ask a 6th grade student about the secret to successful real estate investments. The parroted answer might be – “location, location, location”. Ask a seasoned real estate developer the same question. The answer may be similar but with a slight refinement – like “find the right location, at the right time”. Everyone knows that is easier said than done. It takes special talent and years of on-ground experience to be confident about location and timing in real estate. The Tax Reform and Jobs Act of 2017, however, might make that job a little easier.

We have already reported on the broad changes ushered in by the 2017 tax reform legislation. Most real estate investors know (or at least they think) that the most important impact that 2017’s tax reform on real property investment was the preservation of §1031’s like kind exchange benefit. (For reference, our discussion of the overall impact of the 2017 tax reform legislation can be found here.) Many, however, are only now starting to pay attention to the sections of the new tax bill that (arguably) could have the biggest impact on real estate investment – those are §1400Z-1 and §1400Z-2 regarding Opportunity Zones.[1]

Since 2015, a DC think-tank called the Economic Innovation Group has pressed for tax reform that would focus on distressed communities – communities which have lagged behind in the economic recovery. Part of what they proposed is the Opportunity Zone provisions of the 2017 reform act.

Under the Opportunity Zone provisions of the tax reform act, Governors across the US were asked to select certain areas within their states (designated by census tracts) which are economically depressed, low-income communities. Those selections were then to be sent to the US Treasury Department for final qualification and approval as a, so-called, “Opportunity Zone”. A list of the areas that Governor Scott nominated for designation as Opportunity Zones in Florida can be found here: Florida’s Nominated Opportunity Zones. The following is a link to Florida’s corresponding census area maps to assist in locating which areas have been nominated: Florida’s Census Area Maps. Florida is still eagerly awaiting confirmation of which zones will be designated as Opportunity Zones, which is expected no later than early June. Once finally approved, the 2017 tax reform act provides tax incentives for investors willing to invest in these low-income zones.[2]

Individuals who wish to invest in these zones will do so through certain qualifying private sector investment vehicles referred to as “Opportunity Funds”. These Opportunity Funds must hold at least 90% of their assets in qualifying property within various Opportunity Zones. The Funds’ assets may be made up of qualifying assets in one or more of the designated zones; mixing zones is permissible. The qualifying property in which the Funds may invest includes, without limitation, the stock or ownership interests of operating businesses, equipment, and real property located within an Opportunity Zone – i.e., Qualifying Opportunity Zone Property.[3]

The US Treasury is still due to produce specific regulations on how these Opportunity Funds may be established. We do not know exactly how this will work yet. We do have a general framework, however, and some educated expectations as to how it may be permitted to function.

As confirmed by the Internal Revenue Code, qualifying Opportunity Funds will accumulate funds for investment through contributions by private investors. The monies available for contribution are the gains from the sale of other assets. That is the focus of the program – to bring unrealized gains off the sidelines to help support (and revitalize) these otherwise overlooked Opportunity Zones. The Internal Revenue Code also confirms that investment in the Opportunity Funds offers the private investor three basic tax benefits with respect to the amounts invested – (i) a temporary deferral of inclusion in taxable income for the invested-gains (until 2026 or earlier disposition of the asset), (ii) a step-up in basis as to those invested-gains if the investment is held for at least 5 years, and (iii) the possibility of permanent exclusion from taxable income for the earned-gains on an investment in the fund if the investment is held for at least 10 years.

These tax benefits are significant. Although presently delayed, as parties are not permitted to invest in an Opportunity Fund until the US Treasury provides the appropriate regulations, much participation is expected. The question still looms as to how exactly that participation will be permitted.

Many people, from a real estate or other investment perspective, think of an Opportunity Fund as a vehicle that will look much like a REIT or a mutual fund. That is, a fund manager or other executive will (i) acquire assets, (ii) securitize those assets, and (iii) make those securities available for purchase by investors – a complex three step process that takes significant sophistication. Alternatively, others feel that the process will be simpler. Others feel that individual investors will be able to participate in these zones much more directly – that individuals will be able to certify their own qualifying Opportunity Funds and fund those vehicles directly with their own unrealized capital gains. The two alternatives are not mutually exclusive, however. We anticipate the possibility of participation through both alternatives.[4]

Real estate investors should be excited about the entire process. Now, because of the potential for reinvestment in previously overlooked areas, ‘new’ real estate markets have begun to emerge. As urban infill, revitalization and repurposing of existing buildings enjoy continued popularity among developers, developers may now consider looking not just one step outside of the immediately gentrifying area but maybe two or three. Developers may be able to find less expensive properties (located in an Opportunity Zone) and develop an appropriate asset for ultimate sale to an Opportunity Fund – who perhaps would be willing to pay a premium given the tax benefits it offers its investors. Furthermore, developers will likely be able to set up their own Opportunity Fund, use their own unrealized gains to fund their projects, and enjoy the tax benefits of continued ownership and operation of the property. There is a wide array of potential projects in which the use of an Opportunity Fund could be very attractive – from speculative office development to multifamily housing and assisted living projects. One restriction that the real estate investor/developer should be aware of, however, is the restriction that investors will not be able to simply park their money in land located within an Opportunity Zone – as there is a requirement that the property must be substantially improved.[5]

In the end, we still have a lot to learn about the potential that this program may present to real estate investors and developers. The US Treasury is expected to drop its regulations this summer. For those of us in real estate, we will just have to wait – impatiently.

[1] 26 USCA §§1400Z-1 & 2 (West 2018).

[2] Economic Innovation Group, May 15, 2015,

[3] Economic Innovation Group, May 15, 2015,

[4] Personal Interview with Grey Dodge of Florida’s Department of Economic Opportunity, May 15, 2018.

[5] Economic Innovation Group, May 15, 2015,