“The China Lake Heritage Opportunity Zone”

Opportunity Zones have been a buzzword in the commercial real estate community for over a year. Created under the 2017 Tax Cuts and Jobs Act, the “China Lake Heritage Opportunity Zone” presents Ridgecrest with a true economic development driver that enables “old” China Lake and Ridgecrest to be integrated with a new planned community with both affordable housing and commercial developments.

• A Qualified Opportunity Zone is a low income geographic area where private investments are given some special new tax incentives.
• The intended purpose of the Opportunity Zone is to incentivize long-term private investments in economically distressed areas.
• Census Tract 0053 in Kern County, California has been designated as a Qualified Opportunity Zone. The area includes most of what was originally the community of “China Lake” and extends northeast from the intersection of Ridgecrest Blvd. and China Lake Blvd. (See map)
• Re-development of this area is critical to resolving Ridgecrest’s ongoing financial issues.

Qualified Opportunity FUNDS:

The 2017 Tax Cuts and Jobs Act also created a new investment vehicle called a Qualified Opportunity Fund. The IRS guidelines provide that capital gains be invested in Qualified Opportunity Funds. The Opportunity Fund’s structure is simply a Corporation or LLC specifically created for the purpose of a Qualified Opportunity Fund pursuant to IRS Guidelines (Form 8996).

Why are QOZ’s such a hot topic?

Over $6 Trillion in unrealized capital gains are estimated to exist in stocks and real estate. Sophisticated investors have traditionally required complex exchange transactions in order to defer capital gains taxes on real estate or stocks. Investors can defer and reduce taxes on stock and real estate sales by investing capital gains in Qualified Opportunity Funds. Developers, builders and long-term investors as well as state and local governments now have a new tool to incentivize investments in public and private projects in areas that need economic development the most.

Want to Invest in Opportunity Zones? Think P3 (Commercial Property Executive)

Public Private Partnerships (P3):

This program creates an unprecedented opportunity for economic development through public and private partnerships in Ridgecrest. Infrastructure developments such as the City’s new Sewage Treatment Facility or a City-owned solar field may be financed with private partnerships using QOF’s as the investment vehicle. Because this new program attracts private capital, the tax benefits allow the City to offer investors a smorgasboard of tax-deferred investment partnerships while reducing costs associated with traditional general obligation financing or bonds.

Capital Formation and Economic Development Opportunities in OZ’s:

Opportunity Funds comprised of large investors are actively looking for P3 and standalone private development deals in QOZ’s. In addition to housing and commercial real estate development, any number of basic public infrastructure projects that stimulate economic growth are eligible for investment. P3’s provide an added level of security for the medium and long-term investor along with appealing tax deferral and discounts.

Capital Gains Tax Deferral (See the IRS Opportunity Zone website for more information)

First, investors can defer tax on any prior gains invested in a Qualified Opportunity Fund (QOF) until the earlier of the date on which the investment in a QOF is sold or exchanged, or December 31, 2026. If the QOF investment is held for longer than 5 years, there is a 10% exclusion of the deferred gain. If held for more than 7 years, the 10% becomes 15%.

Second, if the investor holds the investment in the Opportunity Fund for at least ten years, the investor is eligible for an increase in basis of the QOF investment equal to its fair market value on the date that the QOF investment is sold or exchanged.

References:

On July 9, 2018, the IRS published a list of more than 8,700 census tracts designated by the Secretary of the Treasury as qualified opportunity zones in the 50 states and U.S. territories.

California Opportunity Zone website and interactive OZ map

IRS Opportunity Zone Q&A

Information on Structuring P3