Will High-Growth Businesses Benefit from Opportunity Zones?

Noah Buhayar (@NBuhayar) writes an interesting article in Bloomberg, A Google in Newark? VCs Hit Snag in New Tax Break for Poor Areas, that shows Opportunity Zones may be great for local investors and real estate developers, but there is a potential snag for those looking to invest in potential high-growth businesses like tech startups or high-tech manufacturing.

One of the rules requires that businesses generate at least half their gross income within the distressed community or β€œopportunity zone” in which they operate. That’s fine for, say, an apartment building or a grocery store, but a disaster for a business hoping to manufacture a product to be sold widely, or provide services online.

The clause seems to be at odds with the intent of the legislation, which is to attract private capital to roughly 8,700 disadvantaged economic areas and create jobs. Treasury Secretary Steven Mnuchin has suggested that $100 billion could flow to opportunity zones. The Economic Innovation Group, a Washington think tank that helped push the idea, has called the incentive the most ambitious effort to spur investment in low-income areas in a generation.

The tax breaks are especially attractive for people looking for ways to minimize levies on capital gains. Investors can plow proceeds from the sale of a business, stock or other asset into opportunity funds, deferring those taxes until 2026 — and potentially reducing their liabilities by as much as 15 percent. If the funds buy and hold qualifying businesses or property in opportunity zones for at least a decade, investors can avoid paying capital gains on any of the fund’s appreciation altogether.

As great the potential Opportunity Zones offer, there are going to be a number of nuances to investing in Opportunity Zones.

For those accredited investors looking into investing in Opportunity Zones funds, I recommend keeping an eye on Steve Glickman. He is a highly connected investor and specifically runs an Opportunity Zones advisory firm, Develop LLC.

Even for those looking to make non-institutional investments in Opportunity Zones, keeping an eye on someone like Steve makes sense. Below is a snippet of why:

Steve is the Co-Founder & former CEO of the Economic Innovation Group (EIG), a bipartisan research and policy organization in Washington, D.C., which was the architect of the OZ program, the largest community investment incentive in U.S. history.

Steve is also an Adjunct Professor at Georgetown University, where he teaches on economic diplomacy & international trade in the School of Foreign Service. He serves on Georgetown’s Board of Governors & the Board of The NewDEAL.

Steve previously served in the Obama Administration — as senior economic advisor at the White House, where he managed trade and investment, manufacturing, and small business policy for the National Security Council & National Economic Council. Steve also served as Deputy Associate Counsel at the White House & Chief of Staff for the U.S. & Foreign Commercial Service at the Commerce Department.

From his mention in the Bloomberg article above to his instrumental part in helping Opportunity Zones become law, he is someone whose insight on OZ’s is sure to matter. As an individual investor looking to take advantage of large investments in institutional areas, it could be a good idea to follow what Opportunity Zone advisors like Steve are recommending.

As we’ve mentioned numerous times, every real estate investor would be smart to keep an eye on what happens with Opportunity Zones. As the article above mentions it is definitely important to keep an eye on the nuances of the law, to see what segments of the real estate market are likely to benefit most.