New Jersey Opportunity Zone Investing

In December 2017, The Tax Cuts and Jobs Act was signed into law.

This federal law provides substantial tax incentives to tax payers who re-invest their capital gains in long term investments in certain economic distressed communities.  These communities, designated as low income census tracts are called Qualified Opportunity Zones (“QOZ”).  There are approximately 8700 QOZs located across the United States. There are 169 in New Jersey located in 75 municipalities. What they all have in common is that they are all in need of private capital to spur economic development. It is estimated that $6 trillion in capital gains are waiting in the wings to be reinvested by taxpayers into these geographic areas.

THE KEY TAKAWAY OF THIS LAW

This law contains many technical issues, provisions and rules that require the expertise and advice of a tax accountant and / or attorney.  It is beyond the scope of this article to discuss the details and specifics of this law along with how the tax benefits affect individual tax payers.  Thus, it is not intended to provide tax advice to taxpayers.

In order to obtain these tax benefits, a taxpayer must re-invest capital gains from their investment in a Qualified Opportunity Fund (“QOF”) within 180 days of selling their capital asset.  These QOFs are private sector created and managed investment vehicles organized as LLCs, corporations or partnerships.

While this law has been modified, updated and clarified via two regulations in October 2018 and April 2019, the critical feature of this law is that depending on the taxpayer’s investment holding period, this law offers deferred and potential elimination of federal income taxes on a tax payer’s capital gains invested in a QOF.   In addition, taxpayers can also exclude any gains realized from the appreciation of the QOF if the investment is held in the fund for at least 10 years.

WHERE’S THE BEEF

As mentioned above, the primary objective of this law is to redeploy private capital and invest these monies into underserved or impoverished areas across the country generating economic growth.  Examples of such growth would be creating new businesses, renovating abandoned buildings, developing affordable housing, or creating new jobs.

You would be hard pressed to find any specific requirement in this law that speaks to creating any of these economic or social benefits for any qualified opportunity zone community.  How is this possible?    What assurances do our federal government have that these investments will result in the intended benefits just mentioned?    Have local business and community leaders provided input as to how best to utilize the invested money in their neighborhoods?  What department inside the federal government is responsible to verify that the investors will comply with the intended purposes of this law?   Who will monitor these activities?  In other words, where is the oversight?   At this time, the answer is; there is none!!!

In NJ, we have many job creation and retention incentive programs such as the Grow NJ Assistance Program,  New Jobs Investment Tax Credit, Urban Enterprise Zone Employees Tax Credit, and the NJ Neighborhood Revitalization Tax Credit.  These programs are designed to promote economic vitality in our state.  Each of these programs have specific requirements that must be met in order for the taxpayer or business to receive the promised benefits.  There is oversight within these stimulus programs that insures NJ taxpayers that the economic and social benefits have or will occur.

Look no further than the progress that has occurred in Camden, NJ.  Notwithstanding the internal disputes among our state leaders and the methods that were employed to achieve these results, billions of dollars of tax credits were awarded to companies to incentivize them to relocate their offices to this once depressed city.  New jobs were created and the city’s dilapidated housing stock is getting a much needed makeover.  Other related benefits include improvements in public safety, a lower crime rate, higher high school test scores and graduation rates, increased sales and real estate tax revenues and new businesses opening up.  An entrepreneurial spirit has taken hold in Camden, NJ.

IS THERE A SOLUTION IN THE HORIZON

In order to answer this question, let’s first outline what information and data the federal government should be receiving for each qualified opportunity zone project being built.   Since the government is making the rules and distributing the lucrative tax benefits, they should obtain answers from these ten questions:

1. What is the proposed property type and size of the project?
2. Where will the project be located?
3. How much will the total project cost?
4. How much will the proposed tax incentives be?
5. What effect will the construction and build out have on local roads and bridges including local services such as schools, police, fire, and sanitation?
6. How long will it take to complete the project? What are the proposed start and end dates?
7. Who is the owner and what is their real estate development track record?
8. What are the proposed economic and social benefits the project is supposed to accrue to the local town or city?
9. Which department inside the federal government will have overall responsibility and oversight for these projects?

• How will the federal government make this info available to the states and in turn to the local towns and cities?

While these investments will be made by the private sector, the tax benefits will be funded by all US taxpayers.  Therefore, the federal government should be able to assemble all relevant information concerning these projects and provide this information to all state and local entities that will be the recipients of these projects.  Perhaps a uniform set of reports should be created so that all interested parties can evaluate and compare the monetary, social and economic impact these capital investments will generate.

It’s possible that additional resources to collect this data and monitor the projects may be required at the state and local level.  In Newark, corporate and non-profit grants from Prudential Financial and the Rockefeller Foundation have been received to help the city manage and monitor its investments.  Hopefully, additional corporate and non – profit funding will be contributed to other cities and towns for similar purposes.

Nevertheless, this is a federal law so it should start with the federal government.  The government must quantify what the social impact will be of the capital invested and how the economic and social benefits will be established and monitored.   Six trillion dollars is a lot to give away without any oversight and monitoring.

Ronald M. Shapiro is assistant professor of professional practice of the finance and economics department at Rutgers Business School. He can be reached at rshapiro@business.rutgers.edu. The views expressed here are the author’s own and not those of ALM’s real estate media group.