NAIOP Massachusetts
Update
12/14/18
NAIOP's Expert Panel Discusses Opportunity Zones
Opportunity zones were created in late 2017 as part of the Tax Cuts and Jobs Act to bring development dollars to low-income urban and rural communities nationwide. Since their inception, investors have been keen to take advantage of the major tax breaks this program provides. NAIOP put together a panel last week to dive deeper into this new program from a legal, legislative, and development point of view.
Mike Kennealy, Assistant Secretary for Business Growth / Executive Office of Housing & Economic Development, took a quick look at how the state selected the zones from the 110 communities that had eligible tracts. After meeting with the communities the zones were evaluated using three major criteria:
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Opportunities: sites and businesses that are opportunities for private investment and development
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Planning: community describes the planning work done in the tract
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Demographics: poverty rate, median family income, and unemployment rate in the tract and in the wider communities
After this process was complete the state selected 138 tracts, all of which were approved for the program. 48% of tracts are in gateway cities with 16 tracts in Boston Cambridge and Somerville. There are 6 zones in Worcester, including the Central Business District and the areas adjacent to the Commuter Rail stop and 7 in Springfield including the City’s downtown. The state foresees development in these areas will continue the growth in the Commonwealth and position communities for success. Kennealy also touched on the other state programs such as MassWorks Infrastructure that may be used within an Opportunity Zone to further development.
To help explain the complexities of this new program, James O. Lang of Greenberg Traurig discussed applications of the policy and details on how the funds must be utilized to qualify for the big tax breaks. According to Lang, there are $6-$10 trillion dollars in capital gains that could be eligible to be invested into this program and it is attracting many new types of investors to the real estate sector.
Per this new program, investors have 180 days to invest their capital gains into a qualified opportunity fund. The fund then has 31 months to invest in a qualified Opportunity Zone. The three tax benefits to this program are:
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Temporary deferral of inclusion in taxable income 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 disposed of or by December 31, 2026.
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A step-up in basis for capital gains reinvested in an Opportunity Fund. The basis is increased by 10% if the investment in the Opportunity Fund is held by the taxpayer for at least 5 years and by an additional 5% if held for at least 7 years, thereby excluding up to 15% of the original gain from taxation.
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A permanent exclusion from taxable income of capital gains from the sale or exchange of an investment in an Opportunity Fund if the investment is held for at least 10 years.
While there are still some points of the policy that need to be refined (such as how to handle construction delays and penalties) there are proposed regulations under review that will clarify some of these questions and, as Lang pointed out, everything that is in the works is very taxpayer friendly.
Larry Curtis of Winn Development also spoke on the panel. His firm has extensive experience developing properties in many areas that have turned out to be within these Opportunity Zones such as The Watson in Quincy. While Curtis supports the program, he did note that with the high cost of construction, rents still do not support development in many of these zones unless developers look at additional subsidies to make the numbers work. Curtis also pointed out that some of these tracts are now prime property, like Assembly Row, as the data used for determination was from 2010. He fears many developers will only flock to these areas and ignore the tracts that the plan was set in place to help. Having worked on many of these areas in the past, Curtis also discussed how important it will be to get local governments on board to expedite deals and permitting in these areas so that the funds can be deployed in the required time frame. For sites that are largely permitted, towns should be pushing these developments forward as there is a first wave of capital that investors need to deploy now.
While there are still many questions to be answered, and with regulations still to be finalized, this program does provide significant tax incentives for long-term investors and will hopefully spread the Boston/Cambridge building boom to some underserved areas of the Commonwealth.
Check out the full Massachusetts Opportunity Zone Map here
For more information about NAIOP Massachusetts and their 1650+ members visit their website at http://www.naiopma.org