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Trump’s New Investment Program Opens Surprising Tax-Shelter Locations

By Miriam Rozen November 30, 2018

In a city hall meeting room in Norwich, Conn. this week, an audience of 150 people — investors, property owners, local politicians, and community members — paid rapt attention as an asset manager, a lawyer, the town’s mayor and other local and state government officials talked about Qualified Opportunity Zones, established by President Donald Trump’s 2017 Tax Cuts and Jobs Act.

Norwich, with a population of almost 40,000, is known as the “Rose of New England,” even though its economic heyday took place decades ago, a trendline apparent from its large number of nearly-empty downtown buildings. But Norwich officials learned in October that the U.S. Treasury and Internal Revenue Service had designated three of its census tracts as economically distressed zones. Those designations put the Norwich tracts on a list of 72 other such zones in Connecticut and 8,700 in the nation — and, under the new tax law, makes them all potential geographic magnets for tax-shelter-seeking investors.

Under the new tax law, if investors make long-term investments in a designated zone, they can reap significant tax benefits. Specifically, if within 180 days of realizing capital gains, investors redeploy those assets by putting them into a qualified fund that invests in businesses or real estate in one of the zones, and then substantially improve upon those assets in the zone, they can defer paying taxes on the re-invested capital gains for as many as seven years. Additionally, under the new law, they then pay taxes on only 85% of the re-invested capital gains.

Most significantly, if investors keep their stakes in a zone for 10 years, they will incur no tax on the additional capital gains they realize when they sell those assets. One advisor has called the program a “Roth IRA for the rich.”

For its part, Congress created those tax-savings opportunities to draw investors to towns such as Norwich. Local government officials would also like that to happen.

“Hopefully some of the dollars can come here,” Norwich Mayor Peter Nystrom, a Republican, told the city hall audience this week.

But at the same meeting, the discussions also made it obvious that no certitude exists that investors will flock to Norwich as a result of the Opportunity Zone designations. Too many questions remain, and no finality exists about the IRS’s final rules governing the Opportunity Zones. Indeed, Congress is still trying to add new zones to the mix. In mid-November, a bipartisan group of seven U.S. senators introduced a bill that would amend the tax code to treat as Opportunity Zones any applicable disaster zone (such as the areas affected by Hurricanes Florence and Michael and the California wildfires).

Also investors, developers and community members in the zones often have different – and sometimes conflicting – objectives.

“This is not like anything I have ever seen in my 20 years in this business. This is a big deal.”
Liddy Karter
Enhanced Capital

“They are going to have to work together,” Robert Santy, president and CEO of the Connecticut Economic Resource Center, a nonprofit public-private partnership that provides research‐based data, planning and business-formation strategies, warned the city hall audience.

But financial advisors and asset managers – including Elizabeth “Liddy” Karter, a managing director of Enhanced Capital, an asset management firm that focuses on tax benefit investment programs and who spoke to the Norwich audience — stress that investors are wowed by the Opportunity Zones’ potential.

“This is not like anything I have ever seen in my 20 years in this business. This is a big deal. This can transform places like Norwich. We can do this,” Karter told the audience. “There are still some rules coming out, but we don’t have to wait,” she said.

Her firm has established a $200 million target for a fund it’s developing. The firm aims to use its Opportunity Zone fund as co-investor with Zone local partners, she said. About 75% of her fund’s assets will be earmarked for real estate investments, and the remaining 25% for equity purchases in businesses, since both types of acquisitions qualify investors for the Opportunity Zones’ tax benefits, Karter said. (Notably, investors in financial services businesses are excluded from eligibility for the tax benefits.)

Enhanced Capital is also participating in other larger Opportunity Zone funds investing nationwide, Karter said, referencing reports that Anthony “The Mooch” Scaramucci’s hedge fund SkyBridge Capital plans to launch an Opportunity Zone fund by the end of the year, which would aim to raise $3 billion from investors.

A roster of 40 Opportunity Zone funds assembled by accountants that specialize in the topic shows altogether they have set a target of raising more than $800 billion. There exists some $6.7 trillion in unrealized capital gains among investors in this country, a lot of potential for Opportunity Zone fund managers, and for locals in the Zones, Karter told the audience.

What will investors gain by buying stakes in Opportunity Zone funds? Karter estimates roughly 4% in additional return on investment, so if an investment has a 7% ROI and it’s in a zone, make that an 11 % ROI, she said.

Nationwide, investors are aching to learn more about the Opportunity Zones, financial advisors report. Dusty Wallace, the director of planning and the chief compliance officer at Lee Financial in Dallas, which has more than $1 billion under management, has noticed client interest in the topic is buzzing. “They get so excited because they hear about these tax benefits,” Wallace says about her clients. “I’m going to sell my house and not pay any capital gains,” one client told her.

But she hits the brakes hard. “People are rushing into this and not taking the time to do their due diligence,” she says. Her clients, after engaging in “surface discussions” have not come back with specific plans, she says.

President Donald Trump (Getty)

She offers warnings: “It has to be a good investment in the first place. Don’t let the tax result dictate what you do.” She also notes many investors prize liquidity and, under the Opportunity Zones’ 10-year scenarios, liquidity enters none of the equations.

At the city hall meeting in Norwich, it was state government officials who expressed caution and sounded less than completely enthusiastic about the potential of the Opportunity Zone designations.

David Kooris, deputy commissioner of the Department of Economic and Community Development, conceded he has some pessimism to share.

“Most of the funds are just looking for higher returns on projects that are already underway. There are handful of tracts just under the socioeconomic threshold in cities – New York, Chicago, and Los Angeles — that were already going to be gentrified. A lot of the capital will go there,” he said.

But, on the bright side, Kooris told the audience, cooperation between local government officials, the state, developers, investors, and communities focusing on the designated zones will help align public and private interests in the future.

“This is only one tool in the toolbox. It is not a panacea,” said CERC’s Santy about the Opportunity Zone option.