The qualified opportunity zones have been dubbed the largest economic development program in America. In the past months, the commercial real estate industry has embraced the idea of opportunity zones. The U.S Department of the Treasury has also issued regulations to help the program grow. However, the big question is whether these zones assure people of great returns or empower the residents living within the lines of the selected opportunity zones. Therefore, investors must weigh the pros and cons before making a decision.
Pros of opportunity zones
- There are incentives for investors who fund less-privileged neighborhoods deemed unfit for investment. There are trillions yet to be tapped into in capital gains, and the capital could be beneficial for the communities that need it most. After the recession, the recovery was mostly concentrated on wealthy metropolitan areas meaning opportunity zones are a great way to distribute economic growth equally.
- Opportunity zone frameworks are there to guide investors towards adding funds that would lead to positive social developments. The guidelines are implementable through flexible reporting frameworks and are engineered to provide the best opportunity to deliver on the potential of opportunity zones. The zoning laws for the qualified opportunity fund are different from those of cities because community leaders are proactively engaged to identify projects that benefit the community.
Opportunity zones can reach more low-income communities that could benefit them.
- While similar programs have been tested in such communities, their impact was short-lived because they focused on a few impoverished areas. Previous programs focused on passive investment like tax credits to businesses operating in designated zones. The qualified opportunity zones now have data analytics tools that can be used to evaluate outcomes precisely.
Cons of opportunity zones
An investor has no requirements to include local leaders and residents in the planning phase.
The biggest worry is that most investors are excluded from the areas they will be investing in, considering they may not clearly understand what the current residents would benefit from.
- The developers only have to earn money which can be achieved through luxury development. However, this will likely increase rents making the neighborhoods unaffordable for low-income residents who want to live in the communities benefiting from the qualified opportunity fund.
- Even though these frameworks are impactful, there is no rule for developers to prioritize or follow them to benefit the residents. For instance, if a luxury hotel is being built in an opportunity zone, you start wondering if that is the best way to utilize development dollars for a poor community. It would be sensible to have a range of businesses and services that benefit the community, like affordable housing, transportation, and grocery stores.
- Not every opportunity zone was selected because the community greatly needed it. Despite most states doing their due diligence to identify these neighborhoods that need the most help, other states see it as a windfall for developers. Still, many states chose opportunity zones that were already in areas that had signs of improvement in the selection process. Many also had higher-than-average home price appreciation.
Every investment has its benefits and drawbacks, and for qualified opportunity zones, the benefits are greater. Therefore, every investor must understand how they can use these to their advantage and get more returns on their investment.
When you think of opportunity zones, it is impossible to ignore the significance of commercial real estate.
The Tax Cuts and Jobs Acts of 2017 allow investors to invest their capital gains in qualified opportunity funds, which then invest in this area.
That’s why most investors are focusing on commercial real estate.
The Tax Cuts and Jobs Acts also put in place a qualified opportunity fund that facilitates these areas' development.
Failure to comply might lead to loss of investment or exclusion from the tax benefits of investing in opportunity zones.Here’s another point to note.
If you have a substantial amount of assets, you can still invest in commercial real estate through the QOF.
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