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KJP

Opportunity Zones

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While the 2018 tax law contained many controversial provisions, one that may prove intriguing to urban redevelopment is the Opportunity Zone. Call them OZs, O-Funds, O-Zones or whatever, they have the opportunity to make a significant contribution to the development of Ohio urban cores.

 

To learn more about Opportunity Zones, read this primer from the IRS....

https://www.irs.gov/newsroom/opportunity-zones-frequently-asked-questions

 

More guidance will be coming out soon from the IRS and, when it does, the money will start to flow toward real estate development. How much money? Some estimates suggest it could be $100 billion.

https://www.wsj.com/articles/real-estate-developers-rush-to-capitalize-on-tax-incentive-1538229600

 

Others estimate it could be trillions.

https://www.forbes.com/sites/jenniferpryce/2018/08/14/theres-a-6-trillion-opportunity-in-opportunity-zones-heres-what-we-need-to-do-to-make-good-on-it/#55b96aca6ffc

 

For Ohio's largest metro areas, on an admittedly oversimplified per-capita basis, each could see anywhere from $600 million to tens of billions of dollars in investment from O-Funds into O-Zones over the next 8 years.

 

Where are Ohio's O-Zones? They are based on Census tracts. Here is a map...

https://development.ohio.gov/bs/bs_censustracts.htm

 

Ohio's largest cities either have their downtown Central Business District (CBD) tracts or near-downtown tracts included. Akron, Canton, Cleveland, Dayton, Toledo and Youngstown have the CBDs included. Cincinnati and Columbus have the tracts surrounding their CBDs included. Many low-income neighborhoods are included in these and other cities. Large swaths of rural Census tracts are Opportunity Zones too, especially in Southeast Ohio.

 

One debate that remains strong regarding OZs is, how will communities ensure that there is inclusiveness and racial equity in these investments? Will these investments really go to the areas that need them most, or will they merely fund high-rise luxury apartment towers in Cleveland and gentrified townhouses in Cincinnati or Columbus neighborhoods next to their downtowns? Or will they provide the necessary gap financing for affordable, quality housing in Portsmouth or Toledo, and job-rich assembly plants, distribution centers, etc. in Lima, Youngstown or Zanesville?

 

A recent discussion about these issues has been occurring in Cleveland, led by the Brookings Institute. Considering the city's stark differences between the booming growth of downtown, University Circle, Ohio City, and Tremont (all of which are OZs) and the incredibly high poverty seen in many east-side neighborhoods (East Cleveland isn't in an OZ and neither is most of Hough), many rightfully wonder where the money will flow.

https://www.brookings.edu/blog/the-avenue/2018/09/19/opportunity-zones-and-shared-prosperity-emerging-principles-from-cleveland/

 

It's going to be an interesting study for policymakers, urbanists, sociologists, realtors, journalists and others over the next eight years to see where the money goes and for what purposes. But this race is about to begin.

Edited by KJP

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BTW, many investors are wondering WHEN they can start investing in Qualified Opportunity Funds offered by many investment houses, including some local ones. That's a good question. Could literally be any day now....

 

Investors, developers at the ready as Opportunity Zone guidance nears

https://rew-online.com/investors-developers-at-the-ready-as-opportunity-zone-guidance-nears/

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I think many of ours in the Cleveland area are well placed for where it makes sense to see new development and redevelopment. While Cincinnati and Columbus include inner neighborhoods and brownfields, they also look to have huge swaths of exurbs and greenfields - not the case around Cleveland. The argument can certainly be made against Cleveland including the near west side and downtown, but I'd much rather see this money be invested in core neighborhoods than places like Oakwood or Grafton. 

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The Cleveland development community is very adept with tax credits and such, so I expect to see them make good use of this program.

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I'd like to help set up a Qualified Opportunity Fund that invests exclusively in Transit Oriented Development projects. Anyone know a good tax attorney who specializes in capital gains?

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New ‘opportunity zone’ rules offer developers tax breaks

U.S. Treasury to release guidelines designed to spur projects in low-income areas, officials say

Published: Oct 19, 2018 9:46 a.m. ET

 

The Trump administration on Friday will propose guidelines that will help investors use a new tax incentive that encourages development in low-income areas.

 

The Treasury Department designed the rules for the Opportunity Zone program to give businesses enough flexibility and certainty to start making major investments, said senior department officials who described the proposal in advance of its release.

 

The program, with bipartisan roots, was a small piece of last year’s tax law and has been attracting intense attention from real-estate developers and fund managers who have been soliciting investors and anxiously awaiting the rules.

