Opportunity Zone Funds: What Are They and What Do Fund Managers Need to Know?

May 28, 2019
By Millennium Trust
Share: 

Opportunity Zones have become a hot topic in Washington and have garnered a lot of media attention due to their attractive tax incentives. The Treasury Department even estimated that $100 billion of investment capital could be poured into Opportunity Zones.

This is a new market that presents new opportunities for investors, real estate developers and fund managers, but there are still unanswered questions. Many have shown interest but don’t fully understand the complex rules and regulations, or may not even know exactly what Opportunity Zones are.

Let’s dive into a basic breakdown.

What is an Opportunity Zone?

As part of the Tax Cuts and Jobs Act of 2017, Congress introduced a new capital gains tax deferral benefit that is designed to kick start redevelopment in economically distressed regions of the country.

The Opportunity Zone Program authorized governors of all 50 states and five territories, as well as the mayor of Washington, D.C. to nominate up to 25% of their jurisdictions’ low-income census tracts as Opportunity Zones, which stay in effect for 10 years. At the end of 2018, there were nearly 9,000 certified Opportunity Zones.

How is this different from previous programs? Mainly, earlier and existing programs that encouraged private investment in low-income localities allowed for tax credits rather than tax deferrals. Now, with the Opportunity Zone Program, investors may roll over capital gains from any asset sales (real estate, stocks, bonds, etc.) and have those gains deferred for a set timeframe and reduced by up to 15% in certain circumstances. In addition, capital gains earned on the Opportunity Zone investment – if held for the required minimum time – are excluded from the capital gains tax.

The Opportunity Zone Program also has fewer restrictions and is expected to be easier and less costly to create and administer than other established programs.

Investors cannot invest directly in the Opportunity Zones themselves, however, but instead can invest in Opportunity Zone Funds.  

What is an Opportunity Zone Fund?

Opportunity Zone Funds are investment vehicles that elect to be treated as a corporation or partnership for federal tax purposes and invest in Opportunity Zone properties or businesses. (At least 90% of the fund’s holdings must be qualified as an Opportunity Zone property or business.) So far, more than 100 funds whose primary investments are in Opportunity Zones have been created.

Opportunity Zone Funds offer investors diversification with different risk and return profiles and the potential for tax-deferred growth and earnings, ultimately offering potential to benefit investors, as well as the communities in which the funds invest.

Developers and fund managers should discuss the requirements and tax implications with their legal and tax advisors. The full rules and regulations can be found here.  

The Critical Role of a Custodian

This month, members of our Fund Custody team attended the Opportunity Zone Expo, the largest conference for Opportunity Zone investing, in Las Vegas. The event brought together lawmakers, industry experts and investors to talk about how they can navigate this emerging market.

One of the biggest takeaways was that although many developers, fund managers and investors see the significant potential in this space, there is still a lot of education needed – especially when it comes to how service providers come into the mix.

Partnering with reputable and experienced service providers is critical to a fund’s success – and a big component of that is choosing the right custodian. Working with a qualified custodian, like Millennium Trust, can help you meet regulatory requirements and add an important layer of transparency to your fund. Doing so also helps the registered investment advisor of the fund comply with the SEC Custody Rule, which states that the funds and securities should be maintained by a qualified custodian.

Millennium Trust’s expertise lies in the custody of alternative assets with nearly 500 funds under custody – many of which are in real estate-related assets. Our extensive experience can help you create an environment conducive to attracting investors, ultimately helping you achieve fundraising goals.

Read about this exciting new opportunity in our latest whitepaper, “Custody Role Critical to Success of Nascent Opportunity Zone Market.”

Learn More

The material in this blog is presented for informational purposes only. Millennium Trust Company performs the duties of a directed custodian, and as such does not sell investments or provide investment, legal or tax advice.

Please select at least 1 category *