Opportunity Zone Tax Incentive Is a ‘Game Changer’

The opportunity zone tax incentive and qualified opportunity funds could be a “game changer” for workforce or affordable housing development, according to Scott Choppin of Urban Pacific Group of Cos. Urban Pacific is currently building multi-generational urban townhomes in blue collar communities, and he has seen significant early success. The opportunity zone incentive is part of the recent tax reform package and is intended to encourage investment in distressed markets. Choppin’s townhouses are already located in the designated opportunity zone markets, and will be integral in building larger communities that he can hold for the long-term.

“The new opportunity zone tax structure and the qualified opportunity funds, to me, will be a game changer for this business plan,” Choppin, founder of Urban Pacific, tells GlobeSt.com. “We are already building these projects in qualified opportunity zones, so all three of the active projects that we have right now and the fourth project that we have in the pipeline are all in qualified census tracks. The opportunity zone funds will give us the opportunity to do bigger projects and hold them in the long term. The funds will also give us the capability to control the rental rates better than we are able to now.”

The opportunity zone incentive allows for deferral of capital gains taxes if the taxpayer invests capital proceeds into a qualified opportunity fund that will invest in low-income areas. The incentive is also not beholden to the rent restrictions attached to affordable housing tax programs. “Additionally, the incentive doesn’t have covenants like affordable housing tax credits,” says Choppin. “The Opportunity Zones don’t have covenants, like normal affordable projects do. So, for example, we won’t have to restrict rents for 55 years at a pre-specified level. From a social impact perspective and in terms of our own company standards, we want to hold more of these—frankly as many as we can.”

Finding equity sources that will both fund ground-up development and hold a project for the long-term can be challenging. Chopping also sees this the qualified opportunity funds as a way to fill the equity gap. “The capital structures in normal market-rate equity don’t usually match with the project’s life cycle,” he says. “Market-rate equity investors want to come in an invest in a deal and then be paid out in 18 to 24 months, and then move the capital to the next deal. As a result, converting a development equity investor into a long-term equity investor happens, but it is not the predominance of the investment capital that we are able to source and find in the marketplace.”

These tax incentives and funds are a perfect match for Choppin’s business plan, which already focuses on the designated opportunity zones and is aimed at revitalizing neighborhoods and supplying the demand for workforce housing. “The opportunity zone capital will be directly oriented around the types of investment zones that we want to be in, and the tax structure—at least from what we can tell in the regulations prior to the IRS issuing any updates—compel long-term holds for 10 years or longer,” he says. “We are in conversations right now with two major groups to discuss opportunity zone projects with long-term holds.”