Real Estate & Construction Monitor Newsletter - Winter 2019
Table of Contents
- Seize the Opportunity (Zone), But Keep Your Head on Straight
- Blockchain’s Impact on the Future of Real Estate and Construction Companies
- Navigating the New Age of Retail Real Estate
- 4 Changing Realities of Hurricane Season for Hoteliers
- Tax Reform & Tariffs Widen the Affordable Housing Gap
Seize the Opportunity (Zone), But Keep Your Head on Straight
BDO’s Stuart Eisenberg and Marla Miller demystify the new vehicle and recommend ways in which REITs can take advantage of their scale when investing in qualified properties.
The IRS defines an opportunity zone as an “economically distressed community where new investments may be eligible for preferential tax treatment.” The Treasury has certified nearly 9,000 of these districts across all U.S. states and its territories, including the entire island of Puerto Rico. An opportunity zone designation has the potential to trigger a rush of investment activity and is intended to help revitalize neglected areas.
A qualified opportunity zone fund is an investment vehicle that must invest at least 90 percent of its assets in businesses that operate in a qualified opportunity zone, either by acquiring stock or a partnership interest. The fund can also make direct investments in properties and real estate located within a qualified opportunity zone. REITs and other operators are forming opportunity zone funds to access the capital expected to be generated by this program to acquire and develop properties.
WHAT ARE THE CORE INCENTIVES FOR INVESTORS?
Taxpayers can defer taxes by reinvesting capital gains from an asset sale into a qualified opportunity fund. The capital gains will be tax-free until the fund is divested or the end of 2026, whichever occurs first. The investment in the fund will have a zero-tax basis. If the investment is held for five years, there is a 10 percent step-up in basis and a 15 percent step-up if held for seven years. If the investment is held in the opportunity fund for at least 10 years, those capital gains would be permanently exempt from taxes.
WHAT DO INVESTORS NEED TO BE WARY OF?
While opportunity zones offer enticing benefits, tax savings should not be the only factor influencing the decision to invest or break ground on a new development. A bad deal is still a bad deal, and not all qualified investments are worth pursuing. As investors scope out opportunity zones, they should assess the potential investment with the same level of due diligence they would use for any other deal. Questions to consider include: Are the area’s property values and income levels likely to grow? Does the developer or business have an established track record?
Investments in opportunity zones also have associated risks, just like any other investment. Larger qualified opportunity zone funds and ones established by experienced real estate owners and developers like REITs will have an advantage in this arena.
MORE ANSWERS TO COME
Investors should look out for additional IRS guidance on opportunity zones before the year closes. One of the remaining questions relates to “churning” investments, or the time period investors have to reinvest capital gains in a qualified opportunity zone after recognizing the gains from the sale of another qualified opportunity zone asset. The proposed regulation suggests this will be a 180-day period, but confirmation is still pending and could influence investors’ next steps.
To maximize the potential benefits, taxpayers must invest in a qualified opportunity fund before Dec. 31, 2019. While investors shouldn’t blindly rush into opportunity zones, the clock is ticking to take full advantage of the tax savings.
Blockchain’s Impact on the Future of Real Estate and Construction Companies
By David Butcher
For the real estate and construction industries, sensors, data and automation will increasingly define construction projects, as well as cityscapes. Illustrated by the fact that there are currently more than 1,000 on-going smart city projects around the world.
Navigating the New Age of Retail Real Estate
By Stuart Eisenberg and David Berliner
Plagued by seven straight years of unprofitability, Sears filed for bankruptcy at the urging of banks that hold the retailers’ debt this October. Near the end of the year, Sears will close 142 unprofitable stores in addition to the previously announced closure of 46 stores.
Sears joins a long list of retailers shuttering storefronts this year. In the first six months of 2018 alone, more than a dozen retailers with 20 stores or more filed for bankruptcy and closed a total of 3,838 stores according to Retail in the Red, BDO’s biannual bankruptcy update.
Changing Realities of Hurricane Season for Hoteliers
By Clark Schweers
Only a year has passed since the costliest hurricane season on record in the U.S. took thousands of lives and amounted in over US$306.2 billion in damages.
The hospitality industry was among the hardest hit from the year’s three most significant storms: Hurricanes Harvey, Irma and Maria. Hotels experienced—and many are still recovering from—physical property damage, business interruption losses and long-term impacts on occupancy rates.
Tax Reform & Tariffs Widen the Affordable Housing Gap
By Joseph Canataro and Kyle Paisley
The U.S. has an affordable housing gap, and the combined impact of tax reform and tariffs could make it a lot worse. What’s the scope of the current supply gap? The National Low Income Housing Coalition reports a shortage of 7.2 million affordable and available rental homes. This means that there are only 35 available units for every 100 extremely low-income renters (ELI). A household is characterized as ELI when their income is at or below the poverty guideline or 30 percent of their area median income (AMI). While the severity of the supply shortage varies greatly by state, the housing affordability gap stretches nationwide.
What’s taxing the affordable housing market?
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