 

MORE:

https://www.marketwatch.com/story/new-opportunity-zone-rules-offer-developers-tax-breaks-2018-10-19

 

AND

 

Opportunity Zones One Step Away From Receiving Official Guidance Investors Are Desperately Seeking

October 18, 2018

Matthew Rothstein, Bisnow East Coast

 

The last step on the road to a full understanding of the Qualified Opportunity Zones created by the Trump administration's new tax law last December has finally been taken.

 

The Office of Management and Budget has sent the rules governing investment in opportunity zones to the IRS, which will review them ahead of their release to the public, Bloomberg reports. This development likely means the full release will take place either in November or December, Cole Schotz Associate Phil Hirschfeld said.

MORE:

https://www.bisnow.com/national/news/capital-markets/opportunity-zones-guidelines-nearly-ready-everyone-waiting-94080

 

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From the Bloomberg article above -- Considering the high price of land for downtown Cleveland's parking craters, could this provision be a huge boon to developing them? Is it limited to refurbishing/renovations? It doesn't include new construction?

 

The IRS rules specify that funds don’t have to include the value of the land when calculating how much the law requires them to spend renovating or refurbishing property. For example, if a fund were to pay $1 million for a warehouse and land, with the building valued at $400,000, the fund has to spend at least what the building is valued -- not the total purchase price -- in renovations.

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Areas of interest/potential/ongoing development in the Cincinnati Opportunity Zones: 

 

-FC Cincinnati stadium and surroundings 

-the Banks

-lot south of Convention Center being eyed for new hotel 

-Skyhouse Cincinnati site

-US Bank Arena

-Casino & big triangle lot 

-downtown south of Fifth Street (includes PNC aka Central Trust Tower recently proposed for renovation, Carew Tower, Western and Southern land)

-Queensgate

-MLK interchange area/“innovation corridor”

-most of Over the Rhine. Left out are some portions north of McMicken and also west of Ravine that could use some help

 

-bizarrely the historic part of the West End is left out despite its high poverty rate 

Edited by thebillshark

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More... From the Greater Cleveland Partnership's Monday news briefings (source contains embedded links):

https://www.gcpartnership.com/Stay Informed on News and Policy/Newsroom/Every Monday Enews/2018/October/Every Monday 10 22

 

Opportunity Zones Update

 

The United States Department of Treasury released guidance and a related revenue ruling for the Opportunity Zones program late last week. Public comment on the proposed guidance will be accepted for 60 days from the date it is placed in the Federal Registrar. Opportunity Zones were included in the 2017 Tax Cuts and Jobs Act. The goal of the program is to allow investors to defer capital gains from the sale or exchange of property by investing the proceeds in an Opportunity Fund. The fund would invest these assets in a qualifying census tract that has, among other criteria, a poverty rate of at least twenty percent. The proposed guidance clarifies, among many things, the amount of capital gains that qualify for a deferral as well as issues surrounding tangible business property located in an Opportunity Zone. 

This spring, GCP played a leading role with civic and government leaders to development and submit a recommended list of Opportunity Zones for Greater Cleveland. GCP intends to work with key partners, including Cleveland Development Advisors, to submit comment on the proposed guidance. 

 

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On 10/19/2018 at 6:36 PM, KJP said:

From the Bloomberg article above -- Considering the high price of land for downtown Cleveland's parking craters, could this provision be a huge boon to developing them? Is it limited to refurbishing/renovations? It doesn't include new construction?

 

The IRS rules specify that funds don’t have to include the value of the land when calculating how much the law requires them to spend renovating or refurbishing property. For example, if a fund were to pay $1 million for a warehouse and land, with the building valued at $400,000, the fund has to spend at least what the building is valued -- not the total purchase price -- in renovations.

 

My reading of the proposed guidance is that the Bloomberg article took the meaning of "substantial improvements" literally -- that a building had to be improved/renovated. But a substantial improvement, as described in the guidance, could also mean constructing a building on vacant land or underutilized land. So in the IRS definitions, a parking lot could be considered vacant/underutilized land and that a building placed on it would most definitely constitute a "substantial improvement." So yes, my read is that this program could be a big benefit to developing the parking craters in downtown Cleveland.

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One Week Left to Register for the

Middle Market Forum –

Opportunity Zones: Redefining Cleveland  

 

Join the Greater Cleveland Partnership on December 11, 2018 from 7:30 - 9:30 a.m at the Middle Market Forum for an in-depth discussion on Opportunity Zones. 

 

http://gcpartnership.com/Find an Event/Upcoming Events/2018/December/Fourth Quarter Middle Market Forum Opportunity Zones - Redefining Cleveland?_cldee=a2VucHJlbmRlcmdhc3RAYWxsYWJvYXJkb2hpby5vcmc%3d&recipientid=contact-7c3d6301ae18e81180df0050568b3461-e3c6dfc137794f5abf395682e1c330b0&esid=cd60fa83-0df7-e811-80e2-0050568b3461

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