By Meghan Hall
After it was passed as part of the Tax Cuts and Jobs Act of 2017, the Investing in Opportunity Act (IOA) largely flew under the radar as investors waited cautiously for clarification on the program’s tax incentives from the Internal Revenue Service. Now, with those rules released in January 2019, investor interest in opportunity zones is sparking. Commercial Café, a commercial real estate website, recently conducted a study in order to evaluate which of the more than 8,700 eligible tracks will garner the most return for investors. Of the top 20 counties that Commercial Café has ranked for best investment potential, three Washington counties have made the list: King County, Skagit County and Snohomish County.
“While the greater Seattle area is in many ways an example of a booming hub, the region still has pockets of distressed neighborhoods, highlighted by the number of low-income tracts that have been designated as opportunity zones,” explained Diana Sabau, author of the report and copywriter for Commercial Café. “King, Skagit and Snohomish made our list of top 20 counties for investment in opportunity zones, totaling 23 low-income tracts awaiting an injection of private capital.”
In its study, Commercial Café examined all 8,764 opportunity zones provided by the U.S. Department of Treasury, eliminating counties with fewer than five opportunity zones within their borders and unincorporated areas from the list. Commercial Café then examined data such as employment, population and GDP collected from the U.S. Census Bureau to help compile its final list. Each indicator was assigned a point value directly proportional to its value, except for the poverty rate, which received an allocation in inverse proportion. Counties could receive a maximum of 100 points.
“Not all opportunity zones are created equal, and there are certainly areas that will attract a lot more investor interest than others,” said Sabau. “However, as competition over the most enticing tracts increases, investors might want to take a close look at some of the counties outside the immediate spotlight that show signs of growth potential.”
The impetus behind creating opportunity funds, according to Sabau, was an initial proposal created by Napster creator and former Facebook President Sean Parker. Parker noticed that in post-recession years, investors are typically slow to reinvest capital gains and were more inclined to hold on to assets to avoid taxes on those gains. Opportunity zones were proposed as a vehicle that could help introduce nearly $6.1 trillion of unrealized gaines held by American households and corporations. Now, private and institutional investors, or even REITs, can defer and reduce capital gains by investing in an opportunity zone fund.
Investing capital gains from a previous transaction for a minimum of five years receives a 10 percent capital gain tax reduction; holding for seven years is an additional five percent. After ten years, there is zero tax on any subsequent profits made, and there is no limit as to the total amount investors can save in taxes after 10 years.
King County came in the highest out of those selected from Washington, at number 11 on the list, thanks to its prospective population and GDP growth, while Skagit and Snohomish Counties ranked 15th and 19th, respectively. According to Commercial Café’s scoring, all three counties have solid and growing employment prospects, a well-educated workforce and are becoming urban hubs, attracting new residents and employers. In total, Washington has more than 400,000 residents living in its 75 opportunity zones, and 55,821 residents with Bachelor’s degrees. Proximity to educational institutions and infrastructure is also key, noted Sabau, who points out that King County is currently adding $262 million to help update the state’s stormwater infrastructure alone.
“Urban areas that have taken steps to increase walkability and expand their public transit lines provide an attractive investment target,” said Sabau. “Risk-averse investors will be eyeing counties that are already considering large-scale spending packages for their energy, transportation and communications infrastructure.”
However, Sabau is also careful to note that the ultimate success of opportunity zones in communities depends greatly on being realistic about the range and scope of private sector investments. There are 112 existing opportunity zones in the United States which have garnered $26 billion in community development investing capacity, according to Novogradac, a national professional services organization. Sabau stated that most real estate development projects — particularly residential and multifamily — are the most common investment focus areas, with more limited funds aiming to create business or transit-oriented developments in struggling zones. Because of this, opportunity zone funds are limited by existing conditions when it comes to evaluating their potential impact.
“Tax-deferment will not make an unfeasible investment any more attractive,” cautioned Sabau. “So, in this respect, the success of OZ funding relies heavily on existing conditions of each region at the time the law was passed and the degree to which local authorities and communities organize to direct incoming capital in a way that leads to sustainable, long-term growth.”