BY KERRY SMITH, EDITOR, ST. LOUIS CONSTRUCTION NEWS AND REVIEW MAGAZINE
A real estate-friendly byproduct of the Tax Cuts and Job Act, opportunity zones offer investors the chance to diversify their commercial portfolio with a slice of active development in and around St. Louis.
Opportunity zones are low-income U.S. Census tracts nominated by municipalities, approved by the governor and ratified by the U.S. Treasury Dept. and the IRS as a means of injecting needed capital into local shovel-ready developments nationwide. In Missouri, 161 such zones have been designated, 41 of them in St. Louis.
Lewis Rice attorneys David Lemkemeier and Ryan Furtick, among others, are members of a new practice group at the law firm’s St. Louis headquarters that’s specific to opportunity zone investment.
“We’re seeing interest from commercial real estate developers and others who are educated in commercial real estate investing,” said Lemkemeier, a partner at the firm. “Opportunity zones offer investors a chance to inject capital into low-income communities through qualified building projects. The timing for this is ideal because the commercial real estate market is a strong one to begin with,” he added.
St. Louis’ opportunity zones exist in downtown, midtown, north St. Louis City and elsewhere. Furtick said the primary tax benefit of opportunity funds – the name for the investment vehicles within designated opportunity zones – is the temporary deferral of any capital gain invested in an opportunity fund.
“When you invest your capital gain in one of these funds, you can defer the tax until the earlier of two scenarios: 1) When you sell your investment or 2) December 31, 2026,” Furtick said. “In addition to temporarily deferring your capital gain, you can permanently exclude part of the gain that you rolled over and invested in the fund depending upon your holding period. If you hold your investment for 5 years, you can permanently exclude 10 percent. If you hold it for 7 years, you can realize an additional 5 percent permanent exclusion.”
There’s another potential investor benefit, the attorneys attest: If the opportunity fund investor holds his interest in the fund for 10 years, all future appreciation – from day one until that investor sells his interest – remains tax free.
“It has to be a good (real estate) investment to begin with,” said Lemkemeier. “And in order to obtain the maximum tax benefit, it needs to be a development or construction project that is going to be around for 10 years. That requires patient capital and may limit the number of attractive projects within these zones,” he added, noting that if an investor sells its interest in an opportunity fund within the 10-year period, it doesn’t negate the opportunity zone tax advantage, but the investor is required to reinvest the dollars in another opportunity fund within 180 days.
This relatively new real estate investment option offers more flexibility than the long-time 1031 like-kind exchange, which is limited only to real property investment, said Furtick. “With like-kind exchanges, you have to take all of your sales proceeds from the sale of real property and invest them in new real property within 180 days,” he said. “Now your (opportunity fund) investments can also come from the sale of stock, the sale of a business or anything else that qualifies as capital gain.”
Lemkemeier said the opportunity fund provides another layer of the capital stack for investors. “The opportunity zone program has the potential to make major construction projects and major real estate developments happen that might not otherwise. That’s exciting.”