Longer holding requirements, the continual drip of federal guidelines, and a lack of tax savings have left many would-be investors sitting out of tax-sheltering opportunity zones.
A year after the U.S. Treasury released its first set of guidelines, tax breaks for redeploying capital-gains profits into real estate and business ventures in low-income neighborhoods have generated a fraction of the anticipated $100 billion, says Wall Street hedge fund founder (and former White House communications director) Anthony Scaramucci. “The pricing of the tax benefit was just not commercially attractive enough for people to do what the Treasury thought they were going to do,” says Scaramucci, founder and co-managing director of Skybridge Capital, an investment firm with $9.4 billion under management.
Scaramucci made his comments about sluggish investor appetite for the bevy of new opportunity zone funds to tap the new federal tax incentive program during a recent speech to the South Florida chapter of NAIOP, the commercial real estate development association.
Scaramucci, a seasoned Wall Street financier who catapulted into the national spotlight in 2017 for the 11 days he spent working with Donald Trump’s administration, now predicts the program—tucked into the 2017 Tax Cuts and Jobs Act—will generate a more modest $10 billion to $15 billion in investment.
An opportunity zone is an area deemed to be economically distressed by a state based on income data. The tax break allows capital-gains profits to be rolled into opportunity zone funds and then redeployed into projects in any of the nation’s 8,767 designated zones. Florida has 427 zones, with many of the zones in South Florida in up-and-coming areas—including near the Brightline stations in Fort Lauderdale and Miami.
To get the offered tax deferral and savings, capital-gains proceeds must be placed into a qualified fund within 180 days and then 90 percent of it redeployed within another 180 days into an opportunity zone, unless it is for land and new construction, in which case the fund has 30 months to deploy its capital.
If you hold an opportunity zone investment for five years, you shield 10 percent of it from capital gains. If you leave it invested for seven years, you shield 15 percent. If you leave it in there for 10 years, you get the maximum tax savings, and any appreciation in value you derived from your opportunity zone investment is tax free.
“So, what we thought at Treasury at that time is that you would sell your Amazon stock. You would have a million dollars in gain, and you would pay a 15 percent discount on your capital gain after year seven. It is just not enough of an incentive for people to do that,” he told the 200 or so commercial real estate leaders gathered for NAIOP’s annual Signature Speaker Series in Fort Lauderdale. “Secondarily, that 10-year hold was just too long for many people.”
Late last year, Skybridge launched SOZ Real Estate Investment Trust, with plans to raise $3 billion, but has since scaled back its target to $300 million. The REIT has raised about $30 million so far, Scaramucci says, with its first major investment in Richard Branson’s 238-room Virgin Hotel New Orleans.
Brad Molotsky, a partner with Duane Morris, says Skybridge and other major institutional fund managers are only seeing a partial picture. On smaller, project-specific funds, the tax break is better used—and not only by the wealthy.
“It is way too early to say that the program doesn’t work,” Molotsky says.
Since the program’s 2018 launch, his team has closed 27 opportunity zone transactions, valued at about $3 billion, and has 30 more in the pipeline.
Many of the large institutional funds offer “blind pool” funds, which identify projects after the capital is raised, he says.
His firm, however, works on project-driven funds, established by small groups, families and even charitable organizations, including Habitat for Humanity. The price tag for these projects tend to be smaller, between $10 million and $50 million.
“The program does not make a crappy deal good. The deal has to stand on its own,” Molotsky says. “This program is much more flexible than a 1031 exchange” which defers recognition of capital gains and related federal income tax liability.↵
Freelance writer Darcie Lunsford is a former real estate editor of the South Florida Business Journal. She is the senior VP for leasing at Butters Group and is avoiding a conflict of interest in her column by not covering her own deals.