The IRS keeps throwing new regulations at the much-dissected Opportunity Zone program. That, in turn, throws off some commercial real estate investors, developers and lenders, since the Opportunity Zone program involves complex issues related to tax deferral and avoidance.

To bring some clarity to the Opportunity Zone program, which encourages investment in economically distressed pockets of the U.S. in exchange for tax breaks, Richmond, Va.-based law firm McGuireWoods LLP and public affairs subsidiary McGuireWoods Consulting LLC recently launched a national team devoted to the Opportunity Zone program. Members of the team help clients with real estate, tax, funding and public finance matters.

Given that the clock is ticking on Opportunity Zone tax advantages, 2019 should be a pivotal year for investors to jump into Opportunity Zone funds, according to tax attorney Gerald Thomas, an Atlanta-based partner at McGuireWoods.

“There’re going to be people fighting to get their money [into Opportunity Zone funds],” Thomas says. “You’re seeing many products being pushed to market as we speak.”

Thomas spoke with NREI about how high-net-worth (HNW) investors can cash in on Opportunity Zones and how they can steer clear of investment pitfalls.

This Q&A has been edited for length, style and clarity.

NREI: How can high-net-worth (HNW) investors benefit from Opportunity Zones?

Gerald Thomas: Obviously, they get to take advantage of the primary goal of an Opportunity Zone, which is deferring capital gains, potentially to 2026. That’s enormously attractive. That’s one of the best tax deferrals that’s out there right now. It’s pretty straightforward in that if you find a fund that’s investing in an Opportunity Zone, that’s something that the individual can understand—you can get your arms around the investment focus.

NREI: What types of questions are HNW investors asking about Opportunity Zones?

Gerald Thomas: When they come to us, some of them may say they’ve read about this and usually ask, “Is this true?” They don’t want to believe everything you read in The Wall Street Journal or on the internet. We’ll say, “Yes, it is true,” and then walk them through the benefits. Also, they want to make sure that a fund knows what it’s doing—that they are focused on the right investments in terms of Opportunity Zones and that they are aware of the rules.

NREI: What advice would you give HNW investors about dealing with an Opportunity Zone fund?

Gerald Thomas: You need to know where they’re investing. Hopefully they’ve already identified certain Opportunity Zones that they’re targeting. And you’d better understand how the structure is set up. Is this a one-time investment? Are they making various investments? How are they structuring the separate investments?

Even though there is this ability for tax deferral, taxes should never lead business decisions, but taxes should always be taken into account. Make sure a fund is investing in assets that represent a business area that you firmly believe in and that make sense for what you want to achieve from a business perspective.

NREI: Is there a chance that someone could be duped by an Opportunity Zone fund? Are there bad operators out there, or is everybody on the up and up?

Gerald Thomas: Instead of “bad,” I would say “not informed.” There are situations where people don’t understand Opportunity Zones and they may be going to potential investors under the guise of investing in an Opportunity Zone. It might look like a great investment on paper, but an investor might not get the tax benefits that they thought they were getting.

An Opportunity Zone fund is only as good as its legal counsel. Before you hand your money over, look at not only the fund’s reputation, but look at the reputation of who’s representing them as well.

NREI: How can HNW investors avoid missteps with Opportunity Zones?

Gerald Thomas: Make sure you hire good legal counsel of your own. I’m a lawyer, so I’m biased, but I would say it should be competent legal and tax counsel. That counsel should review the private placement memorandum or other disclosure documents and set up a call with the fund’s counsel to get answers to any unanswered questions. Your counsel should be looking out for your best interests.

As long as the fund operates consistently with what they put out there in the private placement memorandum, then this should work. But you can’t guarantee the fund works, because if the fund tells you they’re going to operate in a certain manner and they don’t carry through with that down the road, there’s nothing you can do about that.

SOURCE: NREI

By NO Comment June 28, 2019

Leave a Reply