How can you invest in commercial properties using the opportunity zone program?

1 What is the opportunity zone program?

The opportunity zone program was created by the Tax Cuts and Jobs Act of 2017 to encourage investment in low-income communities. The program allows investors to defer or eliminate capital gains taxes by reinvesting them in qualified opportunity funds (QOFs). These are special entities that must invest at least 90% of their assets in opportunity zone properties or businesses. The program has two main tax benefits: first, investors can defer paying taxes on their original capital gains until 2026 or until they sell their QOF shares, whichever comes first. Second, investors can reduce or eliminate their taxes on their QOF shares depending on how long they hold them. If they hold them for at least five years, they can exclude 10% of their original capital gains from taxes. If they hold them for at least seven years, they can exclude 15%. And if they hold them for at least 10 years, they can exclude 100% of their QOF gains from taxes.

2 What are the benefits of investing in commercial properties in opportunity zones?

Investing in commercial properties in opportunity zones can offer several advantages for investors. First, they can diversify their portfolio and access a potentially high-growth market. Opportunity zones are located in various sectors and regions, and some of them may have strong demand and appreciation potential. Second, they can leverage the tax benefits of the program and increase their after-tax returns. By reinvesting their capital gains in QOFs, they can defer, reduce, or eliminate their tax liabilities and keep more of their profits. Third, they can contribute to the social and economic development of the communities they invest in. By providing capital, jobs, and services, they can help improve the quality of life and opportunities for the residents of the opportunity zones.

3 What are the risks of investing in commercial properties in opportunity zones?

Investing in commercial properties in opportunity zones also involves some risks and challenges that investors should be aware of. First, they may face higher uncertainty and volatility in the market. Opportunity zones are often located in distressed or underdeveloped areas that may have low occupancy, income, or appreciation rates. They may also be affected by external factors such as regulations, competition, or demand shocks. Second, they may face higher costs and complexity in the investment process. They may need to comply with the rules and reporting requirements of the program, which may change over time. They may also need to perform extensive due diligence, renovation, or development work on the properties, which may increase their expenses and time horizon. Third, they may face higher ethical and reputational risks in the market. They may be perceived as exploiting or displacing the local residents or businesses, or as benefiting from unfair tax breaks. They may also face legal or social backlash if they fail to deliver on their promises or expectations.

4 How to find commercial properties in opportunity zones?

Finding commercial properties in opportunity zones can be a challenging task, as there is no centralized database or platform that lists them. However, there are some ways to locate and identify them. One way is to use the online map and tool provided by the U.S. Treasury Department, which shows the boundaries and census tracts of the opportunity zones. Another way is to use commercial real estate websites or platforms that filter or highlight properties in opportunity zones. Some examples are LoopNet, CREXi, or Fundrise. A third way is to use local brokers, agents, or networks that specialize or have access to properties in opportunity zones. They may have insider knowledge or connections that can help investors find and negotiate deals.

5 How to evaluate commercial properties in opportunity zones?

Evaluating commercial properties in opportunity zones requires a careful analysis of the financial, physical, and social aspects of the properties and the markets. Investors should research the area's economic, social, and environmental conditions and trends, such as income, employment, population, crime, infrastructure, and amenities. They should also assess the demand and supply of the property type and sector as well as inspect the property's features, condition, and performance. Additionally, investors should review the QOF's strategy, objectives, and track record as well as understand its fees, expenses, and distributions. By following these steps, investors can make informed and profitable decisions about investing in commercial properties using the opportunity zone program.

6 Here’s what else to consider

